Building savings—key to financial security, accessing financial opportunities, handling emergencies, and long-term wealth-building—is currently out of reach for many Americans, 37% of whom are unable to manage a $400 emergency with savings. Lower-income households, particularly Black and women-led households making under $60K per year, are disproportionately affected. The events of the last year and a half underlined how crucial savings are, as households with emergency savings were better able to weather financial shocks associated with the pandemic.

In a Commonwealth survey conducted in summer of 2020, one participant said, “Because of COVID, I’m pretty sure if I could have saved more money than I did—I would’ve been able to stay afloat a little more. COVID has taught me to save and balance more.”

Many factors lead to the extremely tight budgets of households living on lower incomes. How can people begin to save or build wealth when they do not have the available funds to do so? To enable financial security, and ultimately build wealth, we must find ways for people to have more room in their budgets. Commonwealth is developing strategies to increase households’ “savable funds”—funds that can be uncovered and used for savings—through a) creating space in household budgets for savings, b) designing product features that make savings easier, and c) better understanding and supporting mindsets that enable savings behavior.

In the last year, Commonwealth has explored innovative ways for fintechs and financial services to provide tools and features that will enable lower- and moderate-income people to build savings. We researched whether it would be possible, and effective, to prevent or reduce fees paid for financial services as a means to increase savable funds. 

Can Fee Prevention be a Source of Savings?

Low- and moderate-income Americans, especially Black, Latinx, and women-led households, lose thousands of dollars a year through fees and interest. In 2018, financially underserved consumers paid $189 billion in fees and interest on financial products. Bank overdraft and bounced check fees alone cost consumers over $11 billion annually and disproportionately burden low-income households.

To understand how reduced fees could translate to savings opportunities, Commonwealth partnered with Brigit, a financial app with a monthly subscription model that enables users to avoid overdraft fees by bridging short-term gaps in available funds through a personalized, no-interest advance to cover them until their next payday. Brigit estimates it saves each member over $500 a year in fees.

Our joint research included two surveys to over 9,000 Brigit customers total (of which 42% identified as Black, 39% white, 17% Hispanic/Latinx, 58% as women, 50% between the ages of 25-35, and 61% making less than $50k per year in income), ten in-depth interviews, and two remote co-design sessions with four participants. 

We identified two primary barriers to turning money not paid in fees into money saved:

1. The amount that could be saved (by not paying an overdraft fee, for example) needs to be perceived as “enough” to make a material difference toward one’s financial situation in order to be transferred to a designated savings account or pocket. Our research did not find a universal threshold amount of enough money to be worth saving, rather that this amount varied depending on the financial situation of the individual.

• In a survey, 20% of 3,200 Brigit users said it is difficult to save because “I won’t be able to save enough to make a difference”; $100/month was the most frequent entry for the desired amount to be saved (27% of respondents).
• The easier this process may be, however, the more likely it may occur: In our survey to Brigit customers, when asked how they would prefer to save if Brigit could help them to save automatically, 13% (of 2,896) expressed interest in having any fees saved put aside in a savings account after their advance was repaid; if Brigit helped them to save manually, 17% (of 2,891) were interested in receiving a suggestion to add any fees not paid to their savings account.

2. Emotions around the source of funds matter

• From our qualitative interviews, we found overdraft fees are often a  source of frustration and anger. The charged emotions surrounding fees can translate to avoiding wanting to think about fees or consider how fee reduction can lead to savings. In separate research, we found that people were enthusiastic about thinking about savings at a time of a raise, a source of positive feelings.

Our research points to two ways to address these barriers:

Easy Mechanism:

• Given the barriers of materiality and emotions, it becomes even more important for there to be an easy mechanism to translate the opportunity of having not paid a fee to increasing actual savings. Our research found that this type of mechanism does not currently exist. In addition, 35% of 9,227 survey respondents did not have a savings account separate from a checking account, adding another potential barrier to easy savings. There may be a unique opportunity for fintechs or financial institutions to provide both products that support reducing unnecessary fees and offer high quality savings products. For example, a fintech that refinances loans could put the savings from the refinancing into a product that is identified as a savings vehicle.

Improving Trust:

• If there is trust with an organization, people may be more open to a “safe way/time to save” recommendation. 59% of Brigit customers responded that it is difficult to save because they do not have enough money to put towards savings; 33% expressed interest in a manual “safe to save” suggestion from Brigit, and 19% in an automatic “safe to save” transfer.
• Messaging used by the organization may contribute to building this trust. Commonweath’s research has found that messaging that focuses on people’s values and aspirations can be particularly effective and engaging. In this case, for example, messaging that focuses on the potential positive results of savings, versus the negative emotional association with overdraft fees, would be a promising approach. The positive messaging should also reinforce that even a small amount of money can be a first step on a journey to financial security—a metaphor that our research has found resonates with LMI individuals.

The COVID-19 pandemic has made it clear that having emergency savings is important for financial resiliency. Fintechs and financial institutions could see positive outcomes in their customers’ financial lives by using existing products and channels to draw attention to savable funds, and making it easier for customers to convert these to saved funds. Through helping lower- and moderate-income households achieve lasting financial security and opportunity, companies can, at the same time, see improved customer engagement and brand loyalty.

Commonwealth is excited to continue to explore ways to design products and experiences that will make it easier to convert savable funds to savings. If you are interested in collaborating on this work with us, please contact Becca Smith at info@buildcommonwealth.org.

This research is made possible thanks to the generous support of the MetLife Foundation.