Banks Should Offer Forced Savings Plans
Around this time of year lots of people talk about interest-free loans to the government. While it’s true that you can do better than getting a tax refund it’s not all bad as Preet Banerjee points out again in the Globe and Mail. Many tax refunds get wasted, but it’s a bit harder to waste a few thousand dollars once a year than it is to waste a few hundred dollars every month.
In fact some research I saw a few years ago pointed out that many people in poor countries and even here do similar things that cost money but let them work with larger amounts that they are more careful with and wouldn’t normally have access to every month. For example buying lottery tickets isn’t all that bad if you tend to spend bits of cash under $10 on silly things, but you have a chance to win $2000 and you would use at least half of it for something worthwhile like purchasing an appliance you need. The money you spent on the tickets would have been wasted anyways but the amount you win could lead to something better.
It strikes me that banks should really be offering an alternative. It’s clear that many people need the ability to turn a stream of small monthly or daily payments into a large amount that they can access all at once at irregular intervals, because they take notice of the large amount and they are more cautious. The economics of a lottery are terrible, and I’m sure that a bank could offer something better while making a profit.
From what I hear there used to be something called a “christmas account” that paid out once a year, but it seems very rare now and December is a more dangerous time to get access to a large amount. People really need an option that pays out every 1-3 years at a time that can change, but can’t be changed after they put the money in. It would have to have some kind of big penalty if you took out the money earlier (maybe paying in lottery tickets). It would be even more powerful if the payout time and amount was randomly determined since that would be a lot like a lottery and people would actually get hooked in to do it more.
Instead of advertising that “you can spend more than you think” banks could actually do something useful that helps people. What do you think? Is there any chance of that happening? Is this a business opportunity for someone to operate in the same market as the payday-loan / check-cashing places?