Bankable Frontier Weblog

Christmas 2007 has barely come and gone, but already eager customers in the UK (and probably other countries) have the opportunity to save towards vouchers or hampers for Christmas 2008, via websites like this one. This is more than simply another example of rampant consumerism, however. In fact, saving for Christmas hampers is a longstanding tradition in the UK among poorer households. Christmas savings schemes offer the ability to save during the year in return for a pre-defined hamper of goods or a voucher, guaranteeing ‘a good Christmas’ regardless of economic circumstances in December. The market for this product is serviced by a number of informal savings schemes, some operated by local merchants such as butchers, and by a few large commercial operators: the dominant player is the Park Group, a stock exchange listed firm which reported over 600 000 customers and a turnover equivalent to almost half a billion US dollars in 2006/7.

To be sure, UK consumers have a variety of other formal ways in which they can save for Christmas, as indeed for any defined future need. Some banks and credit unions even offer Christmas-specific accounts.  However, the persistence of ‘hamper savings’ schemes on a considerable scale presents one of the conundrums about savings which is common among poorer households worldwide: why do people continue to use informal or unregulated savings services even when formal, safer substitutes are easily available? While the UK commercial hamper savings market is formal, it is unregulated since it is not considered deposit taking—it is pre-payment for a good. The risks involved were demonstrated very graphically when one of the largest commercial schemes, Farepak, collapsed in October 2006. The resultant loss of savings led to the initiation of a formal review of this market by HM Treasury. The report of the review, which was tabled in March 2007, makes interesting reading, as it describes who uses these schemes, and why they continue to use them: even after the failure of Farepak, the Park group web site reports 2008 orders are 30% up on the same time last year.

All I want for Christmas 2008 is … 

The essence of the answer seems to be that the features of the hamper savings product appeal to a market comprised mainly of women in low income households, many of whom are not financially included. Chief among these features are:

• Target in sight: The fact that the hamper is selected in advance means that the future reward from saving is apparent upfront: as some participants reported in the review “it doesn’t feel like saving”;
• Double Lock in: Possible commitment failure, common in savings schemes, is overcome in two ways: first, it is difficult (and costly) to get money back during the year; and second, the savings can only be redeemed in vouchers or hampers, reducing the ability to use it for some other pressing need.
• Convenience: The main schemes work through agents who collect the savings from the saver’s home (like the UK cousin product on the credit side, home collected credit): not only is this convenient, but since agents are financially motivated to collect savings, they act as ‘personal trainers’ in encouraging regular saving, further increasing commitment.
• Simplicity: The vouchers carry no additional costs or fees: 45 weekly instalments of GBP10 buys you a GBP450 hamper. WYSIWYG! Agent commissions on hamper schemes, ranging 5% to 25% depending on volume, are paid by the company. Of course, the interest foregone on savings during the year should properly be brought to account: however, the Review estimated that the interest earned through depositing the payments above into a bank product could amount to GBP10, a low figure which could easily be exceeded by travel or other fees in making the weekly deposits at the bank or ATM. Participants in these schemes were also more likely to trust the retailer or the scheme, than a financial institution.

Those who would design savings products for the poor, whether in developed or developing countries, would do well to consider these features prominently. Regulators concerned over the possible loss of people’s savings would also benefit from reading the carefully worded recommendations of the Pomeroy review: it did not recommend closing down such schemes, since they clearly fill a niche, but rather putting in place mechanisms to ringfence the savings until they are cashed out for a hamper or voucher; and increasing competition from alternative, more mainstream financial services.