Financial Inclusion Through Savings: Commitment Devices, Mobile Money, and the Role of Trust
Saturday, Jan. 6, 2018 2:30 PM - 4:30 PM
- Chair: Paul Gertler, University of California-Berkeley
Why Do Defaults Affect Behavior? Experimental Evidence from Afghanistan
AbstractThis paper reports on an experiment examining why default savings assignments affect behavior. Working with Afghanistan’s largest firm, we designed and deployed a new mobile phone-based automatic payroll deduction system. Each of 967 employees at the firm was randomly assigned a default contribution rate (either 0% or 5%) as well as a matching incentive rate (0%, 25%, or 50%). We find that employees initially assigned a default contribution rate of 5% are 40 percentage points more likely to contribute to the account 6 months later than individuals assigned to a default contribution rate of zero; to achieve this effect through financial incentives alone would require a 50% match from the employer. We also find evidence of habit formation: default enrollment increases the likelihood that employees continue to save through the program substantially after the end of the trial (when matching incentives are removed), and increases employees’ self-reported interest in saving and sense of financial security. To understand the mechanism behind these effects, we conducted several experimental interventions to try to move employees away from their default contribution. Ruling out several competing explanations, we find evidence that the default effect is driven largely by a combination of present-biased preferences and the cognitive cost of calculating savings trajectories under alternate contribution levels.
Banking on Trust: How Debit Cards Enable the Poor to Save More
AbstractTrust is an essential element of economic transactions, but trust in financial institutions is low, especially among the poor. Debit cards provide not only easier access to savings, but also a mechanism to monitor bank account balances and thereby build trust in a financial institution. We study a natural experiment in which debit cards are rolled out to beneficiaries of a Mexican conditional cash transfer program whose benefits are already directly deposited into a savings account. Using administrative data on over 340,000 bank accounts over four years, we find that prior to receiving a debit card, beneficiaries do not save in these accounts. Beneficiaries then begin to increase their savings after 9 to 12 months with the card. During this initial stagnant period, they use the card to check their balances frequently, and the number of checks decreases over time as their reported trust in the bank increases. After 1 to 2 years, the debit card causes the savings rate to increase by 3 to 5 percent of income. Using household survey panel data, we find that this effect represents an increase in overall savings.
The Limits of Commitment: Who Benefits From Illiquid Savings Products?
AbstractWorldwide, the market for checking overdrafts is $35 billion. These overdrafts often incur high fees and/or interest rates, which are costly to consumers and can result in a debt cycle where new loans are taken to meet these obligations. Working with a private commercial bank in Ghana, we examine the impacts of a commitment savings product designed to help clients taking repeated overdrafts to break the debt cycle. The savings product was very popular, with 73 percent of those offered the product taking it up. The product significantly increased savings with the commercial bank during the commitment period without increasing the average amount in overdraft – this effect holds for participants with both above- and below-median overdraft histories with the bank. However, this masks important heterogeneity in overall savings behavior. After accounting for other sources of savings, we find that above-median overdrafters do not accrue new savings during the commitment period. Rather, they draw down other savings to offset the committed amount and are more likely to take on new debt – as a result, their net savings actually decrease during the commitment period. Individuals who are below median overdraft users, on the other hand, significantly increase savings – both during and after the commitment period. Taken together, these results suggest that the financial pressures and/or self-control problems that lead to heavy use of overdraft facilities also drive these individuals to undo any commitment to accumulate savings.
- O1 - Economic Development
- G2 - Financial Institutions and Services