Innovative Ways to Encourage Savings - National … Ways to Encourage Savings National Conference of State Legislatures Working Families Forum June 26, 2012 ©2010 D2DFund, Inc. ©2012

©2012 D2DFund, Inc.

Innovative Ways to Encourage Savings

National Conference of State Legislatures

Working Families Forum

June 26, 2012

©2010 D2DFund, Inc. ©2012 D2DFund, Inc. ©2012 D2DFund, Inc.

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

Doorways to Dreams (D2D) Fund


D2D Supporters & Collaborators

http://walmartstores.com/

http://www.aecf.org/

http://www.cfsinnovation.com/index.php

http://www.hrblock.com/index.html


Savings Rate: Trend

Source: Federal Reserve Bank of St. Louis


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?”

58%49% 47% 46% 44%

35% 34%27% 26% 23%

18% 18%10%

2%

7% 7% 7%5%

6% 11%

5% 4%4%

5% 6%

1%

MEX UK GER USA POR FRA ARG CAN NETH SING ITALY HKG LUX

I don’t know Can't or Probably Can't

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 low-

saving, low-income parents.

Pew Charitable Trusts Report – A Penny Saved is Mobility Earned Nov 2009


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.


Saving Policy / Product Design Spectrum*

Coerce

saving

Make it

hard not

to

Make it

Easier

Bribe

People

Use

Social

Networks

Make it

Fun

US Social

Security,

UK child

trust fund

Defaults,

bundling

Workplace,

tax time

saving

Incentives ROSCAs,

peer

support

Prize-

linked,

collectible

savings

Source: Tufano and Schneider, Using Financial Innovation to Support Savers:

From Coercion to Excitement (2008)


Can Saving be Easy?

– Convenient

– Timely

– Painless (relatively)

– Relevant

– Simple

– Someone available to help


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

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+

+ Refund

Splitting...

+ U.S. Savings

Bonds (or

other accts)

“Spend Some” “Save Some”

©2010 D2DFund, Inc. ©2012 D2DFund, Inc. ©2012 D2DFund, Inc. 12

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 .


D2D tests tax refund splitting

Before: Spend / Save choice after $ refunded

Split Refunds: choice before $ refunded


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


Tax Season 2012 data from 4/13 cycle

Impact

Buyers

Registrants

Source: Bureau of Public Debt


Data Highlights

• 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)

Serving Working Families and Individuals


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


Can Saving be Fun?

DEPOSIT SLIP


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


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


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

http://walmartstores.com/

http://www.savetowin.org/Home_Page_2.html


Save to Win Results (2009 – 2011)

Growth - Did the program continue to grow and engage

new participants in the act of saving?

2009 (8 Credit

Unions)

2010 (36 Credit

Unions)

2011 (56 Credit

Unions)

Accounts 11.7k 16.2K 16.2K* Total Saved $8.6MM $27.9MM $34.7MM Average

Balance $734 $1,268 $1,982

Growth in the Save to Win Program

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


Save to Win Results (2009 – 2011)

Does the product encourage saving?

– 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.

“Financially-Vulnerable”

Categories

Definition % in 2009 % in 2011*

Non-Savers Reported not regular

savers before Save To

Win account

56% 45%

Asset Poor $5,000 or less in

financial assets 39% 32%

Low-to-Moderate Income Household income less

than $40,000 44% 39%

Single with Dependents Single parents w/ one or

more children 14% 12%

* 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


PLS Momentum – State Interest

PLS legislation • 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


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

http://images.google.com/imgres?imgurl=http://upload.wikimedia.org/wikipedia/commons/2/24/7-11_Japan.jpg&imgrefurl=http://wattsupwiththat.com/2008/09/28/convenience-stores-under-attack-by-agw-zealots/&usg=__b0Fc2OL1JHV14tUdIdYldk6cfBU=&h=480&w=640&sz=174&hl=en&start=13&um=1&tbnid=91yQxNOyYg_XJM:&tbnh=103&tbnw=137&prev=/images%3Fq%3D7-11%2Bstore%26hl%3Den%26sa%3DN%26um%3D1

http://images.google.com/imgres?imgurl=http://inplacenews.files.wordpress.com/2008/04/shell-gas-station-bar-b-cutie2.jpg&imgrefurl=http://inplacenews.wordpress.com/2008/04/30/how-to-lower-gas-prices-in-america-according-to-shell/&usg=__frVxyD6UrC-Xx2rF-4RQ9ZqzMcU=&h=531&w=800&sz=370&hl=en&start=2&um=1&tbnid=8_HfFMImXL2zfM:&tbnh=95&tbnw=143&prev=/images%3Fq%3Dshell%2Bstation%26hl%3Den%26um%3D1

http://images.google.com/imgres?imgurl=http://www.lotteryuniverse.com/Portals/LotteryUniverse/lottery_logos/new_york_lottery.gif&imgrefurl=http://www.lotteryuniverse.com/&usg=__bxrO1x1Yd5GNh7IMPXlOQ9m_KwY=&h=168&w=170&sz=11&hl=en&start=4&um=1&tbnid=SpGMoefYmOO4CM:&tbnh=98&tbnw=99&prev=/images%3Fq%3Dnew%2Byork%2Bstate%2Blottery%26hl%3Den%26um%3D1

http://images.google.com/imgres?imgurl=http://colevilleca.com/images/CaLottery.gif&imgrefurl=http://www.luckylotto.com/general-lottery/california-state-lottery-and-proposition-1-c/&usg=__8vAaGDY-aaNqG4Mla-IN6vBvMUE=&h=90&w=112&sz=4&hl=en&start=16&um=1&tbnid=zvs4jo3fvdDHeM:&tbnh=69&tbnw=86&prev=/images%3Fq%3Dcalifornia%2Blottery%26hl%3Den%26um%3D1

http://images.google.com/imgres?imgurl=http://img.photobucket.com/albums/v296/digital_derek/SawxBlog/lottery.jpg&imgrefurl=http://www.sawxblog.com/2006/03/mass_lottery_to.html&usg=__Y22k4Wvd5IyXr4mNDrqmXRJ97Kw=&h=141&w=450&sz=51&hl=en&start=7&um=1&tbnid=clrzq-FYjErt4M:&tbnh=40&tbnw=127&prev=/images%3Fq%3Dmassachusetts%2Bstate%2Blottery%26hl%3Den%26sa%3DG%26um%3D1

©2012 Goodwin Procter LLP

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

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

29

Goodwin Procter LLP

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

30

Goodwin Procter LLP

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

31

Goodwin Procter LLP


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

32

Goodwin Procter LLP


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.”

33

Goodwin Procter LLP

Other Legal Considerations

Regulatory Oversight

› Bank/credit union regulator will have oversight

› Should gambling regulators also be involved?

Tribal Gaming Compacts

34

State Example:

Maryland Split Refund Option : HB 883/SB 698 (2009)

Prize-Linked Savings Legislation: HB 786/SB 1053 (2012)

State Example:

Maryland


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


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]

Documents

Innovative Ways to Encourage Savings - National … Ways to Encourage Savings National Conference of State Legislatures Working Families Forum June 26, 2012 ©2010 D2DFund, Inc. ©2012