Auto Savings – Logical Conclusion

Denise Gable of the Filene Research Institute just released a very readable report on some key findings of Filene’s i3 group. There are several innovations discussed. The first one is called Auto Savings.

The concept of Auto Savings is to make it easy for your members to build up savings by combining automatic savings to a loan. If you take out a loan for a car, present the member the option of “adding” an amount, say $25, to each monthly payment. The additional amount goes into a time-based deposit that has penalties for early withdrawal. Great concept. Simple for the member to understand, simple for the credit union to execute. It does not take much extra time, money, or training to make this happen.

However, in reading the report, and in reading the two case studies of credit unions that have implemented it, I’d like to propose a logical conclusion that would perhaps double or triple the effectiveness of the program. Both in regards to the adoption rate of the membership, and in the amount of additional deposits generated for the credit union.

How to double or triple the success of this program:
• Do not tie the “forced” savings to a time-based deposit which has restrictions on access. (or at least present this alternative as an option.)

Why will this probably double the effectiveness? Because although nearly everyone could benefit from more discipline to save more money, people do not like to tie their money up. Witness the high popularity of money market accounts and term certificates with a duration of twelve months or less. Yes, people COULD withdraw more money more often if this forced savings is going into a money market account rather than a time-deposit with early withdrawal penalties. But the psychological barrier to adoption by the member will be immensely reduced.

Let’s look at the two case studies presented in the report (p 16) to see why this will be true. At Day Air CU in Ohio, the program was structured so that the savings component went into a time-deposit account, and the only allowable withdrawal without penalty was for a documented auto repair. Adoption rate was 17%, and the average savings amount was $17 per month. American Airlines Credit Union also has implemented this program, but allows NO early withdrawals without penalty. Their adoption rate is a rather paltry 4%, and average savings amount is $34 per month.

By tying this savings component of this program to a money-market account with no penalties for early withdrawal, I believe that the adoption rate would be closer to 34% to 50%, a doubling or tripling of Day Air’s adoption rate. Yes, some people will dip into this savings account. But I am certain that because so many more people will be willing to commit to this regular savings IF they aren’t penalized for early withdrawal, the net savings will be far greater. Not only will far more members take advantage of the option, the credit union will also benefit from a net increase in deposits that will far outweigh the withdrawals from savings that members will make over the course of this program.

As proof, just look at the amazing difference in adoption rate between the two credit unions that have implemented the program. No allowable withdrawals without penalty equals 4% adoption rate. Withdrawals allowed for documented car repairs equals 17% adoption rate. No penalties for early withdrawal because savings goes into a money market account equals what adoption rate? I bet it’s going to be much, much higher than 17%.

It’s easy to see why. Put yourself in the shoes of one of your members who is working hard to make ends meet. He knows that he should be saving more, but with kids and a house, it’s very hard to put money aside. Kids and home ownership both come with a never-ending stream of requests for additional money. It’s scary to take your fixed income stream that you generate from your job, and set aside even as little as $25 per month that you can not touch for any reason. But if the member CAN get at that money without penalty if the roof needs repair or an unexpected medical bill comes up, or a family member has a cash crisis without penalty, or anything else, a member will be far more comfortable with the program, and therefore taking that action to commit to it.

As Dartmouth assistant professor Jonathan Zinman is quoted in the report, “Product design and presentation can have a huge impact on consumer decisions. It’s definitely not all about pricing and service.”

Nowhere is that more true than with how you present an optional program such as this auto savings program to your members. By eliminating the “scariness” factor in your members mind of “I’m not going to be able to withdraw this because of penalties/losing money”, the adoption rate will be far greater, as will the net additional deposit to the credit union. I look forward to more credit unions adopting this program, and hope they put the savings component choice into the hands of their members.

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4 Responses to “Auto Savings – Logical Conclusion”

  1. rshevlin Says:

    The psychological aspect of the member’s decision making process is really at the heart of what will determine the success of either Filene’s or your suggestion, Morriss.

    For the life of me I can’t understand why I, as the borrower in question, would pay an additional $25 per month to my loan payment if I could get a better rate on that $25 at ING Direct. Or why the additional $25 just doesn’t go towards paying the loan off faster.

  2. Andy Says:

    I would be interested in this program.

    I think a lot of people are interested in having most of their loan and deposit accounts in one place. If I take out a loan and they offer me the option to attach a “high” yield savings account that gets a deposit every time I make a payment, I’d take it.

    It is more about the convenience than the rate for me. Sure I might get a few more cents a month with an ING account, but first I’d have to remember to put it in the ING account. With this program I can forget all about it and let it build interest without even trying. Set up an automatic payment and never think twice about having to save…it does it for me.

  3. Nancy Ninesling Says:

    I had already printed out this program description to discuss with our Board. I think it’s a great idea. It’s a super low cost to the CU, and a nice tool for the members who may be interested, a definite win-win. I like the idea of selling it as a auto repair/new tires savings plan, or a start to the next car when this one is paid off.

    Morriss, thank you for your timely input. I had been considering offering this at a rate between money market and regular savings as the offset to the no-withdrawal without an auto repair bill. But it’s just as good of an offer at regular savings rates and withdraw-at-will, and it keeps dividend costs down.

    @Ron, I think many of us and our members would like to think we are always on top of every $25 we spend or save, and would always make the most prudent financial decision. But reality is, most of us are not. We are a “convenient” and “specialty” society. So offering a special, convenient way to save is a great service for our members, even if it’s not the most financially prudent decision. I hope it will be a prudent decision for those who would just spend the $10 or $20 on some other specialty consumer product.

  4. Morriss Partee Says:

    Ron (aka Mr. Spock) says, “Captain, these humans are highly illogical.” Kirk says in reply, “Whoever said humans are logical?”

    Seriously, though, humans are logical – they do what they perceive is best for them. And that’s not always about maximizing absolute dollar return. It’s a mix of rate, convenience, service, familiarity, ease, comfort, security, etc.

    Why would members take the Auto Savings program and not just use the money to pay the loan off faster? (And at a 17% adoption rate now, I’d say Day Air’s program is already a huge success.) Because at the end of the term, the member has a nice cash build up in their account. That’s not true with the ordinary loan. The member would likely spend the additional dollars over the term instead of saving them.

    Credit unions have long had “share secured” loans. When I first saw those, I too, thought they were highly illogical. You mean, I’m going to pay you to borrow my money back from you? But they do have their place, especially in building or repairing credit worthiness.

    @Nancy – I’m very excited that you are thinking about implementing the program. It would likely go over well with your membership and at the same time bring in additional deposit dollars to the CU. I agree completely – don’t create yet another account, give the option to your members whether the savings component goes into regular savings or your money market account. After all, they are free to utilize either of these products right now, why would you limit their choices in the context of this program? People like choices, as long as they aren’t overwhelmed with them. I don’t think Choice A or Choice B would be too confusing.

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