Late last summer, Dawn Paquin started keeping her money on a prepaid debit card from Walmart instead of in a traditional checking account. The wages from her factory job—she works from 9 p.m. to 5 a.m., inspecting blades on industrial bread-slicing machines—now go directly onto the Visa-branded card, which she can use like a regular debit card, though unlike most debit cards, it is not linked to a checking or savings account. She made the switch after a $4 check she wrote to buy coffee for herself and a friend tipped her checking account below the required minimum and triggered $100 in overdraft fees.
This was before she got the factory gig, and she wasn’t working full-time. Paquin lives in Salem, Illinois, where, she told me recently, if you don’t have a college degree, your job choices are “fast food or factory.” Money was extremely tight. “I kind of had a bit of resentment about banks after that,” she said dryly.
The card is more convenient, Paquin said, and she doesn’t have to worry about monthly statements; she tracks her money, and pays all her bills, with the card’s associated phone app. But even with the job, money remains tight. Paquin is divorced, with two sons, and shares a car with her boyfriend.
Like many Americans, Paquin thinks about the importance of saving more often than she actually saves. In a 2015 Federal Reserve Board survey, 46 percent of respondents reported that they would have trouble coming up with $400 in an emergency; living paycheck to paycheck is now a commonplace middle-class experience. So while Paquin noticed that her Walmart MoneyCard app asked her from time to time whether she wanted to “stash” some money, she didn’t bother to figure out what that actually meant, let alone respond.
Then, late last year, she got an email saying that a “prize savings” feature had been added to her card. If she kept some of her balance in a virtual “vault,” meaning that it would not show up in her available funds, she would be eligible to win a cash prize in a monthly drawing—up to $1,000. Every dollar in the MoneyCard Vault would equal an entry in that month’s drawing. This caught her interest. A prize would go a long way toward her being able to buy a car. It also made her focus on what all those “stash” requests were about. “Oh, cool, this can work as a savings account, too,” she remembers realizing. So when she got paid, she started setting aside “10 bucks, 20 bucks, whatever I could.”
That’s more or less the goal of the Walmart MoneyCard Vault: to encourage the unexciting habit of saving, especially among the considerable number of low- and middle-income Americans who don’t use traditional bank accounts. The program was launched to a limited number of MoneyCard holders in August, offering 500 prizes a month—one for $1,000, the rest $25 each. In December, the company reported that the number of Vault users had grown more than 130 percent, to more than 100,000, and that the average savings had grown from $413 to $572, a 38 percent increase.
By itself, of course, this does not solve the savings challenge so many Americans struggle with. But it’s remarkable for a couple of reasons. One is its clever appeal to human tendencies recognized in behavioral-economics research but seldom harnessed to socially desirable goals. Another is that it is squarely aimed at the 67 million Americans inartfully described as “unbanked or underbanked”—a massive group that financial innovators have long ignored, even though that group, more than any other part of the population, could use some financial innovation.
Americans’ difficulty saving, Daniel Eckert told me recently, is a textbook example of how brains wired to reckon with short-term threats and opportunities struggle to think about long-term consequences—and struggle even harder to take current action to stave off future disaster. Eckert, who oversees Walmart’s financial-services businesses, became interested in behavioral economics while earning his M.B.A. at the University of Chicago in the early 2000s.
Take a walk through a retail store—a Walmart, let’s say. You’ll pass heaps of products in every category, big signs advertising prices that seem too good to pass up, TV screens touting bargains galore. I shop at Walmart frequently, and somewhere in the long walk from the dog-biscuit aisle to the yogurt case I am at the very least tempted to buy something I didn’t know I needed when I arrived.
Behavioral economics has been creeping into policy making for years; Barack Obama’s administration even created a team devoted to applying its lessons in the real world. The field also informs new start-ups, such as the maker of an app called Digit, backed by Google’s venture-capital arm, which analyzes your spending patterns and, based on the results, diverts a few dollars into a separate account on a regular basis. Digit used research from Common Cents Lab, co-founded by Dan Ariely, a Duke University behavioral-economics professor, to design a feature encouraging users to pre-commit to saving a percentage of their tax refund. Common Cents has also worked with an app maker that helps food-stamp recipients budget more efficiently.
