It is rare to observe a dialogue that centers on savings for the poor where no one discounts the possibility that it can happen.
Paraphrasing, the skepticism goes something like this: "Poor people do not save
because they are poor. If they have a dollar, they spend it."
In other circles, some contend that poor people need credit simply because they do not have any savings.
In a few, you will hear people who assert that its a function of misguided federal tax policy. Through our system of tax-protected accounts (IRAs, 401-k's and 529s) there is a clear incentive for middle-class taxpayers to make a long-term commitment to save. Pretty much the only place that you will hear that kind of point is at the wonkiest of wonk-fests. Unfortunately, those kinds of good times only come around a few times a year.
But if you take a wider view, it is clear that poor people do think about building wealth.
Yesterday, I mentioned that D2D has pioneered a savings program that uses the incentive of winning the lottery as a means of inducing people to save.
Timothy Flacke, the executive director at D2D, says that his organization's "past work on prize-linked savings has shown that the opportunity to win a prize – even a prize of modest value – can energize and motivate people to save making saving fun."
I have met some of the D2D folks in the confines of some intimate wonk-fests, but until I was forced to sit down and examine how prepaid savings accounts might be redesigned to better help their holders to build assets, I had not given much thought to their concept.
Here's the thing: it is pretty clear that many poor people are attracted to lotteries. One study recently said that 21 percent of Americans think that winning the lottery constitutes their best chance of becoming wealthy. It is hard to imagine a better reason to put more financial literacy curricula in public schools.
But putting that option aside, the important thing to realize is that this is the kind of place where any asset-building conversation has to start from. Many people have no idea of how they might ever put away a nest egg. Payout rates on lotteries currently run at about 55 percent.
That is why I am so amazed and disheartened by the reports of how much low-income lottery players choose to spend on various gaming products. According to one such report that surveyed demographic participation across 38 states, the mean sum spent by a lottery player with an income of between $10,000 and $25,000 was $569. Those numbers are certainly biased by the cases of the addicted: about five percent of players spend more than $3,000 per year on Powerball, MegaMillions, Scratch-Off and the like. Still, those numbers make it hard to argue that at least a few poor folks do not have a few extra dollars left over after they pay their bills. For those that would argue that any consumer choice is based upon rational decision-making (a big assumption), then the only possible conclusion to draw is that people think the lottery is a very good investment.
With SGA costs that run to about 12 percent, states are making a big margin on their games. Maybe that is why states are one of the biggest hurdles out there to making lotteries a bigger element in how the poor save. Right now, most states grant themselves an exclusive monopoly on running a lottery. D2D pulled off their experiment because a few states made an accomodation to allow their credit unions to offer a lottery-style prize. Unfortunately for now, banks are out in the cold.
However, I imagine that a motivated bank could design something akin to a rewards program which built upon the power of the lottery. I am imagining an approach where a bank provided free services, starting with free accounts, to selected winners.
Naturally, my first thought is how that could be dovetailed in to prepaid. Here, the business case is especially clear. In prepaid, the profit margin drivers are all borne out of the core group of consumers that hold their accounts over a long time span. Most likely, that kind of result is the product of the instances where an account is enabled with a direct deposit. Now, why wouldn't a prepaid issuer offer a "chance" for any consumer that made a direct deposit? Why wouldn't an issuer offer a "chance" to a consumer that kept a dollar in a savings account for a period of 60 or 90 days? Chances don't cost much, particularly if the reward is paid in house scrip.
The opportunity for a huge win is easy to see.
Now, a savvy traveler might point out that Haiti's government makes no effort to monopolize the lottery. In any rural village in Haiti, you can find a kiosk emblazoned with the creole word for "bank." These are not banks, but instead the place where locals run their community lottery. Suffice to say that Haiti's level of development undermines the case for private-market lotteries.