Jumpstarting the savings journey for low- and moderate-income people in Vietnam

Posted on by MSC

Nam Nguyen belongs to an estimated one million households in Ho Chi Minh City who had to rely on government support to get through the COVID-19 lockdown. These households represent Vietnam’s low- and moderate-income (LMI) community and comprise farmers, students, daily-wage workers, and nano- and micro-business owners. They are among 70% of Vietnam’s 95 million people earning about USD 2–10 per day.

The third and fourth waves of the COVID-19 pandemic in 2021 severely affected Vietnam and laid bare the vulnerabilities of LMI. It highlighted the need to have a pool of savings to tide them through financial shocks. Construction worker Nam learned this the hard way.

How do LMI people in Vietnam save their money?

Saving after managing expenses remains a priority for LMI people in Vietnam who aspire to lead a better life, absorb income shocks, and strengthen financial resilience. However, ~69% of adults in Vietnam remain un(der)banked and have limited or no access to financial services.

Access to formal savings has been far from uniform, particularly in rural areas. As a result,  most LMI people still prefer to save outside the formal sector, using informal means such as keeping cash at home and saving with informal associations/ clubs.

The figure below highlights the saving characteristics of Vietnam’s key LMI customer segments.

Figure 1: World Bank’s comparison of savings pattern between Vietnam and East Asia & Pacific in 2018

Figure 2: Savings characteristics of Vietnam’s key LMI customer segments

What challenges do LMI people face in saving their money?

LMI customer segments in Vietnam recognize that savings are essential for financial security. However, they face multiple challenges:

Small incomes make it hard to save. In rural Vietnam, the average monthly income per capita is around USD 152, while the average monthly expenditure is USD 105. So at the most, they can save USD 47 a month, even if they cut out all discretionary spending. In addition, most LMI people’s income is cash-based, sporadic, and unpredictable, which means that they sometimes have to resort to emergency borrowing, making it even more of a challenge to save regularly. Moreover, those who do save prefer to save in cash because it is convenient and easily accessible.

The result is that many small savers keep their money in informal channels, like “Ho/Hui,” a rotating credit and savings association. However, these can be risky as there have been cases of frauds where participants have lost their money.

Another challenge is the lack of access to bank branches. For every 100,000 people in Vietnam, there are only four commercial bank branches. Visiting far-off branches is costly, involving transportation and opportunity costs during business hours. Many small business owners also want to withdraw their money at short notice, which they cannot do if the bank branch is far off. Moreover, to open an account, customers have to travel to the bank multiple times —to submit documentation, collect a passbook, and so on. For most LMI people, the costs involved are not worth the effort.

Furthermore, Vietnamese commercial banks only offer one-size-fits-all saving products that do not meet the varying needs of the LMI community. For instance, most commercial banks require a minimum of VND 1,000,000 (~USD 44) to open a savings account. The weekly savings of the LMI people is nowhere near this amount.

Most commercial banks prefer middle and upper-class urban consumers. These banks do not target the different LMI customer segments as they don’t save large enough sums of money to cover the costs of acquiring and maintaining them as clients.

Some state-run financial institutions, including the Vietnam Bank for Agriculture and Rural Development, the Vietnam Bank for Social Policies (VBSP), and the People’s Credit Fund, offer savings and credit products for people with lower incomes. However, barring VBSP, these institutions have not had large-scale success owing to compulsory savings, lengthy and complex processes, and reliance on physical distribution channels.

Three-pronged solution

MSC is working with organizations in developing countries to help LMI people ease into a more robust savings behavior and improve their financial health. The following elements are required to foster small savings for LMI people in Vietnam using technology, smart product design, and innovative distribution platforms:

1. Product features designed to match the lifestyle and needs of LMI people

Such accounts should be simple to open and maintain, and customers should be able to access their money easily. In addition, there should be no requirements for a minimum balance to be maintained or any lock-in period, which is a big concern for small savers.

Figure 3: Key characteristics of an ideal micro-savings product

A digital savings account can provide these features by offering a simple user interface with clear and short instructions that enable users to deposit and withdraw money easily. These digital accounts can have an inbuilt feature that gives customers periodic reminders or “nudges” to set aside money, even as low as VND 20,000 (~USD 1) a day. Offering a goal-based product, such as saving for a child’s education, can also encourage savings.

MSC has helped create such a small-savings product in Bangladesh. In 2019,  MSC partnered with Shakti Foundation, a micro-finance institution, to develop voluntary savings products targeting women. The Family Savings and Lakhpati Savings products are available across Shakti’s 356 branches and have helped more than 350,000 women save money.