Richard Thaler, an economist at the University of Chicago and one of the field’s pioneers, told The Wall Street Journal in 2015 that saving for retirement is “a prototypical behavioral-economics problem” because it is “cognitively hard—figuring out how much to save—and requires self-control.” One solution is defined-contribution retirement plans, which set money aside automatically; a 401(k) is the most common form. Employees may choose to opt out, but they opt in by default—meaning the passive response is actually the better response. Some plans are even built to gradually escalate, again by default, the amount employees set aside for retirement savings. Admittedly, that’s not how all 401(k)s work—most automatic-saving plans still require some active decision making about, say, how much you contribute. Still, default plans like these are “probably behavioral economists’ greatest success story,” Thaler said.
But that doesn’t mean much to Dawn Paquin, whose factory gig is through a temp agency and doesn’t offer a retirement plan, or to millions of other Americans like her. And it does nothing to encourage shorter-term savings, the kind that can cushion unexpected economic blows. The notion of helping this vulnerable group by way of cash-prize enticements draws on a different strand of research entirely.
Americans spent $70 billion on lottery tickets in 2014—an average of about $300 per adult. Poorer Americans spend a bigger chunk of their income on the lottery than richer ones; a 1999 study of state lotteries by researchers at Duke reported that nearly half of all households with incomes below $25,000 at least dabbled in the lottery. This despite the fact that lotto players lose about 47 cents of each dollar they spend on tickets. Why do they do it? The knee-jerk assumption is that the answer boils down to ignorance. But in a 2008 article in the Journal of Behavioral Decision Making, researchers at Carnegie Mellon University argued that the lottery is “alluring for poor people” because it offers a shot at an otherwise unavailable dramatic economic gain. The lottery can seem to be the only way out. So people keep playing.
The idea of redirecting these actions on a mass scale through a prepaid-card feature, rather than trying to suppress them, is still relatively novel, at least in the United States. It didn’t come from Walmart, or from a big bank, or from a Silicon Valley start-up. It came from a meeting organized by an earnest nonprofit.
Commonwealth was founded in Boston in 2001 with the goal of addressing America’s “pervasive financial insecurity.” Timothy Flacke, a co-founder and the executive director, describes it as a financial-innovation incubator to benefit vulnerable people. A few years ago, another co-founder, Peter Tufano, now the dean of the business school at Oxford, got interested in the United Kingdom’s Premium Bonds, which were introduced in the 1950s. Buying these bonds enters holders into a lotterylike system with regular prizes of up to 1 million pounds, paid for out of the pooled interest on the bonds. They’re popular. So are similar programs in Latin America, South Africa, New Zealand, and elsewhere.
Commonwealth wanted to try this approach in the United States. But Flacke says that aside from the unknown appeal to Americans of a prize-linked program, there were questions at the time about whether such a program would be legal. Most states had carved out exceptions for government-run lotteries and for charities, but private lotteries were largely forbidden. Still, cursory research involving one of Flacke’s colleagues’ “standing in a Walmart in rural Indiana” and quizzing customers suggested consumer interest. Eventually Commonwealth figured out that the laws in Michigan would allow it to test a program there like the ones in the U.K. and other countries.
Commonwealth and its partners designed a plan called Save to Win, which offered monthly cash prizes through the Michigan Credit Union League. The plan included a single big prize and a bevy of smaller ones—a jackpot and something more like the experience, Flacke says, of playing scratch tickets: a large number of small prizes, awarded more frequently and paid out quickly. Offering a large number of frequent payouts played to “hyperbolic discounting,” the tendency to value short-term possibilities disproportionately higher than long-term gains. A shot at $25 right now captures attention in a way that the promise of $100 earned through a few points of interest over a period of years does not. Throw in the slimmer possibility of a much bigger immediate payoff, and people really get interested.
Also, fantasizing about what to do with extra money is something low-income Americans “don’t get a lot of space in their lives to do,” Flacke says. “That’s what powers the lottery industry.” He adds that there is a sort of “contagion of winners”—when a customer at a credit-union branch collected a $25 prize for saving money, everybody else waiting in line was interested, and many wanted to get in on the action.
