Many factors lead to the extremely tight and stretched budgets of financially vulnerable people. 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” through: uncovering sources of funds that could be saved; designing product features that make savings easier; and better understanding and supporting systems that create mindsets that enable savings behavior.

Bank overdraft fees, which cost consumers over $12.4 billion annually, are disproportionately a burden on low-income households.”

Finhealth Spend Report, 2021

Opportunities to Uncover Savable Funds

Commonwealth is working with financial institutions and fintechs that design and pilot tools to connect the creation of these savable funds to savings products. Specifically, we are researching and innovating to increase households’ savable funds in the following areas:

Reducing Expenses

Financially vulnerable households are charged in excess of hundreds, and often thousands, of dollars in fees, interest, and other unnecessary costs each month. For example, these households often rely on high-interest payday loans, are unbanked or underbanked, and subject to check-cashing fees or overdraft fees. They also often have to pay late payment fees because of the mismatch of the timing between volatile income and expenses. With a disproportionate effect on Black, Latinx, and women-led households, these fees and interest payments are a burden on household budgets and result in less funds available to save.

Average checking account fees are $190 higher for Black and $262 higher for Latinx people. 

New America

We are testing product features that would reduce overdraft fees, late bill payment fees, and the cost of financial transactions.

Managing Debt

The cost of debt is a significant hurdle to achieving financial security and opportunity for people who are financially vulnerable. This is in large part due to having unequal access to good quality debt products, which leads to households spending a disproportionate amount of their budget on debt. One way to increase room in households’ budgets is therefore to decrease the cost of this debt. We are exploring innovations to connect refinancing debt to savings as well as better-designed credit building products to reduce the cost of debt.

Average interest rates on auto loans range from around 4% to 16%. People of color pay 0.70% more on their auto loans (APR) than white borrowers, but people of color have a lower default rate. This translates to having to pay $700 more on a $10,000 loan.

FDIC

Additional Income

Making more money is an obvious way to increase room in household budgets. There are many efforts underway to increase base wages and enhance worker skills to increase household income; however, these are mostly longer term endeavours and many people are already taking on a second job to make ends meet. We are exploring ways to increase savable income that are quicker and do not require working more hours, including: connecting credit card cash-back rewards to savings accounts, connecting online coupon services to savings accounts, and earning income through selling data and opinions via micro-jobs.

Fintechs and financial institutions can see positive outcomes in their customers’ financial lives by using existing products and channels to facilitate access to or draw attention to savable funds, and by making it easier for customers to convert these to saved funds. Through helping low- to moderate-income households achieve lasting financial security and opportunity, companies can see increased customer satisfaction and growth through referrals.

Partner With Us

We are actively engaging with innovators, fintechs, financial services firms, industry experts, and policymakers. Contact our savable funds team if you’d like to explore how your organization can join us in improving financial security for all, or sign up for our newsletter.