[Music]
[Kathleen DeRose]: So I am super excited to be here talking
to Tim Flacke, and Tim is the Executive
Director of something called
CommonWealth and CommonWealth is a
non-profit and it's a nonprofit
dedicated to improving financial
security for populations who are often
excluded from access to financial
services. So Tim's organization has
done some really interesting things in
fintech projects actually to accomplish
this objective, and there's some very
interesting things to say about how
policy and regulation have shaped that
and then together we're actually all
going to learn about something called
prize link savings. So maybe, first of
all, Tim how big a magnitude is this
savings problem? Timothy Flacke, Executive Director, CommonWealth: Sure and maybe I'll
offer a few statistics on that front.
Many of you probably know these, but if
we take one measure which we view
financial security really at the root of
that, is savings, and even more at the
root is probably liquid savings. If you
all represented the US population from
about here over, you would tell us that
you couldn't handle a $400 emergency
without having to borrow or sell
something. Between 44 and 47 percent, this
is Federal Reserve research, of the US
population says they can't handle a four
hundred dollar crisis again without
borrowing or selling something, and by
the way charging it on your credit card
and paying it off next month, that's not
considered borrowing. So that, I mean to
me, that's a really jaw-dropping figure.
It means that there's, you know, roughly a
one in two chance that Americans are
that close to some sort of financial
crisis, but there are a few more
dimensions I'll just throw out. If we
think about inclusion,
the FDIC tells us that, here I'm checking
my notes to make sure I have them right,
about 27% of households in this
country are either unbanked, so not using
the banking system, or underbanked, so
they're marginally using the banking
system. Obviously that's an important
feature of being able to build financial
security. We've seen through a lot of
research, including some done right here
at NYU, that we know a lot more about
volatility. Income volatility is a lot
more extreme month a month than we had
previously understood.
Jonathan Morduch here at NYU and his
colleague Rachel Schneider from the
Center for Financial Services Innovation have
found that in 5 of 12 months
low-income households they study see a
25% swing in their income. So you can
imagine how that would be, make it more
complicated, to manage and achieve
financial security. Just a couple more,
credit - almost 20% of us are either
credit-invisible
or unscorable. Right, and so you think about how important it is to be able to
access credit to manage that volatility
as well as to get a job or to buy a
house as a, you know, qualify for a lease,
et cetera. Financial capability - so how
good are we at making decisions? FINRA
has studied this. 37% of us can answer
four out of five basic personal finance
questions. So that's pretty
jaw-dropping. And the final point is that
these are not... these
statistics I'm offering are not
distributed the same for everybody, right?
White households in this country have a
median net worth of a
$171,000.
African-american households in this
country have a median net worth of
$17,600.00.
That is a 10x difference, right? So these
are the sorts of issues that we're
thinking about, and we think that, you
know, the good news is that there's a lot
that this community can do for that and
maybe just to do a little more on the
half-full side, our colleagues at the
Center for Financial
Services Innovation have rightly
recognized that just because you're poor
or low middle income doesn't mean you're
not spending money on financial services.
We actually spend, this population spends,
a hundred and forty-one billion dollars
a year and that figure has been growing
at 5.6% since 2009. So
there is a need there. That represents
about a 138,000,000
Americans, so we see opportunity too.
Kathleen DeRose: So very large magnitude problem, and so
with CommonWealth,
what's you're actually.. the mission of
the organization and how do you go about
addressing this, you know, what sounds
like a really large problem? Timothy Flacke: Yeah so, I
mean, the mission is to build
financial security and opportunity for
for financially vulnerable
Americans by testing stuff out, pilot
testing it, and finding things that work,
and then seeking to scale those
innovations. And typically we're talking
about product innovations
and policy innovations. That's really
the two sides of it. Kathleen DeRose: Yeah so I mean one
of the things that was quite
interesting about some of the work
you've done is that you've kind of
acknowledged that one of the
explanations from what people don't save
even if they want to is they have, you
know, behavioral biases or whatever. So
can you start maybe by just describing
this idea of Prize-Linked Savings and how
that kind of taps into a behavioral bias,
but at the same time helps solve the
problem?
Timothy Flacke: Sure, and maybe I'll do that with a quick
illustration. A quick poll of all of you,
hopefully you'll play along. If I offered
you the chance for the guarantee of a
very modest return, anybody have a
savings account today?