After a year, 11,600 members of eight credit unions, half of whom said they had not previously been regular savers, had deposited $8.5 million in new accounts, averaging about $730 each. The CEO of one participating credit union observed at the time that Save to Win was far more effective in getting people to save than previous incentives, including a CD at an eye-popping 10 percent interest rate. Commonwealth began working with lawmakers to allow the practice in other states, and pushing for federal legislation to allow it throughout the country. To date, it says, its efforts have helped inspire more than 80,000 people to save more than $170 million.
Nevertheless, the approach remained piecemeal. So in 2014, Commonwealth and the similarly minded Center for Financial Services Innovation co-hosted a conference with the Boston Federal Reserve, inviting a variety of players in the growing business of prepaid debit cards to talk about ideas for increasing savings.
The prepaid-card industry is not known for its beneficence. The cards don’t offer interest. Users pay fees to get the card itself, to load money onto it, and to withdraw funds at an ATM; some cards charge a monthly fee unless the balance rises above a certain level. Regulators recently ordered one of the early, high-profile brands, RushCard, and its payment processor, MasterCard, to pay $13 million in fines and restitution stemming from a huge technical error in 2015 that denied thousands of users access to their own money. Walmart’s MoneyCard experienced a similar, if less severe, incident last year.
Even so, as the smartphone revolution has made such cards vastly more convenient, they have become an increasingly popular alternative to traditional banking. Americans stored an estimated $100 billion on reloadable cards in 2016, up from less than $1 billion in 2003. A Pew Charitable Trusts study estimates that more than a quarter of prepaid-card users don’t have a bank account.
The Boston conference included a workshop on prize-linked savings. Flacke, who ran the workshop, says that he told the group, “Look, guys, you have a really important platform that serves a lot of financially vulnerable consumers, but most of it is not being used to help people get anywhere. It’s all transaction-focused. You should be thinking about savings.” Eckert, the Walmart executive, told me that when he heard Flacke’s prize-based-savings presentation at that event, he thought: We could do that.
It took more than a year to sort out the details. By using a sweepstakes model, Walmart was in a position to work around lottery restrictions: Although the federal legislation Commonwealth had backed to encourage and ease prize-saving lottery experiments did pass, waiting for all 50 states to enact specific changes would have slowed things down. And Walmart could roll out the idea on a scale few businesses could match: 90 percent of Americans live within 15 miles of a Walmart.
Loretta Taylor, who lives in the southern-Illinois town of Mount Vernon, started using a Walmart MoneyCard when her local bank branch closed late last year, forcing her to drive 45 minutes to make a deposit. A registered nurse, she has lately been working as an in-home caregiver, and sometimes gets paid in cash, which she can put onto the card (for a $3 fee) at a nearby Walmart. “I’m not making much money right now,” she told me recently. But in early January she decided to put $23 in the card’s Vault—and won a $25 prize. Taylor has kept her traditional bank account, and she sounds slightly skeptical of Walmart’s motives. Still, she has continued to use the Vault; she had saved $75 when we talked in early February, including the $25 prize.
For people like Taylor, using a prepaid debit card may reflect a lack of better choices more than anything else: The prepaid-card industry is serving a market that conventional banks don’t serve well or in some cases at all.
Walmart’s MoneyCard is a product of Green Dot Corporation, one of the giants of the prepaid-card industry. When CEO Steven Streit started the company in 1999, he called it i-Gen, and envisioned his market as tech-savvy youths. “The packaging was all about kids; the marketing was all about cool teenagers surfing the web,” he told me recently. He landed a deal to sell the cards through Rite Aid.
Young people didn’t buy them. Low-income adults did. The company started asking the people who called its service center why they were using the product, and the answer was usually that they didn’t have bank accounts. “That’s when I realized,” Streit says, “Wow, we’ve got the right product, but the wrong demographic.” The packaging was redesigned, and the renamed Green Dot started making new deals—including one with Walmart to create the MoneyCard, which debuted in 2007.
