Monday, March 28, 2016

Using the ATM Debit Card to Build Trust and Savings: A Study through Mexico's Oportunidades

Trust is an essential element of economic transactions. This is especially true for savings where transactions take the form of a promise to future returns. Unfortunately trust in financial institutions appears low across the world and even more so among the poor and less educated. In Mexico, for instance, 25 percent of those with primary school education admitted to having "no trust at all" in banks, while 18 percent of those with more than primary school education expressed some trust in the banks (Gallup World Values Survey). This is not entirely inexplicable, given that in the last 15 years, there have  probably been hundreds of frauds in Mexico which led poor savers to lose all the money they deposited in financial institutions. Researchers have also noted that poorer clients who received assistance in surmounting the initial costs of opening bank accounts often ended up using the account to merely withdraw money from transfers and let the account remain idle the rest of the time. Along with transaction costs, low trust frequently figures as the main reason cited by the poor for not using savings account. Overall, this state of affairs might help us to explain why there is little savings in formal accounts.

In our study we were interested in finding out whether ATM debit cards and mobile banking could potentially alleviate this problem since these technologies potentially lower the cost of monitoring movements in the account and simultaneously increase convenience and access to savings. Ideally, this could be tested using a randomized experiment where we award savings accounts with and without ATM cards randomly. Unfortunately, such a randomized experiment does not yet exist in the given context. Thus, in our study, we look at the effect of giving debit cards to the beneficiaries of a Mexican state conditional cash transfer program Progresa/Oportunidades (now Prospera). The beneficiaries had already received their transfer at a government development bank Bansefi but had not been given a debit/ATM debit card connected to the account. For the study, we have used account level information on more than 300,000 accounts some of which received an ATM debit cards in a staggered fashion.

                              Photo: Will Kay, Flicker, Creative Commons:

At the beginning of the research, we were intrigued in part, by the stories of Oportunidades beneficiaries who complained about money disappearing from their account. We found that this was due to the substantial fees they were incurring by frequently checking their account balances. This was so particularly in the beginning when they did not have any trust in the banks and resorted to making sure that their money was there by checking their accounts several times in a single day. Since there was a transaction cost involved in the process, the beneficiaries lost a substantial amount of their funds in this way. We focused on the increase in the savings account of the group that had received the debit cards. For purposes of comparison, we also had a control group that had not received any debit cards as a part of the program. For analysis, we undertook a differences-in-differences empirical design to approximate the causal effect of receiving the card on savings in the account.

As mentioned in the beginning, we found that when they first got the debit card, customers checked their saving balance frequently, but the frequency of this checking declined over time. Most notably, beneficiaries with more than 6 months with the card checked 57 percent less frequently per bimester. This evidence strongly suggests that initial use of ATM debit cards to frequently check and monitor savings account helps to build up trust. Additionally, the increase in saving was gradual and coincided with the increase in directly elicited trust in the bank account and was not related to the learning curve for the debit card use. We found that in the groups using the debit cards, the savings increased dramatically, almost tripling in a span of 2 years after receiving the ATM card vis-à-vis the control group (without the ATM card). We noted that the increase in trust was contemporaneous with increases in savings amount in the bank account.

In addition, the use of a consumption-income survey showed that the increase in savings in the account comes from new savings and not just from savings shifting. We found that although income did not change, consumption decreased after getting the ATM card. One interpretation of this finding is that the account allows for some commitment to saving and avoidance of "temptation goods" like high sugar foods that would otherwise be consumed. In our final report we lay out some alternative explanations such as mechanical savings where saving increases related to more frequent but lower amount withdrawals, and differential changes due to changes in the amount of the Oportunidades transfer. 

All in all these findings indicate good news. Trust and how to increase trust has not received enough attention in the academic literature. Our results suggest that an existing and simple technology – namely the debit card could increase trust, account use, and savings. Furthermore our findings show that in contexts such as the one examined in this study, the experiment can be easily scaled up. Increasingly, the world over, tens of millions of poor households in dozens of countries currently receive cash transfer programs, more and more into bank accounts. Given the possible benefits, providing ATM cards for these accounts appears to be a worthwhile measure worth ensuring.

The final report of the study on how the ATM card has an effect on trust, savings, and the use of formal savings accounts can be found here.

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