April 23, 2008
In a number of developing countries such as China, many consumers rely on "pay-as-you-go" cellphone plans where they "top-up" their accounts with more minutes when running low. Here's how it works: a consumer buys a plastic card from a street-side vendor in a particular denomination (i.e. the equivalent of $10 or $25). Then they scratch off a number on the back of the card and enter it into their cellphone. After, they hear confirmation that the funds have been added. Pretty simple.
So why not do something similar with mutual funds here in the United States? Consumers could buy what could be called "Mutual Fund Top-up Cards," scratch off a number on the back, and "top-up" their accounts via cellphone or Internet. After topping up their accounts, they would hear/view a message letting them know their new balance. Also, they would be able to check the value of their holdings at any time on their cellphone.
Mutual Fund Top-up Cards could be offered by private providers, such as Fidelity, Vanguard, and Charles Schwab in various denominations, starting from as little as $10. There would be just a few types of cards available to make it easy on the consumer. The cards could come in colors representing the type of mutual fund consumers would be buying (i.e. blue for fixed-income, red for fixed-income/equity blend, and green for equity). All options would be low-fee index funds. Retailers such as Wal-Mart, Target, Walgreens, and Starbucks could offer the cards for sale beside their cash registers.
The goal of introducing Mutual Fund Top-up Cards would be to make it (at least almost) as easy for individuals to invest as it is for them to consume. Such a product builds on the thinking of Peter Tufano and Daniel Schneider. In a recent paper, "Using Financial Innovation to Support Savers: From Coercion to Excitement," Tufano and Schneider discuss ways to make it easier for individuals to save. They pose the question, "Would it be possible to create ‘point of sale (POS) savings' where a consumer could ‘buy' savings in the same way that he bought a cup of coffee, pack of cigarettes, or a lottery ticket?"
I believe such a concept can be extended into the investment arena. Mutual Fund Top-up Cards could help level the playing field between consumption and investment. Right now in America, it is much easier to spend than save. The cards could be an effective way for consumers to make the decision to invest more like the decision to consume. Moreover, Mutual Fund Top-up Cards could do at least a small part in bringing about a much-needed second wave in the democratization of investment - the first wave being the popularization of mutual funds and 401(k) plans in recent decades. It could do this by making it easier for low- and moderate-income individuals to invest in mutual funds, especially since they could begin investing with as little as $10 or so (as opposed to, for example, a $1000 minimum).
Of course, mutual fund companies are unlikely to introduce top-up cards overnight. For one thing, they may believe that servicing many new low-balance accounts isn't worth the trouble. Also, I suspect there are many regulatory hurdles to overcome, especially related to disclosure.
This being said, by designing and testing a pilot project, researchers at places like New America could help jump-start this process. This would involve designing a test product and demonstrating that it both helps low- and moderate-income individuals build assets and is a viable product for mutual fund firms.