Lessons in Savings Innovation and Financial Inclusion

By Srishti Kedia

Photo: FirmBee

According to a survey by the Federal Reserve, 46% of Americans said they do not have enough money to cover a $400 emergency expense. In fact, according to another study, from the World Bank, only 54% of the US adult population has a formal savings account, while in developing countries that proportion of adults is even lower — 26% in Indonesia, 12% in Brazil, and as low as 9% in Tanzania.

At Accion Venture Lab, we believe there is huge need to provide individuals with options to save money. We have made one investment in the space with eMoneyPool, an online platform that automates saving circles in the United States, and are eager to do more. As we look at investment opportunities, we wanted to learn more about the unique savings needs of lower-income consumers and how others were thinking about solutions.

To that end, I recently attended AARP’s Savings Innovation Forum, where leaders in the field came together to discuss emerging strategies and programs to expand savings among low-income American households. Here’s what I learned.

We need a new savings paradigm for low-income consumers

Jonathan Morduch, author of The Financial Diaries: How American Families Cope in a World of Uncertainty, gave a great talk on how we need to change the way we have been thinking about savings. We have all been taught that the way to save is to do it slowly and steadily. Put a little bit away each month. That way you’ll have enough for those big milestones — retirement, children going away to college– and if there ever comes a “rainy day.”

This works great if you have a steady paycheck every month, but many low-income people do not always have that luxury. The US Financial Diaries project tracked 235 low- and moderate-income households over the course of a year to understand how families managed their finances on a day-to-day basis. They learned that for many low-income people, their income is anything but steady. Even for those that have a stable job, income ebbs and flows. For example, a car repairman drums up plenty of business in the winter when snow leads to breakdowns, and in the summer when the heat takes a toll. But in moderate spring and fall, there’s a real dip in earnings. This income volatility is further exacerbated by mismatches between people’s income and expense cycles.

When these short-falls occur, lower-income consumers have to pull from their long-term savings accounts, making it difficult to save for the long term.

Help customers “save for soon” in order to help them save long-term

Morduch also shared that the way to smooth these consumption short-falls is to provide products that help people “save for soon” in addition to saving for key milestones and a rainy day. Think of these savings as “working capital.” They require active maintenance; you build up your savings in the peaks and then draw down from them during the dips.

These short-term savings products need to add structure but also provide consumers with flexibility. Savings products today either do not have enough discipline (e.g. regular savings accounts) or have too much of it (e.g. retirement accounts with large penalties for early withdrawals). The Financial Diaries highlighted a few examples of innovative work-arounds that American families have used to achieve this balance. Although none of these are necessarily recommended, these examples are helpful in understanding what kind of balance these consumers need:

  • Bank of Mom: One man gave his savings to his mother. He knew she would prevent him from spending his money irresponsibly, but he could still access the money if he really needed it.
  • A Bank Far, Far Away: A woman purposefully opened a savings account at a bank that took multiple hours to drive to, and destroyed her debit card so she could not access the money via ATM. She could still access the money when necessary, but the long drive time added a significant non-monetary cost and helped add discipline.
  • Essentials for Days: Another American family would use their savings to stock up on essentials (such as shampoo or groceries) rather than deposit savings. This prevented them from spending on unnecessary expenses. When they hit their income slumps, they would draw on their stock of essentials.

Intervene before people are in trouble

There was unanimous agreement across panels that we need to do more before people get trapped in a vicious cycle. Common Cents Lab, an organization that develops solutions based on behavioral intervention, shared two interesting pre-emptive approaches to short-term savings.

Leverage existing payments to make the unexpected expected

For example, people recognize that cars require regular repair costs, but they do not factor these costs into the purchase. Common Cents Lab worked with Credit Union 1 to design a savings account linked to a car loan. When setting up direct payments for their car loans, consumers were prompted to “round-up” the loan payment and contribute the excess into a savings account, providing consumers with a less painful way to save.

Help consumers pre-commit to savings for windfalls

Common Cents Lab partnered with Digit, a start-up that helps people save via automatic deductions based on spending patterns, to help them better manage their tax refund. Digit asked users via text if they want to save part of their tax refund before it hits their account, and if so, what amount. When the tax refund comes through, the app automatically deducts the amount from checking and transfers it into a savings account. With this simple intervention, CommonCents Lab was able to increase short-term savings by 50%.

The jury is still out on how employers can facilitate savings

The panels had mixed reactions on how employers can help solve the savings problem.

Some panelists found employers very eager to collaborate and help improve the financial health of their employees, while others were much less receptive. The panelists did agree need to make sure the incentives are aligned and to carefully consider compromises between employer and employee needs.

Thanks to AARP for hosting a great event! We’re excited to see how the savings space continues to evolve.

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