Although many prepaid cards come with very attractive rates of interest on savings sub-accounts, the model has never found traction with consumers.
Executives in prepaid firms characterize their consumers as “aspirational” savers: they want to do it, but they struggle to realize those goals. A few years ago, the CEO at a large prepaid program manager told me that his company tracked the savings habits of their customers. On average, he said, their sub-account holders only managed to set aside $78 a year. Sometimes averages are very misleading, of course, and if I had a chance to explore the question again with him I would try to explore the distribution. If four out of five sub-accounts never lead to any savings but one does manage to reach $400, then it is possible that the accounts could be the grounds for a fair share of asset development.
Some prepaid cards offer very generous rates of interest on savings. A few years back, I remember one card that was willing to pay 5 percent interest on the first two thousand dollars held on account. Right now, Bancorp’s Vision Prepaid card is paying 5.65 percent. Granted, that rate is variable and it only
applies to the first $1,000, but in an era where the rate of return on a three-month Treasury bill rarely breaks 15 basis points, that is a significant benefit. Nonetheless, if it was possible to look under the hood at those accounts, its likely that their balances are still very low. If you have a thousand dollars, there is probably no better place to park it than with a prepaid card. It might be the best-kept investing secret in the entire world.
So prepaid savings is that good, and yet it still doesn’t work.
It is time to re-examine how these accounts are designed.
Right now, a variety of people are putting their efforts in to the broader question of how products can be designed which will find success in getting poor people to save money. Generally speaking, most of those ideas are based on some kind of insight that is drawn from behavioral economics. Behavioral economics is hot in academia.
What isn’t hot is the Individual Development Account. IDAs were in vogue until very recently. If you are not familiar with an IDA, then a simple explanation of their mechanics is this: low-income/low-asset savers enroll in some kind of program which usually includes some kind of financial literacy component and which requires those individuals to make recurring contributions. The incentive generally consists of some kind of match. A typical program would reward three dollars of savings by a program participant with another free dollar from the program manager. Often times, matched funds were not liquid, and sometimes they were designated toward a specific goal. Common goals included making a down payment on a home or putting aside savings for a college education. IDAs have not lost their appeal because of their effectiveness. One report found that IDAs have helped 83,000 people to save in the years since 1999. Of those, approximately 35 percent own homes. The rub ultimately came down to scalability. People concluded that these programs were too expensive for their funders. In North Carolina, the state with the most IDA programs in the country, 32 different non-profits have successfully helped about 500 people to save. Doing that came at a high price, both in terms of funded staff hours as well as funded matching dollars.
The new ideas use less money and a bit more imagination.
One of my favorites is over at D2D, where people are spreading the idea that people can be compelled to save a bit if they have a shot at winning a lot more. A pilot offered at credit unions in Michigan and Nebraska gave something akin to a lottery ticket to any participant that could put together a minimum of $25 in savings. Michigan’s “prize-linked savings” (“PLS”) program compelled savers to put away $40 million. That kind of result might have required millions of IDA dollars, but D2D’s PLS only cost Michigan an annual outlay of $100,000 in prize winnings.
There are other ideas out there, as well. At the recent CFSI conference, several groups were touting ideas to capitalize on the power of “social” to make people save. Social is the next Big Idea but so far it remains relatively untapped in the prepaid world.
The other approach seems to turn on how communications materials can be designed. Thus, in one example a firm convinced an online tax preparer to put a special screen in the series of pages that are offered to customers due a refund. At the point in time when it was necessary for the filer to indicate who they would like to receive their refund, the software presented the possibility of splitting those dollars into two accounts. One of the two was a savings account. Thus, to not designate a portion of his or her refund to savings, the filer had to push a button that said “I do not want to set aside some of my refund for savings.” When that element was included, more people chose to save.
The power of design is itself a function of our own makeup as human beings. This month’s Harvard Business Review has an article which suggests that compelling people to make a decision can be achieved merely by how various options are ordered in a design scheme. With the exception of a few types of goods (fashion), people generally don’t like to be extreme. Similarly, people are uncomfortable about first options. As a result, most people are likely to favor an option that is neither at the beginning of a list. Thus, when five buttons are placed in a row on a mobile phone screen, the most popular choice (all else being equal) is the fourth one. Go figure.
Now, some things in the behavioral world clearly will not work. One thing that is up in the air – and very relevant to prepaid – is the issue of text messages. Prepaid cardholders can arrange to get lots of text messages. I recently had an account that updated me with my balance every morning at 10 am. Apparently there is a definite happy medium to that kind of service, and people have a tipping point where a helpful reminder becomes an irritating nagginess.
So the takeaway that I am hoping you will “Take Away” is that the current epic fail in savings is not a reason to give up.