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Innovations in SavingImplications for State Policy

Opportunities for Working Families:A Leadership Forum for State LawmakersThe National Conference of State Legislatures

Timothy Flacke, D2D Fund, Inc.June 23, 2009

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Agenda

Why Savings, State of SavingThe ChallengeSome IdeasQuestions / Discussion

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D2D Fund

Mission:expand access to financial services,

especially asset building opportunities, for lower-income families by creating, testing and deploying innovative financial products & services

Boston (Roxbury) based, non-for-profitFounded in 2000 by Harvard Business School professor and senior associate dean, Peter TufanoFocus on scale, sustainabilityRecord of linking private sector capabilities to public (non-profit) ideals

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Why Financial Services & Saving?44MM US households un / under-banked

Realizes less value from (limited) incomeOpportunities to save, get ahead severely limited

Those with least, pay mostOne estimate: 7.5% of annual incomeEquivalent of $625 / month for HH earning 100k

Asset ownership associated withHigher educational achievementStronger physical and mental healthBetter physical and cognitive development

Sources: a) Center for Financial Services Innovation Fact Sheet, b) H&R Block Bank, c) Dr. Michael Sherraden, Senate Finance Committee Testimony (2005)

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State of U.S. Saving / Wealth

Bottom ¼ of HH: mean net worth of ($1,400)¼ to a third of households are “asset poor”

can’t survive three months at poverty lineEst. asset poverty by specific group:

Female heads with children 71%Household head under 25 years 72% African Americans / Hispanics 62% Head with < high school degree 60%

67% of households in lowest quintile of income have not saved in last 12 months

Sources: Bucks, Kennickell, and Moore (2006), Survey of Consumer Finance (2004 & 2007), Haveman and Wolff (2001), Caner and Wolf (2002)

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Savings Rate: TrendPersonal Savings Rate by Quarter

1960-2008

-1%0%1%2%3%4%5%6%7%8%9%

10%11%12%13%

Source: Federal Reserve Bank of St. Louis

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Some Challenges to Saving…

It’s no funIt’s tough to remember / follow through (at opportune moments)I’m not sure where to saveI don’t have the money to save

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Can Saving be Fun?

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Quick Poll – What’s More Exciting?

DEPOSIT SLIP

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Gaming & Saving?

38% of those with incomes below $25,000 think that winning the lottery represents the most practical way for them to accumulate several hundred thousand dollars.

- 2006 Consumer Federation of America study*

* http://www.commondreams.org/news2006/0109-05.htm

Lottery players may seek:1) entertainment2) financial planning / wealth building

Can we strengthen #2 without losing #1?

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How about “Prize-Linked Savings”?Concept:

Earn chance(s) to win by savingForego part of return to fund prize(s)

Why?Make saving fun, exciting, interestingDivert gaming dollars to savingExploit our weakness for evaluating odds

Consider:$57.4 billion in US lottery sales (2006)Average of $515 per household80% of gambling revenue from HH w/ income <$50k*

PLS products in 20+ countries

*Source: Tufano, Maynard and De Neve, Consumer Demand for Prize-Linked Savings.

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An International Precedent

New ZealandOmanPakistanSouth AfricaSpainSri LankaSwedenTurkeyUnited Arab Emirates

Argentina BrazilDenmarkGermanyGreat BritainKenyaIndiaIndonesiaIrelandMexico

Noteworthy:Size – ex.: $47B in UK “Premium Bonds” outstandingAge – ex: Swedish “Lottery Bonds” program est. 1918Variety – ex. of prizes: $1.7M tax free (UK), Mercedes (Oman), Motorcycle (Pakistan), DVDs (Mexico)

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A Test: Test concept in the US

8 Michigan credit unions & MI Credit Union LeagueLed by D2D, Filene Research InstituteSupport from Center for Financial Services Innovation & The Wal-Mart Foundation $100,000 grand prize$3.3K / month in smaller prizes$25 deposit in 1 year Share Cert. = 1 chance to win Max = 10 chances / month (120 per year)

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PLS Challenges / Questions

Do people like it (demand)?Int’l experience suggests yes (23MM UK holders)

Is it good policy?New savings, redirected savings (from what)?Who does it attract?

Is it good business?Cost effective way to attract deposits, customers?

Is it legal?Is it gambling? (lottery vs. sweepstakes)Issues: banking regs, gambling laws, fed vs. state

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Save to Win Early Results: $100k/wk

Launch: January, ‘09Results to Date (6/16/09):

6,966 accounts opened$2.33MM deposits0.9 to 8.9% of CU members

Survey findings (n=3,500 / 59%):$2k or less in financial assets & savings: 27%Report household income less than $40K: 42%

Less than $20k: 15%Spent on lottery / gambling in prior 6 mos: 60%less than a college education: 65%

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Another Approach to Prize-LinkedWho runs lotteries today?

