How Employers in Poor Countries Are Using Nudges to Help Employees Save Money
One of the most common ways to get people to save is through their employer. In particular, behavioral economics—that marriage of economics and psychology that has put terms like “nudge” into the popular lexicon—has provided a powerful tool for increasing savings, in the form of the default enrollment. The idea is simple: people save more in retirement accounts when they are automatically enrolled by their employer than when they have to sign up themselves. Most U.S. employers have adopted default savings programs, but the idea is only just entering poor countries, where saving is less common. According to World Bank figures, half of adults in high-income OECD countries save in a formal account; in developing economies, it’s only one in five. But we now have some evidence about how to scale nudges to help change this.
Along with other aspects of the formal financial ecosystem—ubiquitous banks, ATMs, and credit cards—default savings programs have historically been the province of rich countries. But recently, the world has seen a dramatic drop in the numbers of unbanked adults due to the rapid spread of mobile money. The number of people with phones is far higher than the number of people who have easy access to traditional bank branches, especially among the rural poor. Prior to our study, however, no one had tested whether mobile banking could facilitate default savings programs. In a recent paper, we found that nudging employees to save worked in Afghanistan, one of the world’s least financially developed countries.
The financial technologies, or “fintech,” we hear about most often—like Apple Pay, Bitcoin and Crowdfunding—leverage the high penetration rates of bank accounts and credit cards in rich countries. But what does fintech look like in places underserved by financial institutions? Increasingly, it’s mobile money: a low-cost way to digitally transfer local currency using a mobile phone, supported by a network of human agents providing cash-in and cash-out services. One decade after mobile money first launched in 2007, there are over 118 million active accounts using 277 mobile money services in 92 countries. Employers are catching on to the trend and paying wages with mobile money in Latin America, sub-Saharan Africa, and South Asia.
In our study, we partnered with Roshan, the largest mobile phone company in Afghanistan, and helped them design a default savings account that was provisioned entirely over the mobile phone network, so that people could make deposits and withdrawals without ever visiting a bank. We then conducted a field trial with roughly 1,000 employees to figure out whether such a product could “mobile-ize” saving. The results were striking, and provide a hint of how employers and governments can help get people to save, even in the world’s most challenging environments.
Most notably, we found that when employees were randomly assigned—by default—to automatically contribute a portion (5%) of their salary to savings, they were much more likely to participate than those who had to actively enroll of their own accord. This effect—a 40 percentage point increase in participation—is nearly identical to the effects observed in countries like the U.S. and Europe, and was roughly as large as the increase in savings observed when we offered a hefty financial incentive (a 50% match) for employees to save. Over six months, the average employee who was enrolled to save by default accumulated an extra half-month’s salary in his or her savings account, relative to employees who had to opt in.
This is exciting—and important—because saving formally is essential to a healthy economy. Savings provide a major flow of capital to financial institutions, and enable consumers to purchase large assets, manage unexpected expenses, and prepare for retirement.
We see two takeaways for CEOs, managers, and impact investors. First, defaults matter—and firms everywhere can help boost financial inclusion by nudging their employees to save. Done strategically, automatic savings programs can support employees and the bottom line by reducing turnover and providing a more sustainable alternative to payroll advances. Second, with the rapid spread of digital finance, there is a clear opportunity to export ideas from behavioral economics to developing countries. For example, any transaction that happens regularly, like an anti-poverty cash transfer or even a store owner accepting a mobile payment, could incorporate a feature where a portion is saved by default. The combination of behavioral insights and digital finance can create highly scalable products with positive social impact. Companies and investors that creatively integrate behavioral economics with digital finance are likely to be rewarded.
Joshua Blumenstock is an assistant professor at the U.C. Berkeley School of Information, where he directs the Data-Intensive Development Lab. His research lies at the intersection of machine learning and development economics, and focuses on using novel data and methods to better understand the causes and consequences of global poverty.
Michael Callen is an assistant professor of economics and strategy at the UCSD Rady School of Management. His research areas are behavioral economics, development economics, and political economy.
Tarek Ghani is an assistant professor of strategy at Washington University’s Olin Business School. His research examines how market and institutional frictions affect firm strategy in emerging economies.
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