Most consumers want to save more than they actually do. But many, especially those who are at low-income levels, may not have savings accounts.
“These consumers often must instead rely on a single checking or prepaid account for both day-to-day expenses as well as saving, which can make it challenging to develop regular saving habits,” states the U.S. Consumer Financial Protection Bureau (CFPB).
Results from Project Catalyst found that offering a small incentive to prepaid card users to put some of their money into a savings “wallet” doubled uptake of the wallet.
The study also found that the consumers who chose to save using the wallet continued to save after the pilot program ended. And it found that participants who were offered an incentive to open the savings wallet reported significantly less payday-loan use than those who were not offered the incentive.
Why would the CFPB conduct such a study? The Dodd-Frank Wall Street Reform and Consumer Protection Act mandates that the CFPB provide guidance in the area of financial services to underserved households.
American Express launched a pilot program that encouraged certain prepaid card users to set money aside in a non-interest bearing savings wallet that was separate from funds used for regular transactions. AmEx agreed to share its data from the pilot with the Bureau.
“This Project Catalyst research shows that encouraging and enabling users of prepaid cards to set aside funds can help people reach their short-term financial goals,” said CFPB Director Richard Cordray. “Importantly, it also shows that consumers who are encouraged to save can reduce their use of payday loans.”
The company tested several strategies to encourage savings. Marketing efforts email messages to consumers that touted the benefits of setting aside funds, and focusing on the automatic transfer feature they could sign up for. Another strategy was a promotional incentive that gave customers $10 on their prepaid card if they put in $150 of their own money in the savings wallet by a certain date.
The trial program included about 540,000 prepaid card users, many of whom were low- and moderate-income consumers. Many of the participants did not have access to traditional savings accounts and may face unique challenges building savings.