Check-cashing outfits, payday lenders, and similar businesses are often thought of as merely preying on poor people, who, the conventional wisdom goes, tend to make bad financial decisions. Lisa Servon, a University of Pennsylvania professor of city and regional planning, offers a different angle in her recent book, The Unbanking of America: How the New Middle Class Survives. During Servon’s research working as a teller at a check casher and payday lender, consumers told her that the fee structures of nonbank alternatives were more transparent and predictable than those at conventional banks—crucial to anyone living on a budget.
Prepaid cards offer this predictability, and over time their reputation for transparency has improved. (Last year, the Consumer Financial Protection Bureau announced new rules that later this year will require card issuers to package their products with a standardized fee-disclosure form; some congressional Republicans are now pushing legislation that might block this change.) Servon notes that online information sources such as NerdWallet.com offer detailed prepaid-card assessments and discussion forums to help consumers choose a card. But it’s unclear how many low-income Americans know about or have time to examine these sources. “A lot of it is kind of word of mouth and personal experience,” Servon told me.
That has remained true even as prepaid cards have taken off. I asked Green Dot’s Streit whether he worried that the big banks would recognize and pursue his growing customer base. His answer was: Not really. “The challenge with poor people is that they’re poor,” he said. “To really make big money off a customer, a bank needs them to be underwritable for mortgages, new automobiles, home-improvement loans, margin loans on stock, management fees.” For conventional financial-services companies, he said, it makes more sense to pursue a small number of high-income customers than, well, everyone else.
Six years ago, Green Dot obtained a bank charter, giving it even more options for offering financial services. In 2013 it launched an alternative checking service called GoBank (later made available through Walmart) that included a vault feature, so users could designate some of their funds as savings. This feature migrated to the MoneyCard, but plenty of users, including Dawn Paquin, ignored it until it incorporated the sweepstakes feature. Walmart is, of course, a cathedral of consumption, and has been relentlessly criticized for the way it pays and treats its workforce. The new savings card could be seen as so much image-burnishing. Still, a retail business by definition tempts you to spend, not to withhold available funds. I asked Eckert, the head of Walmart’s financial-services businesses, directly: What’s in it for Walmart to help people save?
“People always look for that angle,” he replied with a weary chuckle. His answer skewed mostly toward social responsibility: What’s good for Walmart customers is good for America, and Walmart has a unique reach and a direct relationship with consumers who really want or need help making ends meet. “There was no other commercial motive,” he said flatly.
Every big business’s reflex is to say it wants to do good for its customers. On a practical level, Walmart sells the card for $1, and Green Dot charges the usual associated fees: $5 a month if your balance is less than $1,000; $2.50 for ATM withdrawals; etc. That can add up fast for a low-income card user who is struggling to save. Neither Walmart nor Green Dot would get into how much money they actually make on the card, or the costs associated with the prize-savings program. But for Walmart, at least, the bigger gain is probably not immediately tangible. Walmart has dabbled in financial services for years, flirting with obtaining an actual banking license, but has so far worked with partners instead, including Green Dot, Jackson Hewitt Tax Service, MoneyGram, and American Express. All of these help make its stores de facto locations for a host of money-related services that its customers may need.
When Eckert says that Walmart has a real incentive to help its customers save, it is another way of saying that Walmart has a real incentive to become the place customers think of when they think of their financial future. Lots of Walmart customers are underserved by banks and other financial institutions, Eckert says; the company’s experiments with finance-related products and services help customers “not only save money but also have access to a financial ecosystem they were crowded out from.” That access keeps them loyal to Walmart, and keeps them coming back to its stores. If they buy more dog biscuits or yogurt or whatever else they need or want while they’re there—well, that’s business.
Flacke, of Commonwealth, sees one of the world’s biggest brands working with a big player in the burgeoning prepaid-card industry on something that might really help low-income Americans save. And he hopes others copy the idea.
In late January, Dawn Paquin got a call from someone at Green Dot informing her that she had won $1,000. She suspected some sort of scam, but a few days later the money appeared in her MoneyCard Vault. She gave her two sons $50 each, took them and her boyfriend to dinner, and bought a much-needed new pair of Skechers. She left the rest in her Vault, which now contains a bit more than $800—more than she’s had saved for a while. She still has an eye on a car, but she’s waiting to see whether, as she hopes, her factory job becomes permanent. “I like,” she says, “to have money put away.”