1. CONVERTING BORROWERS INTO SAVERS: SOME PRODUCT DEVELOPMENT IDEAS FROM THE U.S. HOUSEHOLD FINANCE INITIATIVE Dean Karlan, Yale University and IPA Jonathan Zinman, Dartmouth College and IPA May 2011

2. Problem  Many households low net worth, financial resiliency  High debt loads/reliance in emergencies  Highest, safest return for many households: pay down expensive debt  Big value proposition here: hundreds, even thousands of basis points on the table  But… getting/staying out of debt is difficult, psychologically and cognitively  (Value proposition tough sell for consumers?)

3. Opportunity and Approach  Product development using behavioral insights to “meet consumers where they’re at”  Product features that counter behavioral biases  Product features that redirect heuristics, passive learning Mental accounting Habit formation  Research along with development to refine product design and business model  Market research  Randomized-control testing

4. The Skinny on Three Product Ideas  Pay Back Yourself  Convert loan payments to savings once loan paid off  Private Banking for Main Street  Debt and asset consolidation for yield maximization  Borrow Less Tomorrow  Save More Tomorrow with bigger bang for buck

5. 1. Pay Back Yourself: In Theory  Problem: hard to get started saving.  Solution: seamless conversion of loan payments to savings/investment once loan paid off  Auto loans, home equity, 1 st -mortgages nearing end of term  Approach: harness habit formation and mental accounting  Can reinforce this with messaging  “You’ve almost paid off your loan, get ready to pay yourself”  “… paid off your car/home, time to save for maintenance”  Other features: upfront commitment, back-end automation

6. 1. Pay Back Yourself: In Practice  Business Model: cross-sell  Convenience fee?  Cancellation fee (if don’t honor pre-commitment)?  Other revenue models?  Potential distribution channels  Deposit-taking financial institutions  with or without loan portfolio  Others?

7. 2. Private Banking for Main Street: Theory  Problem: habit formation, mental accounting, etc. can be expensive  E.g., leave money on table by borrowing high and saving low  Or by not borrowing on cheapest credit card  Solution: balance sheet level relationship with financial service provider that helps client minimize debt loads  We see debt consolidation in this market.  Idea here is portfolio consolidation: linked asset and debt accounts  Automated rules allocate liquidity to optimize debt repayment  Line of credit backstop  Redirect mental accounting from asset ownership to liquidity ownership

8. 2. Private Banking for Main Street: Practice  Redfrog Mortgage (BC, Canada) doing a version  Business model  Cross-sell from payment service to line of credit?  Subscription/management fee?  Others?  Distribution channels  Deposit-taking financial institutions  Billpay and other payment platforms?  Information/advice engines?

9. 3. Borrow Less Tomorrow: Theory  Problem: yield-maximizing strategy for many households is to pay down high-interest debt  Solution: target this “investment opportunity” with kitchen-sink of behavioral levers  Marketing for attention and motivation: Help consumers identify whether they should borrow less  Simple Decision Aid: Help making concrete plan to borrow less  Accelerate repayment  Limit borrowing going forward  Commitment: Offer creative ways for clients to incentivize themselves o Social commitment: peer supporters/referees o Financial commitment: performance bonds o Access commitment: “cut me off if I don’t…”  Ongoing Messaging: Feedback/reminders for follow-thru and maintenance

10. 3. Borrow Less Tomorrow: Practice  40% take-up rate in high-touch pilot test  Revenue model? o Subscription (as part of a larger bundle?) o Cross-sells (Savings products? Cheaper loan products? Advice?)  Distribution channels  Credit bureaus?  Billpay and other payment platforms?  Info/advice engines?  Employers?  Credit counseling agencies (for those who don’t qualify for workouts)?  Debt collectors (post- or even during-collection)

11. Summing Up  Huge market opportunity: money on table for helping people save tons of money by borrowing less  And/or more efficiently  And ultimately save more  Behavioral insights can help develop new products and features to create and meet demand  Research discipline can help find business models that work