The Trouble With Incentivizing Saving

There are a lot of good reasons NOT to save, especially if you don’t have a lot of income.

Photo credit: Mario Bollini, CC BY 2.0.

Today’s must-read longread comes from Bloomberg:

Can Science Make People Save Money?

The savings accounts at RiteCheck, called Cash and Stash, are an experiment — both for the check cashing business and for a group of social scientists with the research and policy nonprofit Innovation for Poverty Action (IPA). Originally, RiteCheck wanted to offer savings accounts as a loyalty program: If people have to come in to make withdrawals, they won’t go to a competitor. But check cashers can’t hold money for customers. So RiteCheck collaborated with IPA, along with a local credit union, to run a pilot program. In exchange for helping RiteCheck, IPA is studying how customers behave. The goal: to see if they can get people to save money by using behavioral psychology.

So. A nonprofit that uses evidence to create “better programs and policies for the poor” works with a check cashing company to develop a scientific experiment. If customers make a check cashing transaction and are nudged to put a few dollars in a savings account, will they? If they are told that saving money will earn them rewards points that can be redeemed for toasters and DVD players, will that help? What about if savers were entered into a cash lottery?

Which method actually gets people to save?

The whole story is worth reading, but I want to focus on two disincentives that the researchers discovered:

  1. People have “very good reasons for not having a bank account.” Maybe they know that any money that goes into their bank account will be garnished to pay outstanding tax liens, for example. (This happens, at one point in the article, and the customer is not pleased.)
  2. Tellers at a busy check cashing branch often don’t have time to explain the benefits of savings accounts—or the incentives the nonprofit has carefully created—to customers.

The savings accounts aimed to reduced frictions for customers by offering easy access and an easy sign-up process. But IPA didn’t account for other frictions: “They [tellers] just want to be quick and not read the message,” [RiteCheck employee Dayana Machin] tells me. “If it’s busy, there’s people, like, ‘It’s busy, I don’t have time to be talking.’”

There’s also the obvious point made about two-thirds of the way into the longread, courtesy of economics professor George Loewenstein:

With the Bronx’s unemployment rate at 7.8 percent, around 30 percent of the borough’s 1.4 million residents live at or below the poverty line. “It simply may not be possible for them to save.”

Read the article and let us know what you thought. There’s so much to discuss—the incentives, the disincentives, the way people who opened savings accounts used them like checking accounts (making deposits and then withdrawing those deposits when they needed cash), and, of course, the study’s conclusion.

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