Rule Change Allows More Liquidity in Savings Accounts
Here’s Why Depository Institutions Should Act
COVID-19 has changed business-as-usual in many sectors of the economy, and depository institutions are no exception.
The devastating financial effects of COVID-19 have laid bare the dismal state of emergency savings in America. At the start of the pandemic, fewer than half of Americans said they had enough money to cover two months of expenses. It’s become broadly apparent that we need to reform savings practices to allow more people to build emergency savings, a first critical step in improving financial security.
The government is issuing stimulus checks and additional unemployment payments to aid people in the midst of almost immediate financial crisis as the economy shuts down. Without short-term savings, many Americans will withdraw from their 401(k), due to provisions in the CARES Act that eliminate early withdrawal penalties–a necessary step of last resort but one with long-term consequences.
In addition to the direct aid of the CARES Act, the Federal Reserve Bank is enabling banks and credit unions to make changes to their account structures by eliminating Regulation D’s six per month limit on convenient transactions from savings accounts. This significant decision enables financial institutions to offer savings accounts that customers can withdraw from more frequently in times of need.
While the Fed’s rule change rightly eliminates the requirement for banks to impose the six-per-month withdrawal limit on customer savings accounts, there is no mandate for banks and credit unions to lift the limit.
To best serve customers, particularly during this crisis, banks and credit unions should remove these transaction limits–immediately. Doing so will allow people to effectively leverage their emergency savings to combat income volatility during the pandemic and beyond.
Improving liquidity is a positive step towards a longer-term recovery strategy. Some studies have shown that overall, savings since the start of the pandemic have increased–possibly due to a change in spending patterns, but also potentially attributable to people preparing for a likely recession and income fluctuations ahead. This is consistent with our research and that of others: People want to save, but many face barriers–and a significant one is the structure of savings accounts themselves.
Our nearly 20 years of experience and consumer research at Commonwealth shows that liquidity is a key design element of a savings product that serves lower- and moderate-income (“LMI”) people, allowing them to leverage emergency savings in times of income volatility, employer pay reductions, or unexpected expenses. There is perhaps no time when that has been more needed, collectively, than today.
By design, an effective emergency savings fund can be built, used, and rebuilt, empowering consumers to manage cash flow. In our work with banks and credits unions on savings innovation over the last four years, in partnership with the Federal Reserve Bank of Boston, we have found that this transaction limitation was hindering savings innovation for LMI consumers.
While financial institutions offer traditional savings accounts, the current products don’t address this need for short-term liquid savings to manage income volatility and unexpected expenses. LMI consumers are typically required to use checking accounts when their income volatility requires them to withdraw regularly to manage expenses. Savings accounts commonly aren’t designed for this type of activity under the transfer limits and especially for small balance savers. .
Lack of access to savings products goes beyond the material effects–it’s psychological as well. No matter their level of financial knowledge, those who participate in the process of saving begin to feel capable and accomplished, providing them a springboard from which to begin saving more. This implicit lack of access essentially locks out a category of consumers from achieving the psychological value of savings.
Making savings simple is important, and there is a practical advantage to implementing this rule change, particularly in the digital age. The prior withdrawal limit only applied to convenience withdrawals, such as digital withdrawals and transfers, while in-person withdrawals were not nearly as limited. In an era where much of our banking is done online, especially during social distancing, this type of distinction is a barrier for digital banking customers and unnecessarily complicates savings and withdrawals.
In addition, our research shows the most effective savings tools are low or no fee. Fees for withdrawing from emergency savings funds or falling below minimum balances reduce trust in financial institutions, exacerbate financial emergencies, and may discourage users from withdrawing when they really need it. The confusing rules around what qualifies as a convenience withdrawal can lead to unexpected fees or penalties, which is further reason for removing this limit.
With better short-term savings options that enable people to build and withdraw emergency funds as needed, perhaps the drastic actions the government is taking to provide financial support–as necessary as they are today–won’t need to be repeated in the future.
The takeaway is clear: it is time to change “Savings as Usual,” the existing system for short- and long-term savings. The elimination of this particular requirement found in Regulation D is a step in the right direction, and banks and credit unions should choose to enact it as soon as possible in order to create more accessible savings accounts. By taking the lead in implementing the change, they can help create a more inclusive and responsive savings infrastructure for millions of Americans.
By Nick Maynard, Senior Vice President, Commonwealth & Jason Ewas, Senior Policy Manager, Commonwealth