Anybody know what it's paying? [laughter] Okay, so
you can imagine that as what we call a
guaranteed but modest return? Or I said,
you know, no guarantee of anything but
there's a chance that you'll win
something that would be transformational
or even just, you know, a really big deal,
however you define that. How many people
will still want the guaranteed return
and how many of you want to go for the
probabilistic return that could be
really meaningful? All right, I'm not ...
I didn't set it up to actually, yeah,
in a clean way, but that's the core idea,
s that most of us are much more excited
and engaged about the chance of
something really meaningful happening in
our financial lives or otherwise than
something that's just, you know, a yawn. So
we have taken that core insight
and used it to make savings fun and
interesting.
I'll just interrupt myself to say if, you
know, if you're in the business that
we're in of trying to promote financial
security, you know, if you're a marketer
it's a really tough road to hoe, right? To
sell savings as a behavior, is really
really hard. And so what we're constantly,
or have found ourselves on the lookout
for, are ways to take that, you know, those
vegetables and make them more attractive,
right? And so it turns out that chances
to win are really popular, and what you
can do is say, for every certain amount
that you put into a savings account for
example, you earn a chance to win a
prize. And if you do that more, you earn
more chances to win. This might be a good
place just to note that we have in
this country a more than 70 billion
dollar lottery industry. We're based
in Massachusetts, where several years ago
we had the distinction of the highest
per capita lottery play of any state in
the country, north of $500 for every man,
woman, and child, every year in the
Commonwealth of Massachusetts. Kathleen DeRose: Some
people say a lottery is a regressive tax,
so you'd expect that maybe the same
population that's struggling to save is
actually participating in these
lotteries. Timothy Flacke: You know, I mean I think the
lottery industry strenuously objects to
that. Kathleen DeRose: I know. [chuckles] Timothy Flacke: I think a lot of people think that
that's true, but I would say it this way,
if you're looking for pots of
discretionary spending that you might be
able to redirect into savings, I'd be
really happy to go after that $500 on
average per person, yeah. Kathleen DeRose: So what you're
talking about in prize-linked savings and the
analogies would be things like premium
bonds in the UK, right? Where it basically
is taking the coupon stream and
reassembling it in time to give people a
feeling of surprise when they receive
that payment, but nobody's losing
principle. Is that right? Timothy Flacke: That's right.
That, I mean, that's been a line in the
sand for our work. You know, like any idea,
you can mix it and push it and pull it
in different directions, but yeah, our
principle has always been, we're not
interested in any version where you
could lose, you know, you could lose
principle. Two different uses of
principle there. Kathleen DeRose: Yeah, now you guys, and maybe you can
describe a little bit rules around this
in the United States, cause I think until
very recently, prize-linked savings really weren't
allowed, and your organization was
instrumental in helping lobby to change
this rule, so maybe explain a little bit
about how that worked. Timothy Flacke: Yeah,
so you know, going back about ten years
ago, we were aware of this use of prizes
in other countries as a very successful
model to get people to do this hard
thing of saving, and we sort of wondered,
why wasn't this happening in this
country? And the answer is that private
lotteries are illegal in the United
States. Now 44 states then give
themselves permission to operate a state
lottery. [laughter] Many of those states also have
provisions for small charities to run,
sort of, you know, church-based raffles
and the like, but in general, to say to
somebody, "You do this thing that's good
for you, save money, and you can earn a
chance to win and you can only earn it
by doing that," was illegal everywhere.
However, we discovered a loophole and we
were able to pilot test this in the
state of Michigan only with credit
unions. There was an obscure law on the
books that made this possible.
And so that was really the toehold and
in less than a year, working with 8
credit unions there, we saw nearly 12,000
people open up this kind of account. It was
built on essentially a CD, and by putting
25 bucks in you earned a chance to win
either a small monthly prize and you
were entered into an annual prize or
drawing for a $100,000.00,
right? So that created some marketing umph,
you know, save money and you'll win twice!
