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Using Financial Innovation to Support Savers:  From Coercion to ExcitementFDIC Committee on Economic InclusionMarch 19, 2008

Peter TufanoHarvard Business School, 

D2D Fund, and NBER

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Why this discussion?
        - Savings is important for families, both to achieve long-run goals and to withstand short-term shocks
        - A large fraction of households are asset-poor 
        - People differ and no one solution will fit all
        - Array the full range of ways to support savings for low to moderate Americans

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The continuum of programs

   Force     Make Hard     Make Easy    Bribe      Social      Make Fun

 to Save    Not to Save     to Save      to Save    Support   & Exciting

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Force to Save

   Force     Make Hard     Make Easy    Bribe      Social      Make Fun

 to Save    Not to Save     to Save      to Save    Support   & Exciting
| Impediment | People can’t or won’t save                                                |
|------------|---------------------------------------------------------------------------|
| Change     | Take away the decision;  Mandate or Grant Savings                         |
| Partner    | Government                                                                |
| Resources  | Political will and money (grant)                                          |
| Examples   | Mandate: Social SecurityGrant: UK Child Trust Fund; Aspire Act and others |

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Make it hard NOT to save

   Force     Make Hard     Make Easy    Bribe      Social      Make Fun

 to Save    Not to Save     to Save      to Save    Support   & Exciting
| Impediment | Procrastination                                                                                 |
|------------|-------------------------------------------------------------------------------------------------|
| Change     | Make people to decide not to save                                                               |
| Partner    | Government, employer, businesses                                                                |
| Resources  | Process and product innovation                                                                  |
| Examples   | Defaults:  Auto-enrollment, Auto-IRABundling: Savings added to credit, payments, other products |

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Make it easier to save

   Force     Make Hard     Make Easy    Bribe      Social      Make Fun

 to Save    Not to Save     to Save      to Save    Support   & Exciting
| Impediment | Institutional barriers to savings – it’s too hard                                                                                                                  |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Change     | Simplify the savings process                                                                                                                                       |
| Partner    | All                                                                                                                                                                |
| Resources  | Process innovations                                                                                                                                                |
| Examples   | Change place of savings:  Tax-refund based programs, workplace programs, AFS programs, retail programs (buying savings)Change time of savings:  Pay yourself first |

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Bribe to save

   Force     Make Hard     Make Easy    Bribe      Social      Make Fun

 to Save    Not to Save     to Save      to Save    Support   & Exciting
| Impediment | Savings is economically unattractive                                     |
|------------|--------------------------------------------------------------------------|
| Change     | Provide financial incentives to save                                     |
| Partner    | Government, perhaps employer                                             |
| Resources  | Money                                                                    |
| Examples   | Tax advantaged savings programs (401k, IRA), IDA programs, Savers Credit |

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Support social savings

   Force     Make Hard     Make Easy    Bribe      Social      Make Fun

 to Save    Not to Save     to Save      to Save    Support   & Exciting
| Impediment | Savings not culturally attractive enough                                                                                                                                                        |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Change     | Support social savings                                                                                                                                                                          |
| Partner    | Social groups                                                                                                                                                                                   |
| Resources  | Network bonds                                                                                                                                                                                   |
| Examples   | Geographic: America Saves!                                  Preexisting Groups: ROSCAs, cultural groups    New Groups: Web-based social network sites                 Families: Gifting savings |

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Make Savings Fun

   Force     Make Hard     Make Easy    Bribe      Social      Make Fun

 to Save    Not to Save     to Save      to Save    Support   & Exciting
| Impediment | Savings is boring                      |
|------------|----------------------------------------|
| Change     | Make savings fun and exciting          |
| Partner    | Business (with policy support)         |
| Resources  | Marketing and policy change            |
| Examples   | Collectible SavingsPrize Based Savings |

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The British Premium Bond Program

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What are promising low-cost opportunities? What can the FDIC do?
        - Defaults: Auto-savings 
        - Bundling: Plus-savings
        - Lowering barriers – tax refunds and nearly-auto save
        - Lowering barriers—supporting “buying” savings with simpler retail processes and KYC rules
        - Train to save—kid’s programs
        - Social networks—gifting and supporting informal savings
        - Exciting—prize based
        - Encourage auto-save pilots 
        - Study and encourage broader use
        - Help banks with split-refund IRA work; support indirect savings, support savings bonds
        - Study modifications to KYC rules (e.g., two step process); help  banks support non-bank programs
        - Convening to focus attention
        - Paradigm shifts: We vs. I savings; savings as gifts
        - Study; explore how to make prize linked permissible

OPPORTUNITY			         FDIC STEPS

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