PROspective Vol I No V May 2010

Recently, the Washington Post ran an Op-Ed piece titled “Credit Unions Launch a Savings Lottery, and Everyone Hits the Jackpot.” Credit Unions in Michigan had found a new way to get people, especially lower income people, to save. It’s called Save to Win.

Save to Win is the brainchild of the organization Doorways to Dreams (D2D). For more about the work of D2D, we talked with its Executive Director, Tim Flacke.

Chuck Miller: Explain the purpose of D2D.

Tim Flacke: D2D, www.d2dfund.org, is focused on the financial service needs of low income people. Working poor families often lack access to quality, affordable products to meet their financial needs.  In particular, it can be hard to get started saving or building a nest egg if you have just a modest amount to invest and can’t afford to see your fledgling savings devoured by fees.  Our job is to conceive of new approaches – new products and public policies – to address this need.  We conceive of ideas, test and study them, and seek a strategy to reach tens of thousands or tens of millions of consumers in a sustainable way.

When our founder, Professor Peter Tufano of the Harvard Business School, started focusing on consumer finance in the late 1990s, he found there were people and organizations doing great direct service work typically in a localized way.  But few of these organizations had the capacity or were set up to think systemically.  That’s the niche we aim to fill, in part by coordinating usual partnerships among major financial service firms, grassroots community groups, national non-profit organizations, policy makers and the working poor.

CM: How are lower income people different as savers?

TF: In a basic sense, of course, they aren’t any different.  They have dreams and aspirations, operate under various (often considerable) constraints and juggle a bunch of competing priorities.  We do a fair amount of field work, and one thing we’ve observed is that almost everyone shares an almost intuitive sense that saving for the future – and for a rainy day – is a wise thing to do. 

People vary in their ability to follow through on the saving impulse, which gets us to the challenges and constraints faced by lower-income consumers. To paint a picture, imagine a single mother working two or more part time jobs to make ends meet.  She might work 30 hours a week in retail or in an office job, and supplement this with odd hour shifts in a fast food restaurant or doing data entry at home.  Her schedule and income are erratic, with shifting hours and a constant challenge to line up needed childcare.

Of course it’s tough to find the money to save, but that’s true for nearly all Americans.  If you asked families making $100,000 a year what makes saving hard, my guess is they would reply with the same answer as someone making $25,000 a year:  finding the money.  

But a number of studies have demonstrated that even people living on very modest incomes can and will save, at times more (as a percent of income) than middle and upper income families.

But other challenges remain: are you able to open a bank account?  Millions of Americans are effectively unable to open accounts because they are listed on a private registry of people who have had trouble managing a bank account.  Do you have enough to get started?  Many savings and most investment products require several hundred dollars as a minimum opening balance or to avoid monthly fees.  Are you sure whom to trust?  In some social circles, stories abound about people who have been ripped off by scam artists, or in whose countries of origin the banking system was not to be trusted.  How do you remember to save?  Most of us save successfully through automated programs, such as employer-based retirement savings plans.  But these are rarely offered to part time workers.

So our goal is to introduce products and policies that address these challenges.  One example of this is the President’s 2009 announcement that all Americans may now order US Savings Bonds with a portion of any federal tax refund.  We pilot tested this idea for four years in tax preparation sites around the country before taking our results to Administration officials and recommending this policy change.  Now more than 100 million tax filers have an easy, safe way to link their refunds to a trusted, high value savings product.  And for working poor families, tax season can deliver refunds as high as $7,000 – 20 or 25% of their annual incomes.  The next step is to build awareness of this opportunity – and to experiment with new ways to link tax refunds to retirement savings.

CM: How did D2D decide games could be an effective way to teach financial literacy? Can we see an example?

TF: A lot of work has been done on financial education, since many studies have confirmed what we all may sense: Americans are in need of better financial knowledge and stronger financial decision making skills.  But so far no one seems to have found a formula that attracts those who need the information, and has been proven to be effective.  This was our impetus to reframe financial education as “financial entertainment.”  Our goal is to make essential financial education into something that is “good for you” but also “tastes good,” that vulnerable consumers in particular are attracted to and interested in.  Casual video games offered a great opportunity to test this idea.

In our first game, Celebrity Calamity players assume the role of a financial manager for spendthrift celebrities.  Players must decide which whims to indulge and which to ignore, when to charge something on a credit card and when to use a debit card, and how much to pay each month on an outstanding balance.  Along the way, they learn about APRs, late fees and the true cost of carrying credit card balances.  But the key is that the game is fun.  Players get to laugh at the fictional celebrities’ excesses, all while making the very same choices they must face in their own lives.  This performative aspect of gaming is one key to the learning that results.  In our own testing, players show double digit increases in knowledge and, crucially, decision making self confidence.  It turns out that when people are having fun and problem solving, they are staying engaged and learning.

A second title – Groove Nation, a dance budgeting game – is in the works and we will have two more by the end of 2010.  Our challenge now is to find suitable partners to distribute these games to millions of prospective players and learners.

CM: How did you come up with the idea of Save to Win?

TF: Americans spend more than $50 billion a year on lottery play, or roughly $500 for every household in the country.  By some estimates, 80% of state lottery revenue comes from those with incomes under $50,000 a year.  So we can say with confidence that the promise of winning holds tremendous appeal for many people, including large numbers of lower-income Americans.  Is there a way we can harness that impulse to drive saving?  It turns out there is, and it’s been used successfully in countries around the globe, in some cases for decades.  In the United Kingdom, for instance, the government sells “premium bonds” – a savings product that, rather than interest, offers consumers a chance to win a million pounds sterling tax free, as well as a wide range of other cash prizes.  Over 20 million people hold premium bonds.

So we thought this idea might work in the United States.  In 2009, we got our first chance to test the idea at some scale.  Using a grant from the Center for Financial Services Innovation’s Non-profit Opportunities Fund, which is supported by the Wal-Mart Foundation, and in partnership with the Michigan Credit Union League (MCUL) and the Filene Research Institute (FRI), D2D organized a pilot test involving eight Michigan credit unions.  In less than a year, 11,500 people opened up “prize-linked savings” accounts and deposited more than $8.5MM – in places like Detroit and Flint.  For every $25 they saved, up to a cap of $250 per month, account holders earned a chance to win a $100,000 jackpot and a range of smaller monthly prizes.  From our evaluation efforts, we estimate 44% of account holders had incomes under $40,000.  And in February of this year, 86 year old Michigan resident Mary June Smith won the grand prize.

This is a product with huge potential.  Our next challenge is to encourage states around the country to adopt the policies that made the product legal in Michigan.

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