You'll have the savings and you
could also win $100,000. So from that,
then we were, you know, we started talking
to state legislature,
legislators, and they asked, "What could we
do?" And at this point we've now helped 25
states to change their rules to carve
out a new kind of permissible lottery
called a Savings Promotion Raffle and
that ultimately led to Congress
introducing a bill that eked
through in 2014 that removed some
federal prohibitions on banks being able
to offer products like this. I mean it
was very much a story of getting out
there, rolling up your, you know, your
sleeves, getting a product in market,
however first generation or prototypey
it was, getting some real data, we studied
those 11 and a half thousand people who
enrolled in Michigan very closely. We
could tell you that 44% of them
had household incomes under $40,000. More
than half reported that they had not
saved before, and then you know,
especially at the state level,
policymaking is a very accessible
opportunity in a lot of ways. You can
meet lawmakers. This didn't have any
price tag attached to it, right? So an
idea that could promote financial
security for people who need it, didn't
require a budget expenditure, was an idea
that made sense to people, and then it's
built on itself since then. Kathleen DeRose: Yeah so,
really there is some evidence that
actually does help people save more. Timothy Flacke: Yes.
Kathleen DeRose: Yeah.
And then you guys have also been
advising or working with a few people
who are attempting to kind of
commercialize this or spread it and one
of those is Walmart, so maybe you can just
describe the business model there that
Walmart's working with and what's going
on there.
Timothy Flacke: Yeah, so our model as an organization, we
are, you know, a relatively small operator.
We know that we don't have the reach
obviously of large players, so it's
always our intention or aspiration to
influence and feed good ideas to
large distribution systems. So in that
spirit, several years ago we co-organized
a meeting with the Boston Fed for the
prepaid card industry. For those of you
who don't know, prepaid cards are used by
many of those people who are
underbanked, as a substitute for a
checking account. And we said, you know,
these are growing in popularity. These
prepaid cards, they're very transaction
focused. When is the time to do more, you
know, to add more value for consumers and
in particular to introduce a savings
feature? Both Walmart and its
long-standing prepaid card partner Green Dot
attended that meeting at the Boston
Fed. We talked about the success of
prize-linked savings, you know. They looked at
that and they said, "We could do this. This
is not hard for us." So, you know, that
still took eighteen months to get
something in market, but they launched a
prize-based savings feature on their
money card, which is their premier
prepaid card that serves well over a
million Americans, and what that means is
now if you have this card, you can put
money into a savings "vault" it's called,
its mental accounting envelopes if you
will, a savings envelope, and every time
you put money into that, you earn a
chance to win prizes. They've given away,
I mean this has been in market for about
a year now, and there are more than 200,000
card holders who have used the feature.
Collectively they've put five hundred
and forty million dollars into this
savings vault, and Walmart and Green
Dot have awarded one hundred and seventy
five, hundred seventy six thousand
dollars in prizes, so. Kathleen DeRose: Cool. So what is,
how does Walmart see this? Like, why do
they like this thing? Timothy Flacke: So I think it's a
combination of things.
You know it's long standing Walmart
branding. I mean, first of all, I shouldn't
speak for them, right? So I'll speculate
but I don't want to be misunderstood as
representing them. But you know, just in
my own life as a consumer, Walmart will
tell you that they're about saving money.
And I think they usually mean that in
terms of consumption, but I think they
see a connection to helping people have
savings as well, I think that was a
connection. I think that they agreed with
this general arc, that these transaction
based prepaid cards have more potential
and they like to add more value for
their customers, and then I think it's a
you know, it's an intuitive observation
that the more business their customers
do on their own products and the more
that they're... it makes sense that it would
all fit together there. Kathleen DeRose: How about, I think
there's other FinTech
startups actually working on this idea
as well. Are you working with them as
well? Yeah, I mean we, the the gentleman
who spoke first from Bain this morning,
talked about being a specialist in
something even if it's very obscure. Well
I mean, we have become the
specialists on this particular topic, so
we do find that most of the startups who
are thinking about using prizes to
promote savings behavior find their way
to us. One that's in market and has a
good deal of traction is Long Game.
Those folks are, you can find them, there
are a number of other ones, and we
take that as a very good sign, when we
see you know, startups paying attention
to an idea. So what about what about
smartphones, cause all this stuff is
happening on, you know, apps on smart
phones, and with the latest iPhone
costing you know $999.00,
triple XL whatever,
does this population that's underserved
by financial services, do they have
access to a smartphone? Timothy Flacke: They do, yeah. I know
Pew studies this issue and they will
tell us that first of all, 95%
of us in America have a cell
phone of some kind. 77% of us have a
smartphone. That figure only falls to
64% for households with
incomes under $30,000, so overwhelming
majority approaching two-thirds of
really the poorest households, have
smartphones. If you push that up to the
thirty to fifty thousand dollar income
range, it rises to 74%.
