So what is the big hype about consumer education? Normally when that topic came up in any article or discussion, I would basically switch off; until recently when I witnessed a situation where I actually thought consumer education could go a long way.
My mother takes part in an annual grocery stokvel group in South Africa. A stokvel is basically a saving scheme where a group of people contribute fixed sums of money to a central fund on a monthly basis. The scheme in which my mother takes part, is run by a local supermarket which allows individuals to save money on a monthly basis and can access the money at the end of the year. The stokvel members can either use their stokvel savings for grocery shopping at this supermarket with discounts on certain packages of food, or the members can just collect their savings, depending on which scheme they join. My mother is part of the grocery shopping scheme.
As I stood in the queue waiting to collect the stokvel money so we could go in and do our Christmas shopping, I realised that others simply collect their money and leave. A middle aged lady came in to collect her savings and she was told to wait as it was a lot of money which needed to be collected from the bank. This lady had been saving R3000 (about US$337) per month, not exactly petty cash – and after a year of saving, the sum is not something one would want to be carrying around. This lady was evidently saving for something quite significant, like building her house incrementally or renovating an existing house, for example.
This led me to enquire about the interest earned when saving such large amounts of money with this supermarket. To my surprise, I was told that there is no interest earned. The Supermarket banks the money, so I’m assuming there definitely is interest earned on the money at the bank, so how is there no interest earned by the stokvel member? My conclusion then is that the interest earned on the money is kept by the supermarket as a fee for the service they are providing. This makes absolute sense, they are providing a service which people need and they can’t be doing it for free. But banks provide this service too and they let you have the interest on the money saved. Of course, it is also true that banks charge for their service, imposing deposit, withdrawal, and other fees. This is one of the reasons why some people say that they do not trust banks. For me this reflects a serious case of a lack of consumer education, because with the correct savings account the lady at the supermarket could’ve gotten a little extra money back from her savings.
It has been established that people use many different financial instruments, besides the banks, for various reasons. According to the most recent South Africa FinScope study– a study of consumers’ perceptions on financial services and issues- consumers generally use a combination of financial services to meet their financial needs. Two percent of South African adult individuals rely soley on banking services and 6% rely only on informal mechanisms such as savings groups i.e stokvels to save. This means that banks are not fully catering to people’s needs, and that people lack sufficient information to comfortably use the services offered by the banks.
In the case of the lady who saves her money at a local supermarket to earn no interest when she actually can save at a bank and earn interest of about R400- R500 on her money by the end of the year (depending on the bank and the interest rates), I would argue that it is the lack of information more than it is banks failure to cater to her needs.
According to the Financial Diaries project– a year-long household survey that examined financial management in poor households- financial instruments of households may be determined by the household’s livelihoods. Households with less regular incomes tend towards informal financial tools, like borrowing from neighbours. This finding is made clear in Portfolios of the Poor, a book based on the Financial Diaries research undertaken in Bangladesh, India and South Africa, and written by Daryl Collins, Jonathan Morduch, Stuart Rutherford and Orlanda Ruthven. The FinScope study also illustrates that people use a wide range of financial tools to suit their needs and that there will always be an overlap in product usage from Banked, Informal and Non-Banked formal products. Another financial diaries report also reveals that stokvels are generally a savings instrument of choice. In tracking various people’s financial instruments to saving, the study found that although instruments like savings annuities and unit trusts are used, most savings instruments tend to be either bank-related or informal. The findings indicate a large percentage of home savings, followed by stokvel savings. SaveAct, a non profit organisation, promoting and supporting the formation of savings groups, has produced a document of testimonies of some its participants, and they have established that many savings group members, prioritise the building of a new house or improvement of an existing one. It further reveals that people choose a savings method they can trust. Savings Groups are, therefore, a financial tool that responds to certain financial needs of some populations whether using a group like SaveAct or saving with a local supermarket.
With a savings of R3000 per month, one can assume that the lady in question has a regular monthly income. She may be using a range of financial services to meet her needs, so she may be banked and even have a pension fund. Nothing seems to stand between her and saving her money at a bank for six months, but the lack of sufficient information. Although there are many and varied reasons why people would opt to use other financial tools besides the banks, the bottom line is that one needs to have enough knowledge of the different tools in order to make that decision.