December 20, 2024 • 7 mins
In this holiday bonus episode — sponsored by TransUnion — host Evan Sparks digs into the Banking Journal archives to learn more about the “Christmas Club” savings vehicle, and what this financial product says about human psychology and behavioral economics.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Evan Sparks (00:07):
Did you know that a century old banking product is actually rooted in
some very modern behavioral psychology?
I'm Evan Sparks, and this is theABA Banking Journal Podcast, a bonus
episode in which I'd like to tellyou the story of the Christmas Club.
Today's episode ispresented by TransUnion.
Are you looking to stay aheadin the card and banking world?
Tune into extra credit, a card andbanking podcast by TransUnion where
(00:30):
experts, Craig LaChapelle and JoshTurnbull explore the latest trends and
insights from advancements in lendingtechnology to shifts in consumer behavior.
They've got all the bases covered.
Listen and subscribe today forvaluable knowledge and trade
secrets from industry leaders.
Visit TransUnion.
com slash extra credit or search extracredit, a card and banking podcast by
TransUnion on your favorite podcast app.
(00:51):
The Christmas Club dates back to1909, when the treasurer of the
Carlyle Trust Company in Carlyle,Pennsylvania got together the
very first Christmas Savings Club.
The club attracted 350 customers.
On average, they saved about 28 each, andthe money was returned to them on December
1st, in time for their Christmas shopping.
(01:13):
If you look through the archives of theABA Banking Journal and other banking
papers from the early 20th century,you see a lot of information about
Christmas clubs, which grew rapidly.
Banks would decorate their lobbies anddisplay windows and invite people in.
There would be Christmas trees.
There would be Santa coming to the bank.
And then, of course, there wouldbe opportunities for customers to
save throughout the year and then tocollect their deposits that they'd
(01:34):
saved up for Christmas gifts in lateOctober, November, December, just in
time for their Christmas shopping.
By 1923, Christmas clubs had reached250 million dollars in deposits across
thousands and thousands of banks.
According to A.
S.
Van Winkle of the Empire City SavingsBank, "the Christmas club has overcome
the feeling of fear that thousands ofpeople had at one time entering a bank."
(01:59):
Christmas clubs were allabout inculcating thrift.
Consumers would set asidefunds and basically lock them
up into a special account.
At the time, this account didnot pay any interest because of
the cost of administering it.
but at the end of the time, youwould get all the money that you'd
saved over the course of the year,just in time for Christmas shopping.
Those funds would be set aside and youwouldn't be in a financial pinch in order
(02:21):
to buy presents for your loved ones.
Not to say that Christmas clubs werealways without their problems, however.
In late 1923, there was a bankthat failed in Rhode Island.
This imperiled not just the deposits,but also the Christmas club savings
of its members, because the failurehappened very shortly before Christmas.
In a move right out of a Hallmark movie,a local philanthropist named Jesse
Metcalf saved Christmas by buying out theChristmas club deposit books up front,
(02:45):
and he dealt with the receiver himself.
This action released $159, 000for holiday shopping for those
Rhode Island bank customers.
Christmas clubs are not aswidespread today, although they do
still exist at a number of banks.
They declined over thecourse of the 20th century.
For example, in 1970, there was 187million saved compared with 250 million
(03:07):
in 1923, so definitely declining in size.
They did remain popular amongmutual savings banks that had a
long standing emphasis on thrift.
But the reason they tended tofall out of was because they
reduced consumers' optionality andthey were costly to administer.
It's a whole separate account thatyou have to, that you have to manage.
Over the course of the late 20thcentury and the 21st century we had
(03:30):
credit cards and now their digitalshopping cousin, Buy Now Pay Later,
become more popular and accessible.
And so those instant creditproducts replaced save- in-
advance products like Christmasclubs or layaway in retail stores.
Nowadays, shoppers can do their holidayspending on cards and, if needed,
pay them off over a month or two.
This approach may cost the consumermore in interest, but it gives the
(03:51):
consumer more power over their fundsduring the lead up to the holidays
instead of having their money locked up.
Christmas clubs played on aconcept of behavioral economics
called mental accounting.
