Innovative Ways to Encourage Savings
National Conference of State Legislatures
Working Families Forum
June 26, 2012
©2012 D2DFund, Inc.
Doorways to Dreams (D2D) Fund
 Mission: strengthen the financial
opportunity and security of low and
moderate income consumers by
innovating, incubating & stimulating
new financial products and policies
 Non-profit 501(c)3 headquartered in
Roxbury, Massachusetts
 Founded in 2000 by Harvard Business
School Professor Peter Tufano
 Focus on innovation,
scale & real-world
testing
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D2D Supporters & Collaborators
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Savings Rate: Trend
Source: Federal Reserve Bank of St. Louis
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State of Financial Preparedness
“How confident are you that you could come up with
$2,000 if an unexpected need arose within the next month?”
I don’t know
Can't or Probably Can't
2%
7%
7%
7%
5%
6%
11%
5%
58%
49%
47%
46%
44%
35%
MEX
UK
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GER
USA
4%
POR
FRA
34%
ARG
27%
CAN
4%
26%
23%
NETH
SING
5%
6%
18%
18%
1%
10%
ITALY
HKG
LUX
Source: Lusardi, Schneider & Tufano
(www.tnsglobal.com/news/news-97CC22ABE14E4373B863F0734D99121A.aspx)
Why Savings Matters
– Children of low-income, high-saving parents
are more likely to experience increased
incomes than their counterparts.
+ Children of low-saving, low-income parents are
significantly less likely to be upwardly mobile than
children of high-saving, low-income parents.
+ 71% of children born to high-saving, low-income
parents move up from the bottom income quartile over
a generation, compared to only 50% of children of lowsaving, low-income parents.
Pew Charitable Trusts Report – A Penny Saved is Mobility Earned Nov 2009
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But Saving is Hard
Challenges lower-income savers
face:
+ Limited income – a minimum
wage worker makes $15K a year.
+ Consumerism – pressure to buy
is everywhere.
+ Family & friends – are often in
need, creating pressure to share
resources.
+ Few opportunities – most
people save with structured help
(e.g., 401(k) plans), but LMI
people get little or no such help.
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Saving Policy / Product Design Spectrum*
Coerce
saving
US Social
Security,
UK child
trust fund
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Make it
hard not
to
Defaults,
bundling
Make it
Easier
Workplace,
tax time
saving
Bribe
People
Incentives
Use
Social
Networks
ROSCAs,
peer
support
Source: Tufano and Schneider, Using Financial Innovation to Support Savers:
From Coercion to Excitement (2008)
Make it
Fun
Prizelinked,
collectible
savings
Can Saving be Easy?
–
–
–
–
–
–
Convenient
Timely
Painless (relatively)
Relevant
Simple
Someone available to help
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Opportunity: Tax Season
– Huge financial event
–
–
–
–
$300 billion refunded each year
$115B to 68MM Low / moderate-income families (< $40k)
Average refund $1,680
Up to $7k (25%+ of annual income)
– Also…Universal * Permanent * Recurring
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Source: IRS, tax year 2006 data (www.irs.gov/pub/irs-soi/06in33ar.xls)
An Easy Saving Strategy – Split Refunds
Tax (refund) Time...
$300,000,000,000+
+ U.S. Savings
Bonds (or
other accts)
“Spend Some”
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+ Refund
Splitting...
“Save Some”
Form 8888
Direct Deposit Section
• Can select up to 3
accounts
• Can put remainder of
refund not allocated to
savings bond direct into
an account
Savings Bonds
• Can purchase for
taxpayer and two others
• Simply identify amount
and person(s) the bond
should be issued to.
Paper Check
• Remainder of refund
not allocated to bonds
can be received as a
paper check .
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12
D2D tests tax refund splitting
Before: Spend / Save choice after $ refunded
Split Refunds: choice before $ refunded
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Easy Helps Even “Non-Savers” Save
Findings from Savings Bond Pilot:
– Substantially increased savings
+ In controlled trials, 6-9% save in bonds
+ Mostly by women (79%), parents (70%)
+ Low income ($21k adjusted gross income)
– Savings by “new” savers (55% < $100 in savings)
+ Most didn‟t plan to save
+ Substantially saving for kids
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Tax Season 2012 data from 4/13 cycle
Impact
Buyers
Registrants
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Source: Bureau of Public Debt
Data Highlights
Serving Working Families and Individuals
• 1/3rd of all bond buyers received EITC
• Over 70% under $50,000 AGI
• 44% under $25,000 AGI
• 10% bond returns also received paper
check – potentially unbanked or
underbanked
(from tax year 2010)
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What Can State Legislators Do?
