Suze Orman, the scourge of spending, must be thrilled: This past spring, U.S. credit-card debt rose by the smallest amount in three years.
Banks? Less so. Many have based their profits on high-interest lending, rising fees, and penalties -- drawing the ire of consumer advocates, congressional regulators, and anyone who has ever been on hold with Visa.
Now a range of financial institutions are trying a new business model: being good. Specifically, they're nudging, and even paying, customers to save money. Although they're marketing new programs to feel as fun and easy as "buy now, pay later," saving can be a tough sell and doesn't necessarily benefit the bottom line. "Unless you keep your cost very efficient or charge massive fees," says Peter Tufano, a Harvard Business School professor who for the past decade has been studying and testing new policies to promote savings, "the economics of providing savings programs for low- to moderate-income families are not all that great." The ideas are creative, but can playing the nice guy please shareholders as well as customers? It all depends on the value of good PR.
Way2Save program takes $1 from checking with every ATM-card use or online bill payment, and puts it into an account that pays a loss-leading 5% APR for the first year, plus a 5% end-of-year bonus. (Bank of America initiated the "spend your way to savings" notion with Keep the Change, but it only rounds up to the nearest dollar and pays a meager 0.20% savings rate.) Moreover, customers are allowed to transfer up to $100 a month into their Way2Save accounts, boosting the power of the high interest rates. "I consider this an investment," with a three- to five-year payoff, says Kathryn Black, Wachovia's first-ever savings director. "We're using this to acquire new customers." Although merchants' point-of-sale debit fees, typically $0.50 to $1.50, help offset the program's costs, Wachovia will make money only if these customers move on to higher-margin financial services, such as home loans or investment accounts. So far, Way2Save has attracted more than 250,000 new Wachovia customers in just a few months. In a year when Wachovia's CEO stepped down amid massive mortgage-sector losses, Black admits, "this has been a bright spot for people to talk about."
Using social media to encourage saving is an old concept at heart. "In many societies, savings is not only an individual but a group activity" for friends or extended family, Tufano says. That's exactly what Jon Gaskell and Mike Ferrari have launched with SmartyPig.com, which Gaskell describes as a 21st-century version of a piggy bank. "We're encouraging people to save up before they buy stuff," he says. (This idea qualifies as news to the site's twentysomething audience.) Set up a savings account with an automatic monthly contribution, and you can share goals online with family and friends, who can also contribute to your account. It pays a competitive rate, currently 3.9%, through West Bank of Des Moines. SmartyPig shares revenue with the bank and also partners with retailers that offer a 5% bonus if you cash out to a dedicated gift card.
As community-based nonprofits, credit unions have always promoted saving as part of their mission. But with an aging membership, they're going further to attract new customers. "The first thing I came up with is, let's double the interest rate," says Matt Davis, director of PR at Members Credit Union in Winston-Salem, North Carolina. "That about made our president fall out of his chair." Davis's What Are You Saving For? program offers a relatively paltry 1.8% interest rate, but it also includes monthly drawings for additional cash prizes.
And that's where the future of American savings may lie. In countries such as the U.K. and South Africa, people's monthly savings contributions can make them eligible for cash and prizes. The poorest Americans already spend an average of $645 a year in lottery tickets. Tufano believes that lotteries may be the answer to marry our something-for-nothing culture with the noble goal of long-term savings. Legal issues abound here in the United States, but he has helped pilot the concept using sweepstakes structures, which allow anyone to enter for the prize whether or not they have an account. "I fully expect this to lose money," says Davis, who got the idea when he heard Tufano advise the Credit Union National Association. "But I think the goodwill we'll create will far outweigh that."