Now, in a purely rational world,we don't need Christmas clubs or
separate savings accounts or evenYNAB or Mint or any of the online
(04:12):
budgeting tools to tell us, hey, thismoney here is for Christmas gifts.
That money there is for dining out.
This money here is forclothing, whatever it is.
Humans aren't completely rational.
We don't always follow our own mentalaccounting, and so we may need some help.
As James Surowiecki writes in Forbes,"mental accounting often turns out
(04:33):
to be a useful way of controllingour own weaknesses and foibles.
Mental accounts, it turns out, areoften restraints we place on ourselves
to keep us from doing what we shouldn'tand to help us to do what we should.
In particular, mental accounting isone way in which we strengthen our
ability to delay gratification."
That's why, for example, people oftenlike to pay for their gym memberships as a
(04:54):
monthly basis or upfront instead of payingon a per visit basis, even though most
people, when they go to the gym, it wouldprobably actually, it would actually cost
them less to pay per visit to the gym,they would rather pay up front because
that pre commits them going to the gymbecause they've already paid in advance.
In fact, that's a little bit of whatthe Christmas club concept was based on.
(05:15):
This, this psychologicalconcept called pre commitment.
Under this model of how the mindworks, people voluntarily limit their
options in the present to obtaina better outcome in the future.
It's a device we use when we're morerational to protect us from our own
decisions when we're less rational,and it can take a lot of forms.
(05:36):
The Christmas Club is what the authorsof Freakonomics, Stephen Levitt and
Stephen Dubner, call a commitment device.
It's something that you say, " today,I'm going to bear some kind of cost, so
that in the future, I will bear an evenharder cost if I don't, I'm going to
bear a cost if I don't follow throughwith the commitments that I've made,
in this case about what I'm puttingaside for, for Christmas spending."
(06:01):
Now, Christmas Club accounts are not asquite as restrictive as they once were.
At some of the, the banks I looked atthat offer them, they do pay interest.
They pay competitive rates of interest.
One of them, one of the banks I looked athas a policy that if you want to get the
interest on your Christmas Club account,you actually do have to leave it in
all the way until the withdrawal date.
(06:21):
And so if you withdraw early, you'renot going to gain the interest that
you otherwise would have gainedfrom having it in the account.
And I think that's a useful wayof saying, hey, there's some pre
commitment here in this product.
And so that's the story behindthe Christmas Savings Club.
As a voluntary form of forced savings,Christmas savings clubs took advantage,
(06:41):
even without knowing it, of behavioralscience research on mental accounting and
pre commitment in order to help consumershack their own psychology to prudently
prepare for their Christmas shopping.
So with that, I want to thank youvery much for being a listener to the
ABA banking journal podcast in 2024.
We will be back in the newyear with new episodes.
(07:01):
Until then, Merry Christmas,happy holidays, and a very
happy new year to you.
Did you know that a century old banking product is actually rooted in
some very modern behavioral psychology?
I'm Evan Sparks, and this is theABA Banking Journal Podcast, a bonus
episode in which I'd like to tellyou the story of the Christmas Club.
Today's episode ispresented by TransUnion.
Are you looking to stay aheadin the card and banking world?
Tune into extra credit, a card andbanking podcast by TransUnion where
(00:30):
experts, Craig LaChapelle and JoshTurnbull explore the latest trends and
insights from advancements in lendingtechnology to shifts in consumer behavior.
They've got all the bases covered.
Listen and subscribe today forvaluable knowledge and trade
secrets from industry leaders.
Visit TransUnion.
com slash extra credit or search extracredit, a card and banking podcast by
TransUnion on your favorite podcast app.
(00:51):
The Christmas Club dates back to1909, when the treasurer of the
Carlyle Trust Company in Carlyle,Pennsylvania got together the
very first Christmas Savings Club.
The club attracted 350 customers.
On average, they saved about 28 each, andthe money was returned to them on December
1st, in time for their Christmas shopping.
(01:13):
If you look through the archives of theABA Banking Journal and other banking
papers from the early 20th century,you see a lot of information about
Christmas clubs, which grew rapidly.
Banks would decorate their lobbies anddisplay windows and invite people in.
There would be Christmas trees.
