While families experience financial emergencies, such as car breakdowns, household repairs and medical illnesses, today’s uncertain economy makes them even more vulnerable to these financial shocks. Consumers are not just struggling to build for the future but to manage day-to-day living, with income and expense shocks that can rock the very foundation they have worked so hard to build and sustain. Nearly half of American households are vulnerable to these financial shocks, with a 2011 study by leading researchers finding that 46% lack confidence in their ability to come up with $2,000 in 30 days. While all households experience financial shocks, low to moderate income (LMI) households are even more vulnerable. A study by D2D of families with $20-60K in annual income found that 62% of households experienced at least one financial shock in the last twelve months and 51% of households lacked any emergency savings to help them cope.
Without the right tools to manage these emergencies, families can experience hardships - less food on the table, increased levels of debt, deeper depths of poverty - that can be short-term or ever-lasting. For LMI households, the size of the shock might be small but the relative impact large, long-lasting and potentially forever damaging.
This reality creates a need for innovation to help all consumers better manage financial emergencies and protect their households from the negative impact of shocks on their household’s financial wellbeing. Given the diversity of financial emergencies faced, in type and size, and the range of potential impacts, it is important to explore innovations in savings, credit and insurance. Households not only need access to financial innovations that help them set a little bit aside for a rainy day but ones that can fill in savings gaps and mitigate large and, often, detrimental shocks.
Savings Innovations on Prepaid Cards
Prepaid cards, available and accessible to millions of households in America and internationally, have the potential to be a tool for savings innovations. Prepaid cards can especially help consumers build short-term, emergency savings given that they are in the hands of consumers and accessible when emergencies hit and funds are needed. D2D sees the potential of savings as an add-on feature to general reloadable prepaid cards but also as a stand-alone prepaid card product, and is currently exploring the two examples listed below:
Example A: Savings as an Add-on Feature to a Prepaid Card.
For many unbanked and underbanked consumers, a general reloadable prepaid card serves as a key financial tool to help them manage cash flows and budget to pay bills and cover expenses. The access to, and relationship with, their prepaid card company offers a unique opportunity to provide consumers with a savings opportunity, helping households with limited access to a needed financial product begin building a reserve.
Innovation - "Rainy Day Reserve"
D2D partnered with prepaid card company Plastyc, Inc. to create a savings feature for their consumers. The savings pocket, the “Rainy Day Reserve (RDR)” launched in fall 2011 and initial findings show the promise of an add-on savings feature for both consumers and prepaid companies.
D2D is analyzing the data from our collaboration with Plastyc, Inc. and will be releasing the findings in an upcoming publication. Below are some early findings that show the potential of savings on prepaid cards for both consumers as well as prepaid card providers.
• Demand for the Rainy Day Reserve is strong. More than 5,500 consumers have taken up the savings feature.
• Consumers are engaged in savings. Since its launch, $5.5 million has been deposited in the RDR.
• Consumers are using their funds for emergencies and other urgent needs. The main reasons consumers surveyed have withdrawn from their rainy day reserve are to pay monthly bills (48%), cover a household emergency (43%), and pay for weekly expenses (41%).
• Consumers believe the feature has helped them save. 79% of survey respondents reported that the RDR has helped them save. Households also report less reliance on payday loans, credit cards, and pawn shops.
• The Rainy Day Reserve is helping consumers manage emergencies. Of consumers experiencing financial emergencies, 88% indicated using their RDR to help pay for them.
• A savings feature has the potential to improve the attractiveness and stickiness of a prepaid card. 88% of respondents plan to continue to use the feature over the next 6 months and 78% are more likely to recommend the prepaid card to family and friends.
Example B: Savings as a Stand-Alone Prepaid Card.
To introduce a new product that helps change behavior, we often need to meet consumers where they are and tap into existing behaviors. Creating a product that taps into the growing popularity of the prepaid card industry and the familiarity of gift cards has the potential to do exactly that.
Innovation - "Emergency Gift Card"
D2D has designed an emergency savings gift card as an innovative way to reach consumers with savings. Consumers would be able to purchase a physical gift card that represents actual savings, with a goal of holding onto it as a form of short-term savings.
By utilizing the popular gift card industry, D2D is attempting to transform the very act of savings into a more impulsive, purchase-like decision. If consumption can be fun and immediately gratifying, why not savings too? An emergency gift card also has the potential to resonate well with a consumer – the tangibility in one’s wallet provides security and the comfort that when an emergency hits, the funds are in their hands.
D2D is in the process of finalizing the pilot to test proof of concept of savings gift cards. For more information, see “Emergency Gift Cards: Commoditizing Savings with Prepaid Cards”.
 Lusardi et al. Financially Fragile Households: Evidence and Implications. NBER Working Paper No. 17072 (May 2011).
Household Risk publications:
- Emergency Gift Cards: Commoditizing Savings with Prepaid Cards
- A Need for Product Innovation to Help LMI Consumers Manage Financial Emergencies