This was a great article. Firstly, thank you for posting and beginning the discussion on PLS accounts.
I see the real value here in the incentivization that @zube.paul mentioned, specifically as it relates to platforming the unbanked and motivating low-income individuals to save with a legitimate financial product that resembles the outcome of gambling, but is far from it. Effectively, moving those that might be subject to the predatory practices of gambling schemes into the banking sector. My interest lie in this exact capability of new DeFi and TradFi products that can open the banking and financial services sector to low-income for new forms of wealth creation. Few TradFi products now cater to the low-income user, and leave large portions of communities outside of the financial sector – which we know continues to grow the wealth gap, as low-income individuals turn to non-traditional and predatory methods of “finance” (i.e., payday lenders and check cashers) in the lack of credit unions and banks, and therefore appropriate financial products. Furthermore, the authors are right when they mention: “a growing body of evidence suggests that a large percentage of households in developed and developing countries alike maintain little to no savings.” Even more US households had significant portions or all of their savings wiped out during the pandemic. Which highlights the growing potential market size and need for products like this in the US.
Beyond the technical limitations (gas fees) and need for maturity in DeFi, I’m interested in the potential for social production to be the key focus in a lot of these products. What can be built to solve the failings of a current system that exclude low-income or the unbanked from wealth creation? Can we expand DeFi to those individuals in an effort to remedy the wealth gap? These are the individuals that have the most to gain from a transformed financial system. DeFi products promoting the benefits to low-income and attracting the unbanked can also engage in an Environmental, Social & Governance (ESG) framework that is lacking from the crypto-sphere in general. Ultimately, ESG says ‘are you helping the planet, people, and yourselves’…if yes, then consumers can have another signal that this product is appropriate for them and others.
Lastly, wanted to input here some other quotes concerning the low-income benefits mentioned in the paper, as I found it impressive that the authors were able to see some behavioral patterns among this demographic:
- “We find that the lowest-wealth group are nearly 17% points more likely to open a MaMa account than those with a small amount of savings. These individuals are those for whom a large financial prize is a significant incentive, even if the chances of winning are small, as it represents a chance to significantly change their economic situation.” (page 11)
- “Individuals who feel this way [that their debt is never ending] may be more likely to use PLS because it represents a chance for them to pay off their debts and escape a poverty trap, whereas standard savings products do not accumulate enough interest to do so (Banerjee and Mullainathan 2010). In addition, financial constraints themselves could lead individuals to play the lottery (Haisley et al. 2008, Shah et al. 2012).” (page 13)
- “This finding [that low-income individuals are attracted to these PLS & MaMa] is also related to evidence from the Consumer Federation of America and The Financial Planning Association (2006), which found that 21% of Americans and 38% of those with incomes below $25,000 thought that winning the lottery represents the most practical way for them to accumulate several hundred thousand dollars. Individuals who feel that their dreams are extremely difficult to reach may feel as if the only way possible for them even to have a chance at reaching those goals is by winning a large prize. PLS differs from standard savings accounts by offering highly skewed payouts, making large wealth accumulation possible.” (page 12)