Today The New York Times features a perspective from Shaila Dewan on the importance of credit and saving in the lives of the poor. Dewan highlights that life without credit can be expensive and severly limiting in terms of accessing housing and other services or dealing with emergencies. She also notes that savings and credit are interconnected and quotes FAI's Jonathan Morduch on his own observations of the relationship between this activities from his research in Bangladesh . . .
Read MoreThe Taylors overdraft their checking account every two weeks, on purpose.
As described in a recent issue brief published by the U.S. Financial Diaries, the Taylor family’s income level varies significantly from month to month. Sometimes it’s not enough to cover all of their expenses. So, they opened an account at a bank with a simple overdraft fee structure: One $35 charge per overdraft, no daily fees, and an allowance of up to $500 at a time. Since the Taylors typically make only one large cash withdrawal per paycheck – the entire amount of pay – this bank would charge them at most one $35 overdraft fee each cycle, if they happen to need more cash than the amount of that week’s direct deposit.
The Taylors use overdrafts as another household might swipe a credit card or take out a payday loan. Since their credit history eliminates the card option and they are already tied up with a payday lender, over-drafting becomes another logical – and probably more convenient – place for them to turn to stay on top of their bills. It’s clear that the family responded to and relies on their new bank's transparent behavior. They saw its fee policy, understood how they could manage it, and became a customer . . .
Read More“Wow, the consumer knows about that?”
This was essentially how a banker responded when I told him the story of a woman I interviewed for the US Financial Diaries study. The participant – we’ll call her Jenna – was charged four $32 overdraft fees in the same day ($128 total, if you’re counting). Jenna explained to me that if her bank had processed her transactions in the order she had made them, there would only have been one charge. Instead, the bank posted her largest purchase first, which was enough to take her account balance below $0. That triggered the initial $32 fee, and then three smaller debit card swipes she’d made earlier in the day each prompted fees as well . . .
Read MoreImagine you enter a shoe store that is having a sale – buy any pair of shoes, get a second pair for free. Sounds like a great deal, right? Now imagine that same store had an offer to take 50% off any two pairs of shoes. Even though you are spending the exact same amount for the same two products, perhaps you react differently to the two offers. Perhaps there is something about removing “free” from the offer that might make you feel like you’re not getting as good of a deal. And how would you pay for these shoes – with cash? Credit card? Mobile wallet balance? Does it even matter? Research shows that people perceive $1 in mobile money differently than $1 in cash, and that these different perceptions DO influence spending habits.
The process of mentally separating different forms of money and assigning value to them, keeping track of potential costs and benefits to transactions, and categorizing expenses into buckets like “food” and “healthcare” is called mental accounting . . .
Read MoreMy month-long experiment of surviving on cash only is at an end. One question I had hoped to answer was whether switching to purely cash transactions would cause me to spend less. To find out, I took three months of transaction data from last summer from Mint.com. After removing spending anomalies like an unusually large student loan payment and an airplane ticket, I averaged the expenses for this time period in a number of categories like “entertainment” and “groceries.” I compared the three-month averages with my one month of cash spending during Sorry, Cash Only.
I suspected that the numbers would reveal that I spent less during my cash month. Existing research shows that convenience, reduction of barriers to spending, and even perception of credit all contribute to higher spending with credit cards. However, I wasn’t prepared for how much less I spent . . .
Read MoreHow would you describe a savings account where your money is occasionally stolen, eaten by mice, or washed away by floods? Merchants in Dharavi, the largest slum in Asia, describe it as “safe.”
That’s what Deepti KC and Mudita Tiwari found when they interviewed sellers, suppliers and buyers in Dharavi, home to 5,000 informal businesses that create goods worth more than 600 million dollars a year, in the heart of Mumbai.
Far from being poor peddlers of trinkets, the sellers of Dharavi—particularly those who make relatively expensive leather goods—routinely move thousands of dollars in a single day. They have sophisticated financial lives, often including formal bank accounts, and many have smart phones. KC and Tiwari—like many researchers studying financial inclusion in the developing world—posit that increasing take up of digital transactions “is essential to achieving inclusive financial growth in India” . . .
Read MoreOne of the issues we follow closely at FAI is the rapidly expanding use of mobile money in the developing world. As Jean Lee recently noted, a growing body of research on mobile money has a lot to say about its potential to smooth risks and facilitate transfer programs.
In the interest of keeping a finger on the pulse of the latest results from the field, FAI's Managing Director Timothy Ogden and Deputy Managing Director Laura Freschi recently attended IMTFI's Fifth Annual Conference for Funded Researchers . . .
Read MoreAt a recent Microfinance Club of New York event with Michael Joseph, the former CEO of Safaricom in Kenya and now the Director of Mobile Money for Vodafone, Joseph cited regulatory barriers as the principal reason that mobile money has not taken off in India, the largest market in the world and his current project. A new paper from Eva Gutierrez and Sandeep Singh at the World Bank confirms his intuition, finding evidence for the importance of regulation for mobile money usage by combining the World Bank’s Global Findex database with cross-country variation in regulatory regimes.
The authors argue that both regulatory certainty — stability in regulation — and regulatory openness — policies that favor the introduction of new technologies — are necessary for mobile money adoption. They construct an index of regulatory favorability towards mobile money and look at the relationship between their index and actual end user behavior using the Global Findex to track outcomes for 35 countries, finding that overall, regulation is a significant factor in explaining mobile money usage among both the banked and unbanked . . .
Read MoreMost of NYU’s development economists are on leave this year (Raquel, Debraj, and Hunt: your colleagues miss you). The regular doctoral sequence and development seminar are on hold for the year. Students walk the halls unsure who to ask about the right way to parameterize intra-village treatment heterogeneity when doing power calculations. Bill Easterly and Yaw Nyarko are holding the fort, though, and they pulled off a standing-room-only annual Development Research Institute conference on Friday, November 15. It was a reminder of what makes NYU such an interesting place to study development.
Takeaways: The history of European settlement made more difference than we thought to global patterns of growth (and still does) . . .
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Editor's Note:
If you were hoping that the faiV would be a pleasant distraction from the overwhelming flow of AI-related content, sorry. For the record, the faiV had “ai” built in before Anthropic existed. And a housekeeping note: we’ve finally jumped ship from Mailchimp to NYU’s mailing platform—I guess if you’re reading this it’s been a seamless transition and if you’re not, well, you’re not. Feedback on the faiV’s content and format and delivery methods is always welcome, just drop me an email.
- Tim Ogden