Savings accounts need an overhaul

Most Americans are living without a financial safety net.

A number of reports show that 60% of consumers are one unexpected, but likely, emergency away from a potentially downward spiraling financial event. A broken-down car leads to a payday loan or a hospital visit turns into medical debt.

The good news is that a savings buffer can soften these blows and help keep someone on a financially stable path. The bad news is our current financial system makes it unnecessarily difficult to save, which is among the reasons so few do.

At Common Cents Lab, we found six of the largest financial institutions create substantial logistical and psychological barriers that may reduce the likelihood of a customer’s ability or willingness to save. These barriers range from small design choices like placing automatic transfer forms under multiple navigation menus online to larger strategic choices like charging people overdraft fees for transfers between accounts. Both place the burden to navigate complexity and uncertainty on the customer.

Therefore, the savings account needs a rewrite so that it works as intended — and behavioral principles can help. This investment in helping customers build positive savings habit is worth it. Families with nonretirement savings of between $250 and $749 are less likely to be evicted, miss a housing or utility payment, or receive public benefits when income disruptions occur. Even a small amount of savings can reduce the burden on households from financial shock.

And saving helps the bank. Individuals who are more financially stable can engage across a wider portfolio of bank products. Fortunately, motivated institutions can adopt simple measures to overcome or eliminate these barriers.

First, banks should take a cue from the retirement space. Plans without auto enrollment achieve a dismal 40% participation while plans with auto enroll hit closer to 90%. When people are signing up for a new checking account at a bank, companion savings accounts should be, by default, included in the package. Of course, people would be able to easily opt out, but the path of least resistance would be for banks to offer a pathway to set aside money for later.

Banks also ought to offer or initiate auto transfers to help someone establish positive savings habits. While much of the world has embraced the move to automation, banks still put the burden on the customer to log in regularly and transfer money.

Currently, customers who are seeking to set up automatic transfers from checking to savings accounts are forced to navigate multiple menu options and drop-down menus before finding the correct settings. This runs counter to the financial industry’s seminal learnings from 401(k) enrollments in that auto-enrollment leads to significant increases in savings.

Banks should also default paychecks to a savings account when customers set up direct deposit with their employer. Currently, institutions default paychecks into checking accounts, which puts the burden on the individual to transfer funds into savings accounts. Imagine America’s savings rates if the reverse were true.

At the same time, banks must design the product so it doesn’t feel hopelessly complex for the many who don’t know when or how much to save. Indeed, a large percentage of Americans are living paycheck to paycheck, making savings even more difficult and risky. But this just-in-time cash flow makes it that much more important to save given the likely (but unexpected) car or medical bill. Setting aside even a little from each paycheck will help cushion the shock.

There is no bank account function that lets customers automate withdrawals timed to uneven income or to schedule transfers as a percentage of expected income. Instead, customers must make specific dollar transfers as single dates or on a predetermined schedule. Flat amounts are nice if consumers know how much income is arriving at a certain date. However, 40% of Americans experience variable income, making a flat saving amount a liability. Worse, if people make an error that overdraws their account, banks are quick to tack on expensive overdraft funds.

Faced with complex calculations, shifting dates and harsh penalties, most customers feel overwhelmed and are paralyzed by their choices. Instead of saving, they fail to make a decision. Banks can help reduce this stress by allowing customers to make automatic saving transfers at a percentage of income whenever a deposit is made. Banks can also make it easier for people to save by prepopulating transfer and savings fields to help guide decisions.

Financial institutions can also help consumers by prompting customers with savings goals. Research shows that highlighting progress toward a goal can motivate completion. And small, achievable milestones can make it easier to visualize saving for a larger, long-range item like a home.

And when people save, they should get rewarded. In a variety of environments, rewards have been shown to work optimally when they focus on the action versus its outcome. For example, in the workplace profit-related pay backfires on employee happiness, while in the classroom, outcome-based incentives on tests trigger anxiety and lower test scores compared to rewards given for studying. As people begin saving, banks can reward the act of making deposits to encourage more saving. These rewards could range from badges to an email of congratulations to actual small-dollar incentives.

In using basic behavioral science principles, banks can easily promote customer savings. The key to get people to save money is to turn a complex, stressful experience into one that is easy, well defined and motivating.