Presentation on theme: "CONVERTING BORROWERS INTO SAVERS: SOME PRODUCT DEVELOPMENT IDEAS FROM THE U.S. HOUSEHOLD FINANCE INITIATIVE Dean Karlan, Yale University and IPA Jonathan."— Presentation transcript:
CONVERTING BORROWERS INTO SAVERS: SOME PRODUCT DEVELOPMENT IDEAS FROM THE U.S. HOUSEHOLD FINANCE INITIATIVE Dean Karlan, Yale University and IPA Jonathan Zinman, Dartmouth College and IPA May 2011
Problem Many households low net worth, financial resiliency High debt loads/reliance in emergencies Highest, safest return for many households: pay down expensive debt Big value proposition here: hundreds, even thousands of basis points on the table But… getting/staying out of debt is difficult, psychologically and cognitively (Value proposition tough sell for consumers?)
Opportunity and Approach Product development using behavioral insights to “meet consumers where they’re at” Product features that counter behavioral biases Product features that redirect heuristics, passive learning Mental accounting Habit formation Research along with development to refine product design and business model Market research Randomized-control testing
The Skinny on Three Product Ideas Pay Back Yourself Convert loan payments to savings once loan paid off Private Banking for Main Street Debt and asset consolidation for yield maximization Borrow Less Tomorrow Save More Tomorrow with bigger bang for buck
1. Pay Back Yourself: In Theory Problem: hard to get started saving. Solution: seamless conversion of loan payments to savings/investment once loan paid off Auto loans, home equity, 1 st -mortgages nearing end of term Approach: harness habit formation and mental accounting Can reinforce this with messaging “You’ve almost paid off your loan, get ready to pay yourself” “… paid off your car/home, time to save for maintenance” Other features: upfront commitment, back-end automation
1. Pay Back Yourself: In Practice Business Model: cross-sell Convenience fee? Cancellation fee (if don’t honor pre-commitment)? Other revenue models? Potential distribution channels Deposit-taking financial institutions with or without loan portfolio Others?
2. Private Banking for Main Street: Theory Problem: habit formation, mental accounting, etc. can be expensive E.g., leave money on table by borrowing high and saving low Or by not borrowing on cheapest credit card Solution: balance sheet level relationship with financial service provider that helps client minimize debt loads We see debt consolidation in this market. Idea here is portfolio consolidation: linked asset and debt accounts Automated rules allocate liquidity to optimize debt repayment Line of credit backstop Redirect mental accounting from asset ownership to liquidity ownership
2. Private Banking for Main Street: Practice Redfrog Mortgage (BC, Canada) doing a version Business model Cross-sell from payment service to line of credit? Subscription/management fee? Others? Distribution channels Deposit-taking financial institutions Billpay and other payment platforms? Information/advice engines?
3. Borrow Less Tomorrow: Theory Problem: yield-maximizing strategy for many households is to pay down high-interest debt Solution: target this “investment opportunity” with kitchen-sink of behavioral levers Marketing for attention and motivation: Help consumers identify whether they should borrow less Simple Decision Aid: Help making concrete plan to borrow less Accelerate repayment Limit borrowing going forward Commitment: Offer creative ways for clients to incentivize themselves o Social commitment: peer supporters/referees o Financial commitment: performance bonds o Access commitment: “cut me off if I don’t…” Ongoing Messaging: Feedback/reminders for follow-thru and maintenance
3. Borrow Less Tomorrow: Practice 40% take-up rate in high-touch pilot test Revenue model? o Subscription (as part of a larger bundle?) o Cross-sells (Savings products? Cheaper loan products? Advice?) Distribution channels Credit bureaus? Billpay and other payment platforms? Info/advice engines? Employers? Credit counseling agencies (for those who don’t qualify for workouts)? Debt collectors (post- or even during-collection)
Summing Up Huge market opportunity: money on table for helping people save tons of money by borrowing less And/or more efficiently And ultimately save more Behavioral insights can help develop new products and features to create and meet demand Research discipline can help find business models that work