Jeanne Hogarth & Sarah Gordon

Product Innovations for Emergency Savings

Remarks of Jeanne M Hogarth and Sarah Gordon, Center for Financial Services Innovation

It’s all about demand and supply.  On the demand side – from the consumer’s perspective – having the motivation to save is important; actually saving is important; and having a place to put those savings is important.  On the supply side – from those providing the accounts that hold the savings – the revenue models and business case for small dollar savings accounts can be hard to sell.  So how do we design and implement products and services that motivate consumers to save and financial services firms to provide accounts for these savings?  What innovations are possible on both sides of the market to bring demand and supply into equilibrium?

The four papers in this section bring together a set of ideas and prospects for helping consumers build and maintain a habit of saving, creating a long-term customer base for financial service providers.   A core idea among all the papers is that while having savings is good, having the habit of saving is better.  So the ideal outcome is to instill a habit of saving among consumers.  The Manturuk paper describes the concept of impulse saving versus impulse spending.  Impulse saving incorporates goal setting, social commitments, visualization, technology, and automation along with the psychology of making saving fun. The incentive for the institution is customer retention and the opportunity to build a long-term relationship.  Khashadourian’s paper introduces  accelerated saving, which incorporates rewards for regular, albeit small, savings and breaks down long-term goals into a series of shorter-term saving events – something more manageable for many consumers.  The Mangan paper proposes starter accounts that build on the idea of habit-formation and add prize-linked saving incentives, all delivered exclusively online or via mobile devices, resulting in lower costs for the financial institutions that provide the accounts.  Henderson’s paper on the SmartSave Card provides an interesting twist to the concept of saving by helping consumers give themselves a line of credit by saving for the deposit for a secured card, supported by rewards for consistent on-time payments when using the card.

Incentives

One of the consistent themes running through the papers is the need to discern the nature of incentive structures.  Do consumers need an incentive, and if so, how much? In the retirement saving literature, Choi et al. (2009) show that the presence or absence of an incentive (having a 401k match) has more of an impact on retirement saving than does the size of incentive (the level of the match).[1] Whether the same holds true for emergency savings remains to be seen.

When should the incentive kick in? At account opening or when deposits are made? What behaviors should be incentivized? Regular deposits or on-time payments or sticking with the account for X months? The behavioral economics research on hyperbolic discounting is fairly clear – smaller sooner beats out larger later most of the time.[2] So the implication is that a sign-up bonus would provide more of an incentive than a future payment. But then how do you keep consumers saving on a regular basis?  Rewards – or at least the chance for a reward, such as prize-linked saving – may motivate some to save regularly.  And it turns out the rewards don’t need to be all that large; in Michigan, the monthly prizes range from $2,500 to $3,750, with six grand prizes of $10,000 each.[3]

How long does the incentive structure need to last?  Is 6 months enough to really form a saving habit, or does it take longer?  Furthermore, incentives need to recognize the nature of the financial lives of most low-to-moderate income households.  For many, their savings become working capital that is accumulated, and then used – deposits and withdrawals percolate in and out of accounts.[4] This aspect of savings has impacts for what program outcomes are measured, along with when they are measured.   Measuring account balances at the beginning and then 12 months later may not show the ebbs and flows across time, and may miss the success stories that happen in between.

Beyond Financial Incentives

One key issue with providing financial incentives for saving is funding the incentive structure.  The papers in this section generally rely on grants to fund pilots or proof-of-concept demonstrations.  But taking these programs to the fully-private sector and to scale can be difficult.  So what else can be done beyond incentives to motivate consumers to develop the saving habit and that is feasible for industry to adopt?

These papers provide several answers.  The impulse saving project includes peer accountability – by signing up with a partner and sending a text message when saving happens, there is an incentive to participate and “stay even” between partners.  It also incorporates an element of visualization – consumers are encouraged to provide a picture of their saving goal that is then greyed-out and colorized as savings deposits are made.

