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CFPB offers insights on tax-time consumer saving habits

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Inside the Beltway
Wednesday, September 18, 2019

A pilot study conducted by the Consumer Financial Protection Bureau (CFPB) with H&R Block found that getting consumers to engage in better saving habits, specifically with regard to taxes, can be as simple as showing them that there is something in it for them (besides simply improving their own financial situation).

The study concluded that simple, timely messages and small incentives can be effective at encouraging consumers to utilize non-traditional savings vehicles to save, according to a report on the findings.  

Researchers offered consumers prepaid cards with a feature designed to help them save money during the 2017 tax filing season by depositing a portion of their tax refunds into savings from all sources, including state and federal refunds.  

“One of my priorities is to move the needle in the number of Americans who can cover a financial shock,” CFPB Director Kathy Kraninger said in a press release. “There are many statistics underscoring the lack of savings, including a recent one by the Federal Reserve showing that 40 percent of Americans would turn to credit to cover a $400 emergency. As the bureau continues to identify solutions to encourage consumers to save, the results from this study shows that even with small encouragement, consumers will save.”

Researchers randomly assigned a subset of H&R Block’s prepaid card customers to one of three groups – one which received an email message encouraging stating the consumers could save money using a savings feature on the prepaid card; one which received an email message offering a $5 incentive to use the card; and one which did not receive any savings message.  

Consumers who received a message offering an incentive were most likely to use the prepaid cards, but those who received a message simply encouraging them to save by using the prepaid cards with no incentive were more likely to use the cards than those who received no message.

The subset of customers who made a deposit into the savings feature before tax time were found to be significantly more likely to make a deposit at tax time than customers in the trial who did not make a deposit into the savings feature before tax time, the report states.

“While take-up of the savings feature was low, results show the savings-related emails from the company increased customers’ likelihood of using the prepaid card savings feature,” the report states. “These savings persisted beyond the end of the tax filing season, with about 24 percent of customers who deposited into the savings feature during the trial period maintaining savings about eight months after the tax season ended. Among the subset of customers who deposited during the trial period and consented to provide their tax data, those who used a RAC (refund anticipation check) were significantly less likely to deposit into the savings feature at any point during the trial than those who did not use a RAC, and those with larger EITC (earned income tax credit) were more likely to save during the trial period.”

The 24 percent of savers who had money in the savings feature on their prepaid card averaged more than $105 in savings, according to the report. Among the consumers who agreed to provide their tax information for research purposes, those who received a larger earned income tax credit were found to be more likely to save. Those who used a refund anticipation check were less likely to save. 

Consumers’ saving habits around tax filing season have been found to be an accurate predictor of their financial well-being, the report explains.

“The large lump sum that many households receive at tax time provides an opportunity for individuals to build a savings cushion to help them weather financial shocks during the year, which is an important component of financial well-being,” the report states. “However, previous research has indicated that most individuals do not save their tax refunds, for a variety of reasons. The current research pilot explored one potential reason consumers may not save at tax-time: not having a plan in advance for saving. Specifically, this research pilot employed a company’s prepaid card customer base to encourage its customers — in advance of the tax filing season — to consider saving part of their tax refund and provided the company’s customers with an opportunity to set up and use a savings feature on their prepaid cards.”

The report notes that the CFPB’s National Financial Well-Being Survey in 2017 demonstrated that a consumer’s liquid savings tend to correlate to their financial well-being. The largest disparities between consumers in terms of financial well-being were found between consumers with different levels of liquid savings. Other research also shows that having even a small amount of liquid savings can affect downstream financial outcomes, including a reduction in the reported use of alternative financial services and an increase in financial stability as a means to reduce household hardship.

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