States have legal authorityUnparalleled access

e.g., 21k retailers in CA, 16k in NYMany in underserved communities

How about a ‘no lose’ lottery game?Play game for chance to winBut player can get funds back

Exploration underwayFDIC advisory sub-committee studyingSeeking state lotteries for joint working group

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What Can State Legislators Do?Challenge

most state law generally prohibits lotteries and other games of chance

How state legislator can helpA tailored exception to state gambling prohibitionse.g., in Michigan, MCL 490.411 allows for a savings promotion raffle defined as “a raffle conducted by a domestic credit union where

the sole consideration required for a chance of winning designated prizes is the deposit of at least a specified amount of money in a savings account or other savings program offered by the domestic credit union.”

Why should Michigan be unique?

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MICHIGAN CREDIT UNION ACT (EXCERPT)Act 215 of 2003490.411 Savings promotion raffle.Sec. 411.(1) If authorized by the credit union board, a domestic credit union may conduct a

savings promotion raffle. The domestic credit union shall conduct a savings promotion raffle so that each token or ticket representing an entry in the raffle has an equal chance of being drawn. A domestic credit union shall not conduct a savings promotion raffle in a manner that jeopardizes the domestic credit union's safety and soundness or misleads its members.

(2) Pursuant to his or her supervisory powers under article 2, the commissioner may examine the conduct of a savings promotion raffle. The commissioner may issue a cease and desist order for a violation of this section under article 2.

(3) A domestic credit union shall maintain records sufficient to facilitate an audit of a savings promotion raffle.

(4) As used in this section, "savings promotion raffle" means a raffle conducted by a domestic credit union where the sole consideration required for a chance of winning designated prizes is the deposit of at least a specified amount of money in a savings account or other savings program offered by the domestic credit union.

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More Ways for Legislators to Help

State LotteriesSeeking state lotteries for joint study groupAlready involved

Director of NY state lottery2 largest lottery vendorsBacking from FDIC Chair Sheila Bair

Role for legislators?encourage state lottery directors to learn more (contact D2D)be open to specific regulatory changes, should need ariseAmend lottery’s policy objectives?

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Can Saving be Easy (& at the Right Moment)?

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Tax Time Opportunity?How Large?

$250 billion to 107 million households$115 billion to 68 million households w/ AGI < 40k

average ~ $1,679 (4%+ of annual income)

Tax Refunds areUniversal – open to all AmericansPermanent – drivers of refunds likely to continueRecurring – every year

Also:Most tax returns prepared by “expert”Opportunity for trusted party to suggest saving

Source: IRS, tax year 2006 data (http://www.irs.gov/pub/irs-soi/06in33ar.xls)

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How to Capture Some for Saving?

What if we could pre-commit to save at tax time?Theoretical advantages

ConvenienceAssured follow throughTax preparer as coach / advisor

Most saving happens via convenient, low or no-decision structure (e.g., 401k, social security)

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Solution: Refund Splitting

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The Power of Timing / SequencingBefore: Spend / Save choice after $ refunded

Now: choice before $ refunded

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What Can State Legislators Do?Challenge: link refunds to saving productsSolution: split refunds

Federaltook effect for TS07Administrative change (rather than legislation)

CaliforniaTook effect for TS07Bill (AB 2439) passed 7/20/06

Marylandto take effect for TS10Bill (HB 883) passed 5/19/09

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California AB 2439, Maryland HB 883

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But Where to Save?

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Where to Save?To save, everyone needs a “bucket”Ideal characteristics?

SimpleAccessibleCredibleHigh value

Usual suspects?Savings accountCertificate of DepositMutual Fund401(k)529 Plan

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A Built-to-Order Product?

BarrierSmall balancesSpotty (credit) pastRisk averseMistrust mainstream financial service firmsNo bank accountUnclear goal(s)Long-term goals & liquidity needs in tension

Bond FeatureLow $50 minimumNo credit screenRisk free principalGov’t backed, no fees, good return (5.6%, TS09)No bank acct requiredCan save for anythingLong-term orientation, access after 1 year

Barriers facing many first time, low-income savers & relevant features of U.S. Series I Savings Bonds

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A Test of US Savings BondsTax time “Refunds to Assets” pilots

TS07 – 4 VITA sites, 27 H&R Block officesTS08 – 32 Volunteer Income Tax Assistance (VITA) sitesTS09 – 70 VITA sites

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Findings: Who Buys How MuchStrong demand (TS07-09)

3,300+ buyers / 5,300+ registrants$685k savedtake up (VITA)

3 - 9% vs. 1.2% for CD32-38% repeat buying rate

Buyer profile (TS08 VITA sample)74% parents, 15% grandparents; 81% femaleavg. AGI: $19.9k

Extraordinary awareness74% “familiar” w/ bonds vs. 26% for IRAs, 34% for CDs

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More FindingsFirst time savings? (TS08)

no prior $ saved (64%); < $1k saved (84%)bond = 1st time saving part of refund (37%)“would’ve saved less if hadn’t bought bond” (51%)

Savings plan / intentbought for children (59%), grandkids (8%)saving for long-term, defined goal (74%)

e.g., education, retirementplan to hold bond 5 yrs+ (58%), 10 yrs+ (40%)

redemptions after 1 year: 11% vs. 10% for general popAfter 2 years: 26% vs. 26% for general pop

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A National Saving Plan?Tax (refund) Time... $100,000,000,000+

+ Refund Splitting...