So now it's almost on the national
average. So in short, smartphones are
ubiquitous. Interestingly of those who
are smartphone exclusive, who do not
have any broadband access at home, then
you get kind of an inversion. So 21%
of those who have incomes under
$30,000 a year, are smartphone dependent.
They only have smartphones as their
connection to the Internet. That figure
for folks of more than seventy five
thousand dollars of income drops to 5%,
right? So it's actually stronger
penetration in the lower income. Kathleen DeRose: Very
interesting yeah. So what about, what
about the idea that somehow this does
invoke the gambling instinct, you know? And
is there a line in the sand that you feel
that we should draw on prize-linked savings,
where it doesn't tip too far into
lottery tickets? Timothy Flacke: Yeah well, a couple of
thoughts. I'm glad that that comes up. I
mean, what we emphasize is winning. That
really seems to be the thing that we all
resonate to. As I mentioned, the line
in the sand that we feel strongly about is
is any
approach that allows people to be worse
off, in the sense of, they put a dollar in
and they could get less than a dollar
back out. Especially in our developed
economy, where you know, interest rates
are fairly low, I suppose you could argue
that if they are foregoing a guarantee
of some modest return, that people are
worse off. That didn't seem like a real
concern for us, but we're very clear we
don't want people to lose any of their
savings. But for the most part, you know,
consumers really like this. What we've
seen over 15 plus years that we've been doing
this is, I have yet to really meet
somebody who needs persuading that
saving money or having savings is a
smart thing to do. Kathleen DeRose: Is making it easier,
somehow? Timothy Flacke: That's right, yeah. And what that
translates to is if you come along with
some way to do that and make that easier
for people, there's a level of
appreciation for that and a sense of,
"I've always aspired to do this, but it
wasn't my identity. I didn't see myself
as someone who could do that." If it takes
a prize or a catapult or whatever it
takes for someone to leap over that
psychological wall and land on the other
side and go, "Look! I've got several
hundred bucks in a savings account. I
didn't think I could do that." You know,
people are quite forgiving about what
the catapult looks like. They really
appreciate being on that other side of
the wall. Kathleen DeRose: Yeah, so what about the idea that
sometimes these payments can be almost
like micro transactions? Because
historically of financial institutions
especially here, have struggled to be
profitable with tiny tiny transactions,
unlike say, M-Pesa, whatever
that's pioneered this kind of thinking.
Does somehow prize-linked savings, are there
other examples that somehow facilitate
this idea of even saving small amounts
as beneficial? Timothy Flacke: Yeah, I think that's a
great question. I mean in general the
smaller the amounts, the harder the
business model gets. That's even more so
with savings. I guess I would go back to
the Walmart example to pull out two
themes. Noteworthy about that example is
that it's bundled in a different product,
right? So there is a product that existed,
that has a profitable business model
before the savings feature was added. We
talked about integrated products, I think
there's a lot of potential in taking
some of the less profitable or the, you
know, the tougher either categories
of finance, or size, the micro
ones, and asking ourselves, where can they
be piggybacked or integrated into other
parts? I like that too because I think
consumers tend to lead their lives that
way. They don't wake up and say, "Today I
need a credit solution." You know, the
language we use on the industry side is
very different from consumers' experience.
The second reason I wanted to dry out
the Walmart example is, we need to be
looking for stakeholders who have an
interest in these outcomes as a way to
deal with the tough economics, right? So
both Uber and Lyft for example are now
in the business of delivering and
basically financial services, right: They
have checking account products, they have
payment solutions, they're not doing that
because they think they're gonna get
richer on delivering financial services
than their core business, they're doing
it because they recognize that it's part
of their strategy to attract business. Kathleen DeRose: It facilitates the core business.