Tax time is seen as a “spending time”, not “saving time” – but
it can be BOTH
– Increase awareness among constituents
+ Events, constituent newsletters
+ Direct state tax authority to join awareness effort?
+ State-wide tax time savings day, Saving Bond day
– Complementary state policy
– Maryland and Hawaii
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Can Saving be Fun?
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*
+ Consider:
– $60 billion in US lottery sales (2008)
– Average of $515 per household
– 80% of gambling revenue from HH w/
income <$50k
* http://www.commondreams.org/news2006/0109-05.htm
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Prize-linked Savings Features
Motivates building and keeping savings:
 More you save, more chances to win
 Prize structure can incent certain behaviors
 e.g., greater odds of winning if savings held for longer period
Principal Protection:
 There are no losers – all deposits are safe
Prize money:
 Paid from interest on deposited funds
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A Test
– First Large-Scale Pilot in the US
+ 2009 pilot with 8 Michigan credit unions
+ $100,000 grand prize
+ $3.3K / month in smaller prizes
+ Each $25 deposit = chance to win
+ Max of 10 chances / month
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Save to Win Results (2009 – 2011)
Growth - Did the program continue to grow and engage
new participants in the act of saving?
Growth in the Save to Win Program
2009 (8 Credit
Unions)
Accounts
Total Saved
Average
Balance
11.7k
$8.6MM
$734
2010 (36 Credit
Unions)
16.2K
$27.9MM
$1,268
2011 (56 Credit
Unions)
16.2K*
$34.7MM
$1,982
Impact – over 25,000 unique accounts saving over $40 million from
2009-2011
*Preliminary estimates show that over half of 2010 accounts rolled over to 2011
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Save to Win Results (2009 – 2011)
Does the product encourage saving?
“Financially-Vulnerable”
Categories
Non-Savers
Asset Poor
Low-to-Moderate Income
Single with Dependents
Definition
% in 2009
% in 2011*
Reported not regular
savers before Save To
Win account
$5,000 or less in
financial assets
Household income less
than $40,000
56%
45%
39%
32%
44%
39%
Single parents w/ one or
more children
14%
12%
–
53% of non-savers, 51% of the asset poor, 53% of LMI and 50% of single parents with dependents
continued from 2009-2010 – close to rates of other savers.
–
Financially vulnerable households who continued in 2010 were saving more regularly and able to
save, on average, more in 2009 than financially vulnerable accountholders who did not continue.
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* The difference from 2009 to 2011 may be the result of a smaller survey sample size that may bias data.
Save to Win Results – Early 2012
Nebraska (9 credit unions) –
Early findings:
 9% of accountholders are new to CU
 Features of product important:
 53% said grand prize or monthly prize was
“main reason that attracted” saver to the account.
 55% said ability to deposit small amounts is main
feature that makes saving easier in account
 Half of account holders do not have “rainy day funds” to
cover 3 months worth of household expenses.
 56% of account holders earning <$60,000 annually;
33% of account holders earning < $40,000 annually
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PLS Momentum – State Interest
PLS legislation
•
•
•
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Maryland (2010/2011) •
Rhode Island (2010) •
•
Maine (2010)
North Carolina (2011)
Washington (2011)
Nebraska (2011)
Future of Prize-Linked Savings (PLS)
State Laws:
+ MD –2011– sponsors: Delegate Olszewski & Senator Klausmeier - HB
786, SB 1053
+ RI – 2010 – sponsor: Senator Pichardo - SB 2399; 2011 - Amended Bill
SB 0797
+ NE - 2011 – sponsors: Senators McGill, Dubas, Hadley, Mello et al –
LB524
+ WA – 2011 – sponsors: Senators Kilmer, Hobbs, Carrell, Keiser et al –
SB 5232
+ NC – 2011- sponsors: Senators Gunn, Clary et al – SB 513
+ ME – 2010 sponsors: Senators Sullivan, Alfond et al – SB 0645
– Interest in AL, FL, IA, MS, NM, MN, OR, NY, HI, AR
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Another Approach to Prize-Linked Savings
– Who runs lotteries today?