Shakti’s women customers do not need to maintain a minimum balance with no lock-in. It encourages savers to set a goal and gives them frequent reminders on their feature phones to add as little as BDT 100 (~USD 1). Users also get information about their account balance on their phones, saving them the trouble of going to a branch.

2. Phygital distribution channels to democratize savings

With innovations in technology and finance, traditional banks can tap into new channels to bring micro-savings to LMI people. These include digital wallet providers, e-commerce platforms, or “super apps” such as MoMo, Grab, Zalo, and Shopee, which have amassed millions of customers in Vietnam lately. These technology-led platforms will reduce the cost of acquiring new customers by accepting documentation online or via a phone and doing an eKYC. Moreover, super app players can market savings products to a strong base of millions of LMI users much faster.

Saving through an app is easier and cheaper for individuals. For instance, users can deposit or withdraw money from their accounts in a few seconds using biometrics or one-time password verification. Meanwhile, the technology platforms also benefit by acquiring new customers and eventually cross-sell them other products and services.

MSC is working with a leading FinTech in Vietnam to offer a digitally-enabled savings solution to enable its users to put small amounts of money aside when they can. The solution provides goal-based savings mapped to the users’ lifestyle, interest rates at par with incumbents/banks (~5%), easy (digital) access and monitoring, and withdrawal flexibility.

3. Agent networks to tap into rural, underserved areas

Agent networks are essential in a context where a significant customer base is rural, underbanked, and yet to try out technology-based, self-initiated transactions.

Agent networks have expanded access to and usage of financial services in Bangladesh, Kenya, and India. For instance, Bangladesh launched its mobile financial services (MFS) in 2011 and now has 1.1 million agents that serve 110 million customers. At present, 13 companies offer MFS to 60% of the adult population. In addition, more than 11,320 agent banking outlets serve 5.26 million customers.

In 2017, the state-run State Bank of Vietnam (SBV) piloted a ‘cash-in and cash-out’ agents program with MB Bank – Viettel, PGBank – Petrolimex sales points, and Vietcombank – MoMo. Vietnam, however, does not have a formal agent banking network, which will be critical as an intermediate stage in reaching out to and onboarding rural customers.

The National Financial Inclusion Strategy aims to develop and issue regulations on licensing and guiding the operation of banking agents. It also aims to facilitate non-bank organizations with a vast network or operating areas in rural and remote areas to become agents of banks.

The bottom-line

Savings is an essential tool that helps LMI people like Nam strengthen financial resilience. Collaboration among multiple stakeholders, including regulators, financial institutions, and financial-technology firms, is needed to digitize and simplify the savings journey for LMI people in Vietnam. MSC and Startup Vietnam Foundation (SVF) are driving one such multi-stakeholder partnership- the ‘CO4GROWTH’ accelerator program. We are supporting 35 startups under the program to develop innovative, technology-enabled solutions for the LMI people in Vietnam. We expect the regulatory sandbox for FinTechs approved by the Government of Vietnam in September 2021 to foster the development of new services, such as digital savings accounts for small savers. Meanwhile, service providers need to understand this opportunity and innovate —which, if done well, can lead to a win-win proposition for all.

Journey of Social Safety Net (SSN) beneficiaries during the COVID-19 pandemic period

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Bangladesh reduces poverty and vulnerability through its Social Safety Net (SSN) programs using cash assistance. These programs support the elderly, widows, persons with disabilities, women, and men of working age with temporary employment. The programs also support young mothers and children. Before digitizing the SSN payments, most beneficiaries had to wait long queues and travel long distances to receive the payments. During COVID-19, many were worried about how they would receive their payments. Then, in the fiscal year 2020-2021, the Bangladesh government introduced a digital intervention through MFS, which supported 25 million beneficiaries. This initiative also ensured that the beneficiaries had financial freedom and easy access in rural areas of Bangladesh.

How has the pandemic changed the way LMI people in Vietnam save?

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The digital savings and payments channels carry the immense potential to increase access to basic banking services. The changes in the payments landscape due to the pandemic have altered people’s outlook in Vietnam. Digital payments solutions, such as mobile, QR, and card payments, saw an upward trend in Vietnam as people preferred the convenience of saving and paying digitally.

The “Innovate, Implement, Impact” or “i3” program, supported by the MetLife Foundation, uses digital technology to provide better opportunities for people to plan, save, borrow, and spend safely. Further, the video explores the digital journey of Vietnam during the pandemic.

Is access to smartphones essential to bridge the digital divide?