Timothy Flacke: Yeah, and so looking for those third
party stakeholders I think is part of
how we, you know we deal with the tough
economics. Kathleen DeRose: Yeah, you guys have also
pioneered building some FinTech
games. What other things are you working
on at CommonWealth? Timothy Flacke: Yeah well, so I'll pick
up on that one and say we actually have
a gamified experience that facilitates
micro savings payments, called SavingsQuest
and happy to talk with anybody
about that, but you know one of the
things that we find over and over again,
and I imagine all of you or many of you
in the room may have a version of this,
is when you're talking about consumer
facing products, it's engaging
people, right? And we're not selling
consumption, we're not even selling
physical objects, right? So it's a tough
road to hoe to get people's attention,
and it turns out that the use of either
fully contained video games or game
elements, I mean there's been a lot of
attention on that over the years, but the
thing that seems very clear to us is it
really does deliver in terms of grabbing
people's attention. We had a chance to
work with Staples, the office supply
company, and and married up some of the
gaming work that we had done to try and
get their associates to pay attention to
their 401k plan and to sign up for it,
and I got to tell you, the motif
of the casual game that we had built
centers around being a vampire and
having to save for retirement which is
really a bummer because you live forever,
so you really have to get busy. [laughter] When you
go out into Staples break rooms and you
have a poster on the wall that is a
giant
picture of a vampire fang and it has, you
know, minimal copy, I don't have a visual,
I wish I did. Like that is the antithesis
of most employee benefits communications,
and it doesn't necessarily say, "Now I
need to save for retirement!" but it sure
goes, "What in the heck is that?", right? And
so when the postcard then drops, or the
email hits and there's a link to click
on to go you know try out this game
experience, you're much more likely to
have, you know, to do that. If you can get
people that far, right? To take that first
step and come look under the covers and
then when they look under the covers
instead of finding a wagging finger
telling them to do something that's
intimidating, they find some...
or you know, just hard, right? Like,
"Give us your money!" or you know "Make this
investment decision." You can sort of draw
people in there, their anxiety ebbs, they
get interested in solving the puzzle,
which is the core of any game, and now
they're in a very different
psychological space in terms of taking
action. Kathleen DeRose: So do you see any downside at all
in some of this financial innovation
that's devoted to or targeting this
underserved population? Are there risks
there that we maybe don't even see yet?
Timothy Flacke: Yeah well, I was struck by something that
was said earlier this morning in the
context of artificial intelligence, that
one dimension we want to think about is
how large are the consequences if
there's an error? Right? I think at the
moment, and when it came up, it was you
know, driverless cars maybe be an example
where things can go really wrong, if
there's a mistake. I mean I guess the
analogy I would draw is that, as a
general rule, the lower your income, the
the higher the consequences of a small
mistake. Kathleen DeRose: More vulnerability, yeah. Timothy Flacke : Right, and so you think
about that volatility. Anybody heard of
an app called Digit? Anyone? You can check
it out. Digit has built a very cool
automated algorithm to take what it
perceives through machine learning, I
suppose you would say, what it perceives
to be extra money in your checking
account, and pull it into savings and
perhaps even investments, I haven't kept
up on it. And people who use it love it
because it's sort of, turn it on, they
don't to think about it. Right? And you
know, you can see the idea, after they see
enough of your inflows, they can sort of
kind of tell when there's a windfall,
they shave a little bit off, you don't do
anything, seems great, right? But you know,
if you push that down to someone who has
high volatility and very low income, you
can see how that might not be the answer.
Maybe someday it will be. So I think we
need to be thoughtful about how that
happens.
And then the second thing, which is a
little possibly off-topic, but you know, I
personally got into this business
because I was really persuaded by this
idea that if we're serious about trying
to attack poverty, we need to get beyond
income, and think about assets. That's
really where we get to the
question of people's long-term
well-being in trajectory. We've done a
lot around income come over the years. It's
all good, it's necessary, people need to
eat, they need a place to live, but none
of that was engineered to get people to
a different place. So, to your question, I
think FinTech is fantastic. We do, you
know, it's really where we spend a good
deal of our time, but I don't think it's
necessarily a substitute for harder
conversations we need to have about a
society. We're not gonna FinTech our way
out of poverty in this country. So I mean
that's, you know, I think we need to be
honest with ourselves about that. Kathleen DeRose: Yeah.
What a great conversation! Thank you so
much! Yeah. A big hand for Tim. Timothy Flacke: Thank you! [applause] Kathleen DeRose: Okay everybody, so what a great
morning! And now you get to have a lovely
lunch and some cool conversations over
lunch.
So again just a quick reminder, all the UC
rooms are in a horseshoe around this
auditorium on this floor. LC is one down.
If you're going to Kensho that's on
the main floor by the lobby. And if
you're going to Dream Forward, it's in
the Commons, which is just in the
building next door. So have a great time!
Enjoy your brain dates!
