The days of easy credit are over, and as consumers face up to the debt they have accumulated over the last decade, banks might want to turn back the clock and revisit a simple financial innovation: the savings bond.
It may sound quaint, but savings bonds have a lot going for them, especially for underbanked consumers and other small savers. They can be purchased for as little as $50 and provide a competitive return.
The principal is guaranteed by the government, and Series I bonds are indexed to inflation. They can be given as gifts, and anyone can buy them.
Savings bonds have served many purposes throughout our history. They have helped raise public funds and built patriotism during wartime. They have promoted thrift. And they have provided small savers a vehicle to put aside money for the future, in good times and in bad.
Tough economic times lie ahead, and tough times disproportionately affect low-income consumers, who have less of a cushion to fall back on.
The Consumer Federation of America reports that less than two-fifths of low- and moderate-income households have at least $500 of emergency savings. A recent survey of people with incomes of under $25,000 showed that nonsavers were four to eight times more likely than savers to bounce checks or have trouble making a mortgage, rent, or a credit card payment.
Savings bonds offer a low-cost tool to turn this trend around. As a major distribution channel for bond sales, banks can play an important role in a restoring a culture of savings.
The bonds have been getting renewed attention in the last few years, largely as a result of the work by Prof. Peter Tufano of Harvard Business School.
Through the Doorways to Dreams Fund, a nonprofit he started several years ago, he has organized test programs to offer low-income tax filers the chance to buy savings bonds with a portion of their refunds.
The concept is a throwback to the 1960s, when tax returns had a check box giving filers the opportunity to put their refunds in savings bonds.
So far this tax season over 1,000 people in 16 cities have ordered nearly $200,000 of bonds through the Doorways to Dreams program.
Of these bond buyers, 78% report using a checking account regularly, but 65% report having no savings.
Prof. Tufano recommends a number of policy changes to make savings bonds more accessible to small savers. In particular, he wants the savings bond check box returned to tax forms. He also says bonds should be easier to redeem in an emergency — an issue for consumers living paycheck to paycheck.
While Prof. Tufano aims for increased access through policy changes, the entrepreneur Brian Lawe is taking a different route to the same goal. His company, USgiftBonds LLC, is trying to tackle the distribution challenges by linking savings bonds with prepaid gift cards.
Thousands of financial institutions and employers technically are eligible to issue bonds, but in reality it can be very difficult to find a teller or a human resources manager who knows the mechanics of facilitating a purchase, let alone where to locate the forms.
They have little incentive to do so, since the Treasury Department pays less than a dollar per transaction. The Treasury is pushing distribution to an online tool, TreasuryDirect, but the process can be cumbersome for the average consumer.
Moreover, the Treasury recently stopped taking credit cards for savings bond purchases; buyers must have a bank account to place an order.
USgiftBonds plans to use gift cards to commoditize savings bonds so they can be sold by retailers and redeemed by any consumer, even those who are unbanked. Consumers would purchase a $25 or $50 savings bond gift card, scratch off a code on the back, and enter it into the company's Web site along with some additional information.
That data would be sent to the Treasury, which would mail the consumer a paper bond.
Consumers would pay a $4.95 fee for a $25 bond and $6.95 for a $50 one. USgiftBonds would split the fee with its retail partners. It is preparing to launch its first test in the next couple of months.
The renewed energy and enthusiasm around savings bonds should galvanize Congress to restore the marketing budget for the nation's bond program, which died in 2003 after lawmakers failed to authorize funding.
Banks' own marketing efforts would be buoyed by a government-led awareness campaign.
On all counts, savings bonds compare quite favorably to savings accounts or certificates of deposit. With a bit of 21st-century innovation, they may even prove to be more accessible to the consumers that need them most.