– States have legal authority
– 200k retailers in 44 states
+ Many in underserved communities
– How about a „no lose‟ lottery game?
– Play game for chance to win
– But player can get funds back
– Exploration underway
– FDIC Committee on Economic Inclusion (COMEIN)
subcommittee meeting in July, 2009
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Prize-Linked Savings (PLS):
Legislative Issues and Considerations
National Conference of State Legislatures
Working Families Forum
June 26, 2012
Daniel B. Preysman
Associate, Goodwin Procter LLP
©2012 Goodwin Procter LLP
General Overview
Why isn’t this already legal?
› Every state prohibits private lotteries
› Lotteries involve: (1) chance, (2) a prize, and
(3) consideration
› What is consideration?
▪ Almost any required action (e.g., deposit in a bank
account)
▪ Bank account that pays lower interest
Goodwin Procter LLP
29
Drafting State Legislation
In general, two legal changes are required at
a state level to permit PLS products
› First, in the penal code, carve PLS out from
lottery prohibitions
▪ Define PLS (also commonly referred to as “savings
promotion raffles”)
▪ Exclude PLS from lottery prohibitions
› Second, in the banking laws, explicitly grant
banks and credit unions explicit to offer PLS
products
Goodwin Procter LLP
30
Key Legal Considerations

Defining a “savings promotion raffle”
› “a contest or promotion in which a chance of winning designated
prizes is obtained by the deposit of a specified amount of money
in a savings account, share account, savings association, share
certificate, or other savings program.”

Empowering banks and credit unions
› Federal law governing banks and credit unions participation in
PLS differs (banks are generally subject to greater restrictions)
› But there are advantages to including both credit unions and
banks – if federal law changes (or is applied differently), banks
will automatically be able to participate with no further action at
the state level
Goodwin Procter LLP
31
Key Legal Considerations

Consumer protections
› Start by looking at existing consumer protection laws
(usually found in Unfair Business Practices Acts) relating
to disclosure, prizes, etc. Should these apply to PLS?
› Other protections, e.g., disclosure of prizes and rules, not
required to be present to win, etc.
› But PLS products are not yet established, and differing state
regulations could impede ability to scale
Goodwin Procter LLP
32
Key Legal Considerations

Consumer protections, cont.
› Sample language limiting fees/consideration:
▪ “Participants in a savings promotion raffle shall not be required to
provide any consideration to obtain chances to win other than a
deposit in a qualifying account. Participants shall not be deemed to
have provided such consideration (i) merely because the interest
rate associated with the qualifying account is lower than the interest
rate associated with comparable non-qualifying accounts, or (ii) as a
consequence of paying fees similar in kind and amount to those
charged in connection with non-qualifying accounts.”
Goodwin Procter LLP
33
Other Legal Considerations
 Regulatory Oversight
› Bank/credit union regulator will have oversight
› Should gambling regulators also be involved?
 Tribal Gaming Compacts
Goodwin Procter LLP
34
State Example:
Maryland
Split Refund Option : HB 883/SB 698 (2009)
State Example:
Maryland
Prize-Linked Savings Legislation: HB 786/SB 1053 (2012)
Recap: Action Ideas
– Prize-Linked Savings
– Offers chances to win prizes for depositing money into
a savings account
– A “no-lose” lottery
– Split Refunds
– Makes tax time an opportunity to save by directing tax
refunds into multiple accounts, including savings, or
purchasing U.S. savings bonds
– Federal split refund option is available and can be
replicated on the state level
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Questions?
Contact Information:
Joanna Smith-Ramani
Doorways 2 Dreams Fund
857.753.1892
[email protected]
Daniel Preysman
Goodwin Procter LLP
650.752.3306
[email protected]
Delegate John Olszewski Jr.
Maryland General Assembly
410.282.1733
[email protected]
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