By Kristen Berman, Wendy De La Rosa and Mariel Beasley, Common Cents Lab
If there is one thing that unites people around the world, it’s a lack of trust in the financial services industry. And it’s getting worse. In a recent survey just 8 percent of respondents reported having faith in their financial institutions, down from 13 percent in the prior year.
From Ponzi schemes to bank scandals, Americans’ relative mistrust of financial institutions is understandable. In fact, it has led many consumers to exit the banking system and opt for alternative banking products such as prepaid cards. As a result, prepaid cards are a growing business. From 2012 to 2014, prepaid card usage increased by more than 50 percent and is forecast to grow to $3.1 trillion globally by 2022.
As they command a larger and larger share of the market, prepaid providers are at a crossroads. They can follow the path of some alternative financial providers that create products that end up costing low-income users between $1.8-4.5 billion each year, or they can be consumer-friendly products that change behavior for the better. Prepaid card providers have massive potential to expand financial inclusion and increase financial well-being by unlocking features typically provided by banking institutions and then executing them better. In this way, we believe they can actually increase their appeal and expand into new market territory.
Here are three features backed by social science evidence that our team at Common Cents predicts can help prepaid card providers increase the financial well-being of its fast-growing user base.
It may be counterintuitive that people with very little income want to save. However, research finds that people do choose to tuck away some of their hard-earned cash—you just have to ask them to do so.
Consider this experiment with the Latino Community Credit Union (LCCU), in which we helped to increase the number of members depositing some of their check into an account versus cashing the entire thing. By simply asking members coming in to cash a check to fill out a check cashing slip first, and then suggesting they deposit some of the money, about 10 percent of check cashers deposited an average of $167. When fully scaled, this simple piece of paper, acting as a gentle nudge, has the potential to increase deposits into accounts at LCCU by more than $2 million each year.
So, how can saving features help prepaid card providers?
To take advantage of this finding, prepaid card providers could simply re-design their direct deposit sign-up flow to ask people if they want to automatically transfer a percentage of their deposit into a savings account.
Most prepaid card providers already have some savings features but it is cumbersome, not integrated with the onboarding flow or direct deposit forms, and requires the user to take the initiative to set it up. By helping to create simple automatic transfers that help people ‘pay themselves first,’ providers can make saving money a routine part of getting paid.
This feature helps prepaid card providers differentiate in two ways. First, most banks don’t offer features that time savings transfers with deposits. This is critical for lower-income consumers. Second, savings may be the retention magic bullet that will help providers keep consumers active on their cards. By holding money in an account and tagging it for the longer term, we hypothesize that consumers would view their provider with that same longer-term mindset.
We all need reminders, even for things we really want to do.
A study of more than 10,000 participants conducted by researchers Catherine Rodriguez and Juan Saavedra found that savings balances were 43 percent greater for those receiving semi-monthly savings reminders than for those in the control group not receiving any reminders. People who received financial education text messages about the importance of saving with no reminders saw no difference.
Similarly, our team ran a study with fintech company Digit to help people save a portion of their tax refunds. One simple text message reminder to save prompted 15 percent of the sample set to commit to saving some of their refunds. In another study we ran with a different partner company, a reminder message actually doubled engagement.
So, how can reminders help prepaid card providers?
Banking institutions typically send alerts for potential fraudulent transactions, but few banks default customers into notifications that proactively help manage their finances. Imagine if prepaid card providers stepped up and filled this gap with bill pay, loan or rent reminders. Providers could even send reminders to trigger savings for holidays, school fees or car repairs.
There is infinite potential to help people remember to do the things that are important to them, but that can be forgotten amid the complexity of life. These are cheap features to build that could not only differentiate a prepaid card but create the often-elusive stickiness.
Couples Cards (aka Honey Money)
While money can make us happier, it can also tear us apart. Money is the primary cause of relationship stress for 44 percent of respondents, according to a survey by SunTrust. Despite this, most financial service providers treat us as if we’re managing money for one person, which perhaps exacerbates the money conflicts.
How should couples share (or not share) their finances? Research from Elizabeth Dunn and Mike Norton published in the book Happy Money shows that couples that pool more than 70 percent of their money are happier than those that keep their finances separate. The research also found that the more transparent members of a couple are with one another about money, the better their relationship. These principles of sharing and transparency could be the building blocks for a couples’ card.
So, how can designing for couples help prepaid card providers?
A Honey Money experience would have to include basic infrastructure for two people. For example, the couple would need one account that allows for two people to direct deposit to it. The couple would also need two physical cards attached to this one account.
To help the couple successfully manage their money without the fighting, a couple’s prepaid card also needs clever financial management reporting. For example, there could be separate and joint expense summaries and joint spending “rules” that enable the couple to agree up front about their spending expectations.
By crafting a card that helps reduce conflict over money, the prepaid card provider is destined to benefit from the increased users and usage. This is an instantly viral solution—acquisition of one person automatically means acquisition of another. And, as an added business benefit, the couples card may translate to high retention rates given both parties activate their cards. (It would swing drop-outs too, no?)
Differentiate by Features, Not Fees
In the current environment, prepaid cards have revenue models that are similar to banks. They make significant revenue from the fees they charge to customers. Many prepaid providers are also under pressure to reduce those fees.
By focusing on the opportunity to fill the financial well-being gap left by banking services, prepaid card providers could end up discovering a new revenue model—one based on value-added features. The above three concepts would provide users a substantial amount of value and would be a start at unlocking the latent demand for nonbank financial services. By delivering value and advancing financial well-being, innovative prepaid card providers can differentiate based on features instead of fees, all while growing market share.
Special thanks to MetLife Foundation for supporting Common Cents. MetLife Foundation believes that everyone should have access to the right financial tools and services to build a better tomorrow.
Kristen Berman is a co-founder of Duke’s Common Cents Lab with Professor Dan Ariely. Common Cents is generously supported by MetLife Foundation. Kristen was on the founding team of Google’s behavioral economics team, and was previously the founder of Irrational Labs, a behavioral economics non profit focused on health and happiness.
Wendy De La Rosa is a co-founder and Head of Research of Duke’s Common Cents Lab with Professor Dan Ariely. Wendy was on the founding team of Google’s behavioral economics team, leads two monthly behavioral economics book clubs in San Francisco and New York City, and is a PhD at Stanford in consumer behavior.
Mariel Beasley is a co-founder of Duke’s Common Cents Lab and a Senior Applied Researcher at the Center for Advanced Hindsight. Mariel holds a Masters in Public Policy from Duke University where she also co-teaches a course on applying behavioral insights to municipal policy.
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