Americans first heard about the so-called $400 problem about five years ago, when the Federal Reserve Board of Governors introduced it in its annual survey of the economic well-being of U.S. households. After that, Brian Clarke heard about it almost everywhere he went.

“It was all people wanted to talk about in meetings and at conferences. They’d say, ‘Is that true? I can’t believe it,” said Clarke, a Federal Reserve Bank of Boston business strategy manager who has expertise in emergency savings. 

The $400 problem refers to a finding in the Fed’s survey of 2013 households that almost half (48 percent) of respondents couldn’t cover a $400 emergency expense without selling something or borrowing money. Soon after the finding came to light, the banking community—including Clarke and the Boston Fed—began looking for ways to bring that percentage down. The Bank has since worked with prepaid card companies to make saving easier, and it’s also encouraging other strategies, such as helping employers simplify saving for employees. 

Shocking as it was to people, the $400 problem seems solvable to the banking community, and it’s also an issue they feel good about tackling, Clarke said.

“If you can change the way your product is offered, help people save money, and still do good business, you’re going to feel pretty good walking into work every day,” he said.

Potential in prepaid cards

The Boston Fed quickly viewed the prepaid card industry as a fruitful place for emergency savings innovations, specifically its “general purpose reloadable” cards, Clarke said. These can be used similarly to a debit card and re-loaded with cash (for a fee) when their balances run low. The cards are popular among the low- to moderate-income earners the Bank’s community development group focuses on helping, and the prepaid card industry was looking for ways to stop customers from discarding the cards so frequently. 

It turned out adding so-called “savings pockets” encouraged users to both save money and hold the cards longer. One example is the “vault” Walmart added to its prepaid card after attending a 2014 meeting of major prepaid card players organized by the Boston Fed, Commonwealth (formerly D2D Fund), and the Center for Financial Service Innovation. Users simply transfer money into the vault, which Walmart incentivizes by giving customers one entry in a monthly cash prize drawing for every dollar saved. 

“The industry has found adding the savings pocket really works,” Clarke said. “It’s become more like an actual, all-encompassing, full-service banking account for people.” 

Emerging tactics

The data shows the $400 problem is decreasing, but is still significant, with the latest Fed survey (covering 2017 households) indicating it affected about 4 in 10 respondents. Clarke said the Boston Fed is exploring a variety of strategies to keep attacking the problem, including:

• Helping employers see themselves as financial partners with their employees. Employees without adequate savings can be more stressed and less productive, which is why some employers have responded with a more collaborative approach to worker finances. Programs include making it easier for workers to directly deposit earnings into savings accounts and offering no-cost emergency loans, to be paid back from future paychecks. 
• Credit building tools. One such tool is known as “self-lending,” in which users take out loans, and the money immediately goes to a certificate of deposit, available to the customer only after he or she pays the loan back. For instance, the customer can pay back a $480 loan with 12 months of $40 payments, plus interest, building their credit rating and having a balance of $480 saved upon completion of the program.

Clarke is optimistic more progress on the $400 problem is coming soon as FinTech advances take the inefficiency and friction out of saving money. Last fall, the Boston Fed co-hosted a conference with the Aspen Institute to explore ways established and emerging FinTech solutions can help low- to moderate-income populations save money and increase financial security. 

The conference brought together people with expertise in the populations most in need of financial services and the FinTech tools that could help them. The idea was to start substantive conversations about solutions among those best equipped to create them. 

“It turns out that if you make it easier for people to save money, they actually do,” Clarke said. 

For more about the Boston Fed’s work with technology, check out our FinTech page.