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Usage of smartphones appears to increase household income and consumption. Both quality (relatively) cheap smartphones and 3G+ coverage are increasingly available throughout Africa. But the majority of households have very limited disposable income both to buy a smartphone, but in particular to purchase data. The prohibitive cost of data stops many using the internet/apps and those that do “sip” rather than “surf”. The result is a significant and persistent usage gap, even as the coverage gap reduces. Orality and lack of digital capability mean that icon- and IVR-driven interfaces will be essential to build self-initiated usage. But much of the shift to internet/app usage must be assisted and mentored by agents. Agents offer a range of real advantages but also a wide variety of risks/consumer protection concerns which will require attention.

The resilience of bank agents in Bangladesh through the COVID-19 pandemic

Posted on by MSC

Bangladesh sanctioned and launched agent banking in 2013 to provide alternative and accessible banking services to its underserved and underprivileged population. As of 2021, 13,591 banking agents opened 11 million bank accounts through 18,314 banking outlets. However, due to the COVID-19 outbreak, Bangladesh imposed lockdowns and stay-at-home orders that prevented businesses, including banking agents, from generating income. Despite the hard barriers, like many other agents, 60% of Bank Asia agents did not stop operating even when the commercial branches were closed. They borrowed money from friends and family members to continue their banking operation and supported the government by disbursing assistance funds to vulnerable people.

Different yet similar—the behavioral biases of low- and moderate-income segments in Bangladesh and Vietnam

Posted on by MSC

The biases of the LMI segment and product development lessons for providers

Our previous  blog showed that Bangladesh and Vietnam have some macroeconomic similarities yet differences. This blog examines the similarities, and even differences, in biases through the lives of two low-and moderate-income LMI segment protagonists, Morium from Bangladesh and Hoang from Vietnam.

Our work suggests three distinct behavioral biases drive people’s decision-making from the LMI segments while using digital financial services (DFS)—loss aversion, status quo bias, and social default bias. There are several other biases, but financial service providers  (FSP) seeking to serve LMI people with DFS will always face these three key ones.

What do they face?

Morium works in a readymade garment (RMG) factory on the outskirts of Dhaka. During the pandemic, she received her salary in her mobile financial services (MFS) wallet but still primarily uses cash for day-to-day transactions. Hoang hails from the north-central coastal district of Quỳnh Lưu in Vietnam. She has been running a grocery store for the past five years and is relatively tech-savvy.

How should FSPs factor in these biases when designing products for the LMI segment? Understanding and responding to these biases is key to effective product design.

Loss aversion

Loss aversion is best encapsulated by “losses loom larger than gains.” Morium lives on a salary that is just about sufficient to make her ends meet. Hence, she wants to make low-risk choices and avoid losses from incorrect financial decisions. She wishes to save money cautiously for the future. She, therefore, invests in the Deposit Pension Scheme (DPS), a formal recurring deposit instrument used by millions of LMI people. On the other hand, Hoang does not trust banks and chooses savings options that she believes carry a lower risk. She prefers to keep cash at home and with informal associations and clubs comprising people she knows and trusts.

When she sends money home through mobile money, Morium depends on agent-assisted transactions, as she fears sending money to the wrong account.

Status quo bias 

Status quo bias is seen in people who persist with their current practices and resist any new behavior. People tend to continue with the old system unless they find a strong enough reason to change.

After COVID-19 hit, the Government of Bangladesh mandated all RMG factories to transfer salaries to workers’ MFS wallets. Morium received her salary in her bKash wallet for the first time. Prior to this, she has always used cash to buy her daily needs from grocers and merchants. Due to this status quo behavior, even now, she withdraws her salary (at an MFS agent point) and spends in cash rather than using her MFS wallet to pay digitally for her purchases. Morium exhibits status quo bias because had she not withdrawn money in cash, she would have saved on the 1.85% cash-out fee she has to pay the agent – about BDT 185 (USD 2.15) for her BDT 10,000 (USD 116) salary. bKash P2P charges are BDT 5 (USD 0.058) for transactions of less than BDT 25,000 (USD 290) (for that month), so she would have to do 37 of these before cashing out became a rational economic decision. Status quo behavior can be expensive!

Hoang wants to borrow formally but hesitates to visit banks due to the hassles of providing collaterals and navigating complex documentation requirements. She is more comfortable maintaining the status quo by borrowing from informal sources. Even though she knows of the risks, she shuns buying insurance cover. She perceives it as an expensive product for the rich. She maintains status quo bias by depending on informal support groups. The idea of saving now and reaping benefits later does not appeal to them.

