June1, 2012

BEHAVIORAL FINANCIAL PRODUCT DEVELOPMENT:

A PROGRESS REPORT ON SEVEN PROJECTS

Jonathan ZinmanDartmouth College and

IPA’s U.S. Household Finance Initiative

RAND Behavioral Finance Forum 2012Washington, DC

Financial Products Innovation Fund

“The Financial Products Innovation Fund was created as a joint effort between IPA’s US Household Finance Initiative and the Ford Foundation to support the development of scalable, market-tested products that help households make better financial decisions, escape cycles of debt, build assets and achieve financial resiliency.”

• Emphasis on product development informed by behavioral research• Theory, evidence, principles

• Competitive call for proposals launched in August 2011

• Seven projects awarded funding in January 2012

• Product development and “alpha-testing” for feasibility and level of demand• Will also be doing some analysis of demand determinants

• Pilot tests currently underway (Apr – Dec 2012); results by May 2013

“Pay Yourself Back” – Two Pilots

• Problem: Hard to get started saving

• Solution: Seamless conversion of loan/DMP payments to savings once loan/DMP is paid off

• Behavioral approaches: Harness habit formation, redirect mental accounting, easy on-ramp (use existing accounts)

• Key Features: Upfront commitment, back-end automation

• MCUCD target market: members of 3 participating Montana credit unions LSSSMN target market: graduates of LSSMN’s Debt Management Plan program

• MCUCD launch date: May 1, 2012; LSSMN launch date: May 23, 2012

Pay Yourself Back – “Get Saving!”

“Frictionless Savings” – Two Pilots

• Problem: Easy to spend on impulse, but not to save (on impulse)

• Solution: Clear path to saving at times when you are most liquid• For example: at the check cashing window

• Approaches: Redirect impulsivity, meet people where they prefer to conduct business, streamline bank account sign-up

• Key Features: MicroBranch: Upfront commitment, back-end automation; RiteCheck: “impulse saving”

• Target Market: Low-income check cashing customers in San Jose & New York City

• Launch dates: April 15, 2012; June 1, 2012

“Frictionless Savings” – Two Pilots

“TGIF: The Goal is Freedom” Loan

• Problem: Small dollar loans are expensive, and have high default rates

• Solution: Borrowing accepting 5-day delay in disbursement gets 28% - 69% discount

• (Sister product: emergency line of credit with “frictionful” drawdowns)

• Approaches: Incentivize planning, risk screening-by-sorting

• Key Features: Delayed disbursement, frame interest as savings to incent improved financial planning; (voluntary liquidity restriction)

• Target Market: Roanoke credit union members, 61% designated low-income

• Launch Date: May 17, 2012

“The Trust Card” Credit Card

• Problem: Yield-maximizing strategy for many households is to pay down high- interest debt, but many only make minimum payments each month

• Solution: Behavioral Credit Card for debt consolidation

• Approaches: Decision aid; default option; commitment options

• Key Features: default to accelerated payment plan; built-in planning tool; restricted access to liquidity going forward; option of further voluntary restriction

• Target Market: Low-income credit union members in Washington Heights, NYC

• Launch Date: April 2, 2012

“The Trust Card” Credit Card

“Now and Later Account” Restricted Withdrawal Account

• Problem: The temptation of lump sums (some jobs, many tax refunds)

• Solution: Voluntarily restrict own access to lump sums

• Approach: Decision aid, commitment, and automation bundled with savings account

• Features: Budget commitment to withdrawal schedule

• Target Market: Students via Single Stop USA’s Community College Initiative (smooth disbursement of student loan payments)

• Expected Launch: August 2012

“The Now & Later Account”

The Now&Later Account

Summing Up:Financial Products Innovation Fund

•Putting behavioral approaches to work for financial product development• “R&D&R”

• Seven projects underway with different implementing partners• Credit unions, check cashers, credit counseling service, nonprofit advisor,

commercial bank• Complements other IPA work underway on (U.S.) financial product development• Debt reduction• Commitment for health goals• Financial management tools