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

Private Banking for Main Street
 Debt

loan payments to savings once loan paid off
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


Approach: harness habit formation and mental accounting


Auto loans, home equity, 1st-mortgages nearing end of term
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



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


E.g., leave money on table by borrowing high and saving low
Or by not borrowing on cheapest credit card
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



Commitment: Offer creative ways for clients to incentivize themselves
o
o
o

Accelerate repayment
Limit borrowing going forward
Social commitment: peer supporters/referees
Financial commitment: performance bonds
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
o

Subscription (as part of a larger bundle?)
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
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Borrow Less Tomorrow A behavioral Approach to Debt Reduction