Think a savings account is a waste of time and effort? Maybe $10 would change your mind.
Last month the Consumer Financial Protection Bureau (CFPB) reported the results of a study that suggests consumers who don’t use traditional savings methods only need a small cash reward to change their financial behavior.
The survey of American Express Serve prepaid card users showed that customers were more than twice as likely to put money into a savings account built into the card when offered a $10 incentive to do so. These card users also tended to keep high balances in their savings accounts long after taking advantage of the offer, which required them to set aside $150. What’s more, cardholders who took the $10 were much less likely to resort to payday loans, which have notoriously high interest rates.
The CFPB launched the study in conjunction with American Express to encourage better saving habits among consumers, with an eye toward helping those with lower incomes. The bureau cited a recent Federal Reserve report that revealed 53 percent of households making less than $40,000 per year saved no money and 17 percent were unbanked.
Many low-income consumers use only checking accounts or prepaid cards in lieu of traditional savings accounts, according to research by the FDIC. The CFPB said these consumers often have difficulty separating money they intend to spend from funds they need to save. Earmarking funds into separate accounts, however, has been shown to encourage people to save.
People’s habits can be hard to change, no matter their income level. But it is surprising how little effort is needed to turn someone who eschews savings accounts or banking altogether into a cash hoarder.
Participants in the study were offered a $10 account credit if they deposited $150 into the card’s savings account during a three-month period. The savings account — referred to as “Reserve” by American Express — does not earn interest. Its primary purpose is to set aside funds that can be spent later. A mobile app allows users to easily transfer funds between the savings account and the available balance at any time.
Some users were only offered the incentive, but others also received an email offer to be signed up for automatic transfers or were mailed a refrigerator magnet with language encouraging them to save.
There was a 115 percent increase in enrollment among active card users who received just the $10 incentive relative to a control group of users who didn’t receive anything. The customers who enrolled left their saving accounts largely untouched — although the median savings balance dropped by $50 just after the three-month incentive period ended, it held steady at $100 nine months later.
In addition, the study showed participants who received the incentive were 20 percent less likely to use payday loans. Users who received the $10 plus emails encouraging them to save and enroll in automatic transfers were 40 percent less likely to take out cash advances against their paychecks.
The American Express Serve is one of several prepaid cards that allow users to set money aside from the card’s main transaction account. The CFPB’s study suggests these cards could gain in popularity among low-income and unbanked consumers as long as issuers are willing to invest a little time and money to help users reap the benefits.
It also proves that saving money is a habit that can be quite addictive — but some of us just need a little push to get going.
See related: 6 rules of thumb for smart credit habits