The starter accounts project includes options for badges or recognition markers for social media circles along with a support network to cheer consumers along the way.  The program also includes opportunities for consumers to increase their financial capabilities through education-on-demand online courses and videos.

These projects rely on automation and technology to keep delivery costs low, which will help in broader adoption and scalability.  But financial institutions need to know how well these different non-financial incentives work before they willingly adopt them in their offerings.

Credit as an Entre to Saving

While financial institutions may struggle to discern a positive revenue model for small-dollar savings, the profitability of small-dollar credit is well established. The SmartSave Card project approaches LMI consumer finances from a holistic framework, incorporating the liquidity needs of consumers and leveraging those needs to build a model for saving.   In essence, this project asks, “if the emergency fund for most middle-class consumers is the line of credit on their credit card, is it unreasonable to extend this to LMI consumers?”  Indeed, the asset-building community may benefit from viewing the household balance sheet more holistically – is it helpful to encourage savings if consumers are amassing high-interest debt at the same time?[5]

The idea of saving for the security deposit on a secured card (“give yourself a line of credit”) is one such extension.  This not only establishes a motivation to save and an incentive to save more (to increase the line of credit), but if consumers use their lines of credit and make regular payments, it also can establish a positive credit record, boosting credit scores with the potential for lower interest and insurance rates. And in this sense, the credit score is as much of an asset as money in the bank.

However, one question this approach raises is whether we need to differentiate between the small-dollar emergency fund provided through this line of credit and “rainy day” funds that might be needed to cover other, higher-dollar situations, such as a spell of unemployment.  The SmartSave Card can be an important tool in the savings toolkit, but it cannot be the only tool.

What’s in it for Industry?

Each of these papers offer up programs that are both exciting and promising.  But at the end of the day, the products need to be something that financial institutions can and will offer.  What is reasonable and sustainable for financial service providers? Some of these products may be well-suited from large money-center banks who can take advantage of scale, while others may be feasible for community banks, credit unions, or community development financial institutions.

The research community can do a lot to analyze what a sustainable product design looks like.  What is the suite of products and what features do they need?  What is the marginal benefit of adding social networking, visualization, or financial education to a product?  Can these features be blended and combined in ways that allows customization for the consumer and revenue for the firm?  How do these features affect both cost and customer retention?

It’s about demand and supply.  The demand exists. But after the grant money goes away, is there a sustainable business model for these products to help bolster supply?


1. Choi, James, David Laibson, Brigitte Madiran, and Andrew Metrick. 2009. “Saving for Retirement on the Path of Least Resistance.”  Working Paper available at http://faculty.som.yale.edu/andrewmetrick/documents/plr_bpf.pdf.  Accessed July 12, 2013.

2. Meier, Stephan and Charles Sprenger. 2009.  “Present-Bias Preferences and Credit Card Borrowing.”  IZA Discussion Paper #4198 available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1412276##.  Accessed July 12,2013.

3. See http://www.savetowin.org/ and http://mi.savetowin.org/How_It_Works_17.html.

4. Duncan, Greg, Richard D. Coe, Mary E. Corcoran, Martha S. Hill, and Saul D. Hoffman. 1984. Years of Poverty, Years of Plenty:  The Changing Economic Fortunes of American Workers and Families. Ann Arbor: Institute for Social Research.  See also Hogarth, Jeanne M., Jane Kolodinsky, and Marianne A. Hilgert. 2007.  “Financial Education and Community Economic Development.”  In Financing Low-Income Communities, edited by Julia Sass-Rubin, 72-94.  New York: Russell Sage.

5. Widdows, Richard and Dixie Porter Johnson. 1986.  “Emergency Fund Holdings of U.S. Households: Evidence from a Partial Equilibrium Analysis of Survey Data.”  In Proceedings of the 32nd Annual Conference of the American Council on Consumer Interests, edited by Karen P. Schnittgrund, 139 – 143.