On a recent Freakonomics podcast episode, Is America Ready for a No-Lose Lottery, a professor at the Saïd School of Business specializing in consumer finance shared some interesting insights about consumers’ savings habits (or lack thereof). He surveyed nearly 10,000 people to see if they could come up with $2,000 in 30 days.
“Why $2,000?” Tufano asked. “Because an auto transmission is about $1,500. Most estimates of everyday emergencies are about that order of magnitude… And then, why this language ‘come up with’ as opposed to ‘save?’ Because we wanted to see if people had access to resources between savings, credit, friends and family.
What he found was that nearly half of Americans are not able to come up with $2,000 in 30 days. That means they are just one emergency or crisis away from dire circumstances.
The study highlights the need for credit unions to encourage their members to save, really save. A number of financial services providers are finding creative ways to do just that by adapting to consumer behaviors, particularly those of low-income communities. Below are a couple examples.
Twenty states currently allow prize-linked savings accounts as a way to encourage their residents to save. With this model, consumers deposit money in an account with an understanding they won’t receive interest on their deposits. Instead, the interest of all participants is pooled together and awarded as a large cash-based prize.
This type of account appeals to certain segments of the population because of a phenomenon economists call “skewness.” Skewness is the idea that despite really poor odds, there is an almost irresistible appeal to the idea that with a low upfront investment, one big win could change your life. This phenomenon is illustrated by the nearly $60 billion Americans spend on lottery tickets every year.
Prize-linked savings does carry a few roadblocks and concerns – namely, such a product is not yet legal in every state. Also, the product may be difficult for consumers to understand, particularly for underserved populations who may not even be familiar with the role of traditional financial institutions.
However, if we can overcome those barriers, it may be an interesting product. As Freakonomics host Stephen Dubner said, “In a country where it’s easy to borrow your way to bankruptcy, where you can buy lottery tickets anytime you buy a loaf of bread, prize-linked savings is like a big neon billboard that turns a boring old savings account into an exaggeration of itself. Stick some money in here, it says, and you just might hit a big payday. And even if you don’t — well, your money still belongs to you.”
Tanda is a Spanish term used to describe a savings and lending circle among family and friends that helps people reach financial goals. With more than 200 different names that vary from country to country, the concept of an “informal loan club” has been around for hundreds of years.
Here’s an example of how it works: 10 friends and family members form a tanda. Each member gives $100 every week to the group’s organizer. At the end of 10 weeks, one participant gets the payout of $1,000. This continues until each member has received the payout. By working in a group in which others are counting on them, participants have motivation to stick with the plan. Tandas are particularly popular in Hispanic and immigrant communities in which a high level of value is placed on mutual trust among family and friends.
To appeal to today’s increasing digital consumers, organizations such as eMoneyPool and PayPal are bringing the concept of a tanda into the digital world.
eMoneyPool is a sharing community that operates much like a tanda except anyone can join in less than five minutes using a connected device. Unlike a traditional tanda that only includes family members and close friends, eMoneyPool offers a marketplace where participants can take part in a pool anytime with people from across the country. This means there will always be a pool available to meet their needs. With PayPal Money Pools, participants can create a page that lets others easily chip in for group gifts, special events and more.
Whether prize-linked savings or next-generation tandas are the right path forward for your credit union, one thing is clear: There exists a real need among consumers, and particularly among Hispanics and other underserved communities, for creative and relevant savings options.Leave a comment