Life without Labels

The recent acquisition of the online bank ING Direct by Capitol One caused heated responses from some of ING’s 7.7 million customers. Their biggest fear was that Capital One would abandon ING’s labeled savings account option. The simple option allows customers to open and nickname additional savings accounts into which they can set up online automatic transfers and funnel money toward a specific purpose. 

Top nicknames for ING sub-accounts include “savings,” “vacation,” “emergency fund/rainy day,” “house” and “taxes.” People can use this feature on the go, instantly opening a new labeled savings account from their smart phone when they decide they would like to start saving for something new, like “roof repair,” while they’re driving home in a hail storm, or a “wedding ring,” after a successful first date.  

The idea is familiar from behavioral economics.  The most-cited reference is Richard Thaler’s “Saving, Fungibility, and Mental Accounts” in the 1990 Journal of Economic Perspectives. Thaler argued that if money is fungible, having sub-accounts like the ING option is meaningless – you should save in a single account and parcel it out as you like.  But, he countered, in practice people like to label accounts. With separate accounts for a wedding, vacation, or unpredictable expenses, it can be easier to put a little money away for each goal before it slips out of our hands in day-to-day spending. More importantly, it helps make a cause salient and helps keep track of progress.

The big insight is that having two or more accounts can be much more valuable than just having one.  The lesson is clear in the financial diaries collected in Portfolios of the Poor. The majority of families using informal savings devices had labeled them for specific purposes on their own. They managed in part by creating their own sub-savings systems.

Given this link between the saving systems of poor families and the use of labeled savings accounts, it is surprising that more banks don’t make this option available.