+ U.S. Savings Bonds

Spend Some Save Some

IRS Form 8888(state tax forms?)

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But How? A Precedent (1962)

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Future IRS Form 8888 (State Tax Form)?

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Idea Getting Traction

LegislativeNew Saver’s ActSaver’s Bonus Act

Press attentionTime magazine (July 17, 2008)Money magazine (August, 2008)The New York Times (July 31, 2008)Jane Bryant Quinn on Bloomberg.com

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What Can State Legislators Do?

Challenge:Improve easy, convenient access to bonds

Solution:Federal

Proposed tax time purchase optionAdministrative change

CaliforniaProposed tax time purchase optionIntroduced legislation (AB (1693)

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How Can I Find the Money to Save?

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I Don’t Have the Money to Save!Consider:

2007 credit card industry profit… $40.7 billion*2003 card penalty fees: $12 billion**Typical late fee in 2009: $39

Solutions?RegulationEducation

Limitations of financial educationAppealing?Effective?Expensive

* Source: http://www.time.com/time/magazine/article/0,9171,1715293,00.html** Source: http://www.pbs.org/wgbh/pages/frontline/shows/credit/more/rise.html

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Idea: Financial EntertainmentConsider:

72% of Americans play video gamesRates of play highest among < age 35

Could video games help us learn financial skills?

“casual video games” are fastest growing segmentcasual segment dominated by female players

Source: NPD Group, Market Research (http://kotaku.com/375187/72-of-us-plays-video-games)

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Financial EntertainmentWe envision a library of casual video games, each teaching a simple financial lesson, such as:

Using credit & debit cardsBudgetingPerforming basic calculations (e.g., compound interest)Saving for retirementManaging student & other loansAvoiding expensive pitfalls (e.g., pay-day lending, check cashing)

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First Prototype Game: Celebrity Calamity

While focused on fun, the game’s explicit learning objectives include:

Paying more than the minimum credit card paymentMinimizing credit card finance chargesAvoiding fees (bank overdraft, credit card late payment, over-limit)Making good annual percentage rate (APR) choices.

www.celebritycalamity.com

The game also includes implicit learning objectives, such as raising awareness of spending behavior and the value of saving money.

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A Preview…

Click the images to watch videos on the Internet

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Preliminary Testing: Self-Confidence

-1%4.614.66Follow directions from my boss/supervisor.

5%4.434.23Perform assigned job-related tasks.

15%4.093.57Manage my finances.

32%4.143.14Save money regularly.

25%4.053.23Avoid late fees, over-limit fees, and overdraft fees.

29%4.093.16Pay more than the minimum amount on credit card bills.

21%3.843.16Pay off new charges on credit cards every month.

22%3.933.23Avoid impulse and emotional spending.

7%4.304.02Identify needs and wants separately.

11%3.893.50Change bad spending habits

%PostPreRate your degree of confidence in the following:

Table 1: Self-Confidence (Pre and Post, % Change)

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Preliminary Testing: Knowledge

4%64%61%Interest Compounding

14%93%82%Pay More Than the Minimum

71%82%48%Finance Charges

58%86%55%Annual Percentage Rate (APR)

%PostPreKnowledge Area:

Table 2: Knowledge (Pre and Post, % Change)

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Qualitative Feedback Enthusiasm: “Can I have a copy of the game? Where can I buy it?”

Engagement: “I’ve got the hang of it now, I can do this.”

Education: “I’ve had credit cards for a while now, but I did not know what annual percentage rate, APR, was, until now.”

Empowerment: “It helped me to better understand how to manage money.”

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What Can State Legislators Do?

Challenge:Re-orient discussion on financial “literacy” or education to “financial entertainment”Emphasis on fun, innovation, scale, distribution and more “bite sized,” timely interventions

Role for legislators: Change focus, language of state financial literacy & asset building commissions, task forcesAs an example, in The National Strategy for Financial Literacy (2006, 162 pages) the word:

“useful” appears 13 times, “comprehensive” 11 times“fun” just once, “entertain” / “entertainment” not at all

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Recap: Action Ideas for State Legislators

Prize-linked savingsState “carve out” to gambling laws, ala MichiganEncourage state lottery to join joint study group

Tax time savingsState “split refunds” bill

Savings BondsBond purchase option on state tax form

Financial EntertainmentChange language, focus on state financial education efforts

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Contact Information

Timothy FlackeExecutive DirectorD2D Fund, Inc.tflacke@d2dfund.orgwww.d2dfund.org617.541.9064