As a field researcher collecting data for the US Financial Diaries project in Cincinnati, I interviewed 30 low-income families about the details of their household finances over 16 months. One question was always in my mind: What’s the difference between their financial lives and mine? And how might this comparison help design financial products for people who are struggling to make ends meet? One of the most important distinctions I identified was our vastly different abilities to save. For me, an unexpected $300 car repair might be a pain in the butt, sure – but I’m able to deal with it by dipping into my savings account. For USFD families, that same bill could throw the household into a mire of debt, stress, and embarrassment (not to mention lack of transportation).
My experience in the field lines up with data on the dismal savings rate in the US compared to other parts of the world. It speaks to the difficulty of putting aside money when very little is coming into a household in the first place, and it highlights the dearth of financial products offering effective carrots or sticks to boost Americans’ savings.
Fortunately, researchers are testing innovative services that could make a difference. Some new products require automatic deposits into savings accounts; others involve matching incentives. Still other studies examine savings programs that rely on relationships and accountability, like the 2012 working paper Under-savers Anonymous by Felipe Kast, Stephan Meier, and Dina Pomeranz. This experiment compared the effects of peer-based savings products in Chile.
First, researchers had savers state a weekly savings goal. Some participants joined a peer group where they publicly announced their progress to other members each week. Success was rewarded with a sticker and, presumably, peer approval. Compared to a control group of savers who had weekly goals but no group meetings, peer group members saved significantly more: their average monthly deposit was about twice the amount of control group deposits, and their average monthly account balance was around 1.5 times higher.
As noted in a May 2012 FAI post, peer group members also saved more than participants with a high-interest (5%) savings account and no group meetings. In fact, the behavior of these high-interest savers hardly differed from that of the basic control group. In other words, study participants responded to a behavioral savings tool (peer groups) – not to a financial one (interest rates).
So what is it about savings groups that help people save? After the peer group experiment ended, the Under-savers Anonymous crew tested a feedback text message product within the same sample. When these savers met their weekly goals they received an excited text: “Congratulations! Last week you made your weekly deposit.” When they missed a week they faced a guilt-inducing message that read, “Ooh! Last week you did not achieve your deposit.” This simple accountability mechanism, without in-person group meetings, had a huge impact on saving behavior: These participants’ average monthly deposit was over 11 times the amount of savers who didn’t get text feedback!
Suddenly the complicated group intervention boils down to a much simpler text-based commitment device. Feedback texts appear to mimic – and even inflate – the savings effects of peer groups. Maybe it’s because text savers are held accountable with a message whether or not they want to be, while group savers can more easily skip out on their meetings.
But is the text intervention too good to be true? It’s unclear how effectively it would translate from Chile to the US and, more generally, whether it would remain effective over the long-term. For one, in the age of constant tweets and status updates, some of us have become de-sensitized to mobile alerts. Further, I can imagine the least successful savers becoming especially immune to a discouraging repetition of “ooh, you missed your goal” texts. (Still, a potential work-around comes to my mind: Fuse text alerts with monthly or bi-monthly financial coach meetings.)
The only way to know for sure is to implement feedback text messages and related savings products in the US. Consider this a call to action for financial institutions large and small to recognize one simple, glaring notion: The time is ripe for us to apply and test these lessons here.
This post was written by Julie Siwicki of the Financial Access Initiative. The views expressed therein are those of the author, and not necessarily of the USFD project or its funders.