Social default bias

Individuals exhibit this bias when they can or do not make informed decisions and copy others’ choices. Morium tends to follow the “leaders” in her factory who influence major financial decisions. Despite owning a mobile phone and an MFS wallet, Morium follows her friends and exhibits social default bias by making P2P transfers with the help of an agent. Stories of DFS-related fraud, instances of siphoning value out from wallets, sending money to the wrong customers, and cautionary media news weighs heavily on her mind and pushes her to display this bias. Even when it comes to savings, Morium saves in DPS, just like her friends.

Address bias through smart product design

FSPs can create a strategy that takes these biases into account by scrutinizing the requirement of customers using the eight Ps of the marketing framework—product, price, place, promotion, people, process, physical evidence, and positioning. Doing so will help them overcome the barriers that often prevent LMI people from accessing DFS.

Product:

  • Morium and Hoang are attached to their current ways of managing their finances. People will buy your product only if it offers an easier experience than their current one. Break status quo bias with product features such as zero savings balance, high liquidity and easy access, quicker turnaround times, and no penalties.
  • Stop trying to attract customers with high return rates alone. A combination of liquidity, safety and return (in that order of priority) may address loss aversion better.
  • Mimicking the features of informal financial systems familiar to LMI users helps overcome status quo bias. For example, MSC supported the FinTech Kosh to mimic microfinance digitally.
  • Use the power data to offer need-based products. MSC supported the FinTechs Finarkein and Numer8 to optimize the power of data for product design.

Price:

Place:

  • Morium fears stepping into banks to access financial products. Offer her products in surroundings familiar and comfortable to her. FSPs can partner with aggregators, mom and pop stores, agent outlets, post office outlets, and community centers. MSC is working with several FSPs in Bangladesh to offer financial products through some of these outlets.
  • If you build digital marketplaces or platforms, make sure they are in a local language, with colloquial terms, are easy to navigate, and have less clutter. And remember that many people are oral, so intuitive interfaces are key.

Promotion:

  • Build marketing strategies that appeal to the needs of LMI people using local language and cultural context. MSC has helped many FinTechs build this in India—Bridge2Capital, myPaisa, Navana tech.
  • Communicate the benefits of products straightforwardly using words that people from the LMI segments use. Train your staff and cut the jargon!
  • Many LMIs use WhatsApp and YouTube for entertainment, use these wherever possible for promotion, education, and marketing.

People:

  • Ensure that human customer touchpoints are easy to reach, knowledgeable about the product, and sensitive to the needs of LMI customers. This comfort breaks the status quo behavior of the likes of Morium. Learn from Bangladesh’s microfinance!
  • Enable and support agents to build trust. Remember that the bank security guard is probably the preferred touchpoint for LMI people coming to your bank branches.
  • Partner with influencers and local entities. This helps use social default bias to your advantage. Frontiers Markets in India uses SHG leaders for social commerce.

Process:

  • Shorten forms, reduce paperwork, and limit data fields. This allows people to sign-up quickly and try something new by reducing status quo bias.
  • Think of ways to mimic the features of informal financial systems familiar to LMI users. These have great simplicity. Hoang is comfortable with informal clubs; can your financial product give her the same comfort and ease?
  • Use a combination of technology and in-person support to break status quo bias. BRAC Bank in Bangladesh banks on technology and agents through its bKash network to reach the last mile.
  • LMI people employ coping mechanisms, such as animating money, income shaping, and liquidity farming extensively in their lives. Keep this in mind, and use these design principles.

Physical evidence:

  • The status quo springs from a fear of the unknown. Create a physical environment that is welcoming, familiar, and helpful with clear and concise signage in the customers’ language. When MSC first worked with Equity Bank, we saw farmers leaving their shoes at the door of the bank’s polished marble branches.

Positioning:

  • FSPs should build customer protection in their solutions. Toll-free phone numbers that work, empathetic agents, responsive and supportive grievance redress systems will build customer trust.
  • If you feel that building a brand will take time, partner with a known brand to which LMI people can relate to address the status quo and social default bias. Customers value the safety and security of products—so use this to address loss aversion bias. Fintechs that offer savings and investment products partner with well-known banks and mutual fund houses.
  • Focus on emotional appeals that resonate with LMI customers. Our i3 program partner in Bangladesh, Apon Wellbeing, stresses “workers wellbeing” in its pitch. It stresses the importance of health, hygiene, and nutrition in its product offering, which helps people shun the status quo bias.

Conclusion

Biases are not specific to LMI segments. These are inherent human behaviors and are challenging to overcome. But what FSPs can definitely do is create products that appeal to this population and nudge these users into using these products. Thinking about the 8 Ps should at least help them offer an antidote to some biases. However, it will be a trial and error path with no successes guaranteed.