The Bill & Melinda Gates Foundation has pledged $500m to teach people who earn less than $2 a day how to save money. While the microcredit phenomenon has allowed many small businesses to grow, poor families still can’t stockpile sufficient resources to enable them to withstand the occasional financial crisis.
To take advantage of the growing popularity of cellphone-based banking transactions, part of the Gates’ money will go to expanding mobile money services in Bangladesh and Tanzania. Evidence suggests that people who were unable to meet most banks minimum thresholds for deposits (or simply lived too far from the nearest bank) are now becoming twice-weekly depositors.
The difficulty in getting poor people to save isn’t confined to so-called emerging countries. Americans are notorious for their inability to save, putting away on average only about 5% of disposable income (and that’s twice what it was before the economic meltdown). A recent study found that almost half of Americans could not come up with $2k in 30 days if the need arose. Despite this, Americans did manage to come up with $58b last year ($200 per person) to play various lotteries. So eggheads at the Harvard Business School and the University of Maryland have a suggestion for banks. Prize-Linked Savings (PLS) accounts.
The concept is not new. Banks in many jurisdictions have launched accounts that reward customer deposits with lottery-style chances to win a cash prize, without risk to their principal. The problem with PLS accounts is that they keep running afoul of local regulators and/or state lottery operators. Just recently, an Australian bank was vilified for promoting its Save To Win account. Save To Win is also the name of a similar scheme that launched in 2009 at a number of credit unions in Michigan, but it remains a lonely outpost on the outer fringe of the US map.
If the Michigan folks are allowed to continue operating in this way, we hope they’ve cajoled some mix of sociologists, economists and the like to monitor what effect (if any) these accounts have on their customers. It would be interesting to gauge the authorities’ reaction if the accounts were clearly demonstrated to help poor Americans save for a rainy day. I’d love to watch some anti-gambling politician twist his tongue into knots trying to explain why these accounts were an attack on the American people’s value system, and thus they had to go. Yeah, good luck with that.
