At several points in the recent past, I have questioned the efficacy of the savings sub-accounts that are typically on offer with most prepaid cards.
The most common iteration in prepaid savings is the high-yield account with a
maximum deposit of approximately $2,000. The fact that such an account exists is a testament to the good intentions of card issuers. Some accounts yield five percent and few pay less than one percent. In an era when a traditional savings account at a big bank pays less than five one-hundredths of a percent, that is a real bonus. For most people, such an account could become the jump start to building a nest egg.
In spite of that, savings has never really taken off. I have spoken to a variety of program managers and issuers and I've always heard the same thing: few people leave much in an account for very long. One company quoted an average balance of about $75, another said $200. Those balances probably explain why high interest doesn't make a difference. With monthly compounding, $200 at five percent returns $9.36 after one year. Never mind that most cards with savings accounts have higher maintenance fees; that isn't even enough to trigger the need to file a 1099-INT.
Savings is important because it creates a cushion which can shield a household from a financial emergency. I had an interesting conversation with a policy advocate working in asset building last week. She commented that their typical IDA client reports four such emergencies each year. Absent savings, those surprise events become crises.
But if high yields don't work, then what might instead? No one can really be sure until someone comes up with a solution that is demonstrably successful. In the interim, though, the industry faces a choice. One option, albeit a cynical one, it to assume that savings is not possible. Empirical evidence at this stage would seem to justify that kind of perspective. Nonetheless, not everyone has adopted that opinion. Certainly, the cards that continue to offer high yield accounts are among those that demonstrate a belief in a better day. Elsewhere, though, some people are trying new things.
The new new thing seizing the spotlight through economics is behavioralism. If you have ever taken a moment to read some of things that Daniel Kahneman and Amos Tversky have written, then you will know that some of these observations are refreshing. Indeed, some make me laugh at myself. It is fair to say that people at all ends of the financial spectrum come to some poor judgments about the value of time and money.
One of those "maybe that's a good idea" ideas is the automatic savings plan. Another one of those "maybe..." ideas is incenting saving by adding some concrete rewards to that behavior.
The iBankUP card from Plastyc taps on both those concepts. Here is a picture of dashboard on iBankUP's web interface:
iBankUP uses the term "Rainy Day Reserve." There are other cards out there that allow people to label their goals (vacation, car repair, summer camp, et al) but for now Plastyc is keeping it simple.
As you can see, the account holder can go to this screen and set up an automatic transfer from their "spend" over to their reserve in any amount and at a frequency of their own choosing. It is also possible to make a one-time transfer.
There are about 100,000 iBankUP accounts. Roughly one in ten are savers.
In the near future, Plastyc's CEO Patrice Peyret believes that his card will expand beyond the Rainy Day Reserve to give cardholders the opportunity to designate savings purses for multiple goals.
Some people think that an employer could have in influencing the commitment to save. Given that such a large percent of prepaid is held by payroll cards, there is a real opportunity for this industry to become a touch stone for how policy sets about to help people save.
"Perhaps a pilot," says Peyret. "When you commit to saving to your employer - a person of authority - would they stick to it?"
A recent bit of applied research demonstrated that how an employer communicates with an employee make a big difference in the ultimate outcome. When language from the boss man says "we have a matching account..." then people tuck it in the back of their mind. When the boss man/boss woman says "if you contribute $100 a month to our match, you will have $7,000 in four years," people take savings more seriously. But I was further taken by their second point, which was that people saved more as the employer increased the suggested amount.
When is it time to call this a success? When does prepaid cease to be just a "financial anxiety reduction business," as Peyret calls the traditional prepaid card, and instead become a platform for building a more complete financial life?
Peyret likes both ideas, but he thinks automation holds more promise than rewards.
"Probably when we start to see meaningful savings," says Peyret. "Right now, people have between $50 and $100, and their number one goal is saving for a real emergency."