When Star Trek’s Captain Jean-Luc Picard was absorbed by the Borg, he entered one of the most famous battles in Star Trek history, a struggle between collective power and individual freedom.
A similar tension — which happily comes without the threat of destroying the universe — exists between freedom and constrained choice in the design of hybrid financial products.
Hybrid products combine the functions of two or more consumer financial tools that are generally offered separately, integrated for the purpose of improving people’s capacity to effectively manage their money. In many ways, hybrid financial products are a very old idea — savings and lending circles in communities across the globe have been around for centuries. But hybrid products remain rare in the formal financial sector. The Aspen Institute Financial Security Program’s EPIC initiative – a research project that brings together voices to study emerging consumer finance issues – dedicated its first research cycle to one of the factors impacting the short-term financial needs of families: income volatility. Other issues experienced by families that make hybrid financial products so necessary and important include expense volatility, financial shocks, and a lack of emergency savings.
Innovation in the realm of hybrid financial products is coming from many quarters: fin-tech start-ups, traditional players, and non-profits. One promising type of hybrid product that Aspen FSP has been exploring is a sidecar account for rainy day savings — a short-term savings account linked to a traditional retirement account.
In one important sense, rainy day savings already exist in the US retirement system, accidentally, in the form of leakage from retirement plans. Estimates vary, but as much as 40 cents of every dollar saved for the long-term leaks out before retirement, as Americans often draw down funds to cover emergencies, education expenses, medical bills, home repair, and more. However, there are disadvantages with an unintentional system like this, such as a lack of real emergency liquidity and large tax penalties. Formalising the distinction between short and long-term savings through a hybrid product like a sidecar savings account can result in less long-term funds lost and more access to simpler, more affordable liquid savings.
For hybrid products like sidecar savings accounts, a version of the tension Picard faced in his battle against the Borg lies at the heart of good design — how do you balance individual choice against intelligently designed products, informed by the lessons of behavioral economics that show too many choices can lead to sub-optimal outcomes?
Overall, hybrid financial products come with a variety of challenges but represent an exciting new frontier in the financial security space — a bold new world well worth exploring.
By Jeremy Smith, associate director at the Aspen Institute Financial Security Program and director of the Retirement Savings Initiative.
Watch Jeremy Smith, Professor Brigitte Madrian from Harvard Kennedy School and NEST Insight’s Matthew Blakstad, in our NEST Insight conference panel discussion exploring the interaction between shorter and longer-term financial resilience.