Individual Development Accounts: Savings Incentives to Build Wealth
By Jeff Rosen, Director of Community Development, U.S. Bank

Building assets takes discipline requiring an understanding of the tools available to help savings grow. But for some, saving money poses additional challenges. Sometimes the dollar is stretched so thin that saving for the future seems out of the question. Or a   person's past financial challenges may have made it unduly difficult to open a bank account. As a result, dreams remain unfulfilled.

That is why banks and nonprofit organizations are partnering in a program that inspires individual saving, provides added financial support, cultivates lifelong saving habits through financial education, and makes dreams a reality for those who choose to participate.

A holistic program

The Individual Development Account (IDA) is a matched savings account that helps people of modest means obtain productive assets that can generate long-term benefits—such as purchasing a new home, opening a small business, or furthering an education. The theory is that with a combination of economic incentives and education, more and more families will save for long-term goals.

Additionally, on the technology side, U.S. Bank has reinforced this approach by developing the technology to produce monthly statements with two columns, showing the total savings and the earned match. We have also simplified the administration of the product by transmitting balances directly to specialized IDA software housed at nonprofits. To do so, we developed a system to provide periodic downloading of IDA data. The nonprofit can import this timely information directly into its MIS IDA database through a secure system.

U.S. Bank participates in several IDA partnerships nationwide. To illustrate the many ways in which IDAs benefit the banking industry, the community, and the individual, let's look at a successful partnership in Nebraska. The Lincoln Action Program (LAP) is a nonprofit with an IDA program that has been hailed as an effective way to help low-income people -- including refugees from other countries -- develop assets and escape poverty. Over the past three years, with the assistance of the federal Office of Refugee Resettlement (ORR), an agency of the U.S. Department of Health and Human Services, the LAP IDA program has helped more than 80 persons and families to build assets valued at more than $1.1 million.

LAP's IDA participants, who must be working and earning an income, contribute money to their accounts weekly at a rate of $50 per family each month. Participants deposit their weekly savings at U.S. Bank, and those funds are matched by ORR and other grant funding at a two-to-one ratio, thus accelerating their savings.

Savers participate in financial education courses as they work toward their savings goal, and once they reach it, turn to U.S. Bank to finance whatever it is that they wish to purchase, be it a mortgage, student loan, small business loan, or car loan. LAP's IDA also allows participants to deposit income tax refunds into the saver's account through direct deposit from the Department of the Treasury. This encourages participants to save their refund for an important asset goal, rather than spending it on other things. U.S. Bank's IDA account is locked to prevent non-asset withdrawals.

Multiple benefits

The IDA concept has multifaceted appeal. Private charitable foundations, government agencies, community activists, and ordinary citizens are united in support of IDA projects. Specifically, they see that IDAs are sound public policy, promoting economic independence, building financial knowledge and skills, increasing homeownership, opening doors to education and jobs, and strengthening families and communities.

Banks like IDAs because the investment in the program has a high impact and high rewards. Based on a software program developed by Washington University, we estimate that every $1 invested by U.S. Bank in the LAP program has the potential to generate $12 in assets.

Banks also like the IDA program because it engages nonprofit partners who identify appropriate clients and market the program on behalf of the bank. While the person is saving, the account is maintained at the bank. When the client achieves his or her goal, the IDA savings translates into an earned asset through a bank product, such as a mortgage, student loan, small business loan, or car loan. And customers who started their relationship with the bank through an IDA are highly likely to remain loyal. At LAP, for example, each IDA customer has opened an average of four other accounts at U.S. Bank.

But the single best thing about the IDA program is that it spurs families to develop positive financial habits. Financial education directly changes behavior. IDAs turn the banking-fearful into trusting partners, hand-to-mouth spenders into savers, and single parents without plans into role models.

IDAs are good for our bank -- and good for the banking industry as a whole, because our job is to serve every type of customer. The Individual Development Account is a concept and a program that we at U.S. Bank have embraced and will continue to support as part of our commitment to invest in the families and communities we serve.