There would be Santa coming to the bank.
And then, of course, there wouldbe opportunities for customers to
save throughout the year and then tocollect their deposits that they'd
(01:34):
saved up for Christmas gifts in lateOctober, November, December, just in
time for their Christmas shopping.
By 1923, Christmas clubs had reached250 million dollars in deposits across
thousands and thousands of banks.
According to A.
S.
Van Winkle of the Empire City SavingsBank, "the Christmas club has overcome
the feeling of fear that thousands ofpeople had at one time entering a bank."
(01:59):
Christmas clubs were allabout inculcating thrift.
Consumers would set asidefunds and basically lock them
up into a special account.
At the time, this account didnot pay any interest because of
the cost of administering it.
but at the end of the time, youwould get all the money that you'd
saved over the course of the year,just in time for Christmas shopping.
Those funds would be set aside and youwouldn't be in a financial pinch in order
(02:21):
to buy presents for your loved ones.
Not to say that Christmas clubs werealways without their problems, however.
In late 1923, there was a bankthat failed in Rhode Island.
This imperiled not just the deposits,but also the Christmas club savings
of its members, because the failurehappened very shortly before Christmas.
In a move right out of a Hallmark movie,a local philanthropist named Jesse
Metcalf saved Christmas by buying out theChristmas club deposit books up front,
(02:45):
and he dealt with the receiver himself.
This action released $159, 000for holiday shopping for those
Rhode Island bank customers.
Christmas clubs are not aswidespread today, although they do
still exist at a number of banks.
They declined over thecourse of the 20th century.
For example, in 1970, there was 187million saved compared with 250 million
(03:07):
in 1923, so definitely declining in size.
They did remain popular amongmutual savings banks that had a
long standing emphasis on thrift.
But the reason they tended tofall out of was because they
reduced consumers' optionality andthey were costly to administer.
It's a whole separate account thatyou have to, that you have to manage.
Over the course of the late 20thcentury and the 21st century we had
(03:30):
credit cards and now their digitalshopping cousin, Buy Now Pay Later,
become more popular and accessible.
And so those instant creditproducts replaced save- in-
advance products like Christmasclubs or layaway in retail stores.
Nowadays, shoppers can do their holidayspending on cards and, if needed,
pay them off over a month or two.
This approach may cost the consumermore in interest, but it gives the
(03:51):
consumer more power over their fundsduring the lead up to the holidays
instead of having their money locked up.
Christmas clubs played on aconcept of behavioral economics
called mental accounting.
Now, in a purely rational world,we don't need Christmas clubs or
separate savings accounts or evenYNAB or Mint or any of the online
(04:12):
budgeting tools to tell us, hey, thismoney here is for Christmas gifts.
That money there is for dining out.
This money here is forclothing, whatever it is.
Humans aren't completely rational.
We don't always follow our own mentalaccounting, and so we may need some help.
As James Surowiecki writes in Forbes,"mental accounting often turns out
(04:33):
to be a useful way of controllingour own weaknesses and foibles.
Mental accounts, it turns out, areoften restraints we place on ourselves
to keep us from doing what we shouldn'tand to help us to do what we should.
In particular, mental accounting isone way in which we strengthen our
ability to delay gratification."
That's why, for example, people oftenlike to pay for their gym memberships as a
(04:54):
monthly basis or upfront instead of payingon a per visit basis, even though most
people, when they go to the gym, it wouldprobably actually, it would actually cost
them less to pay per visit to the gym,they would rather pay up front because
that pre commits them going to the gymbecause they've already paid in advance.
In fact, that's a little bit of whatthe Christmas club concept was based on.
(05:15):
This, this psychologicalconcept called pre commitment.
Under this model of how the mindworks, people voluntarily limit their
options in the present to obtaina better outcome in the future.
It's a device we use when we're morerational to protect us from our own
decisions when we're less rational,and it can take a lot of forms.
(05:36):
The Christmas Club is what the authorsof Freakonomics, Stephen Levitt and
Stephen Dubner, call a commitment device.
It's something that you say, " today,I'm going to bear some kind of cost, so
that in the future, I will bear an evenharder cost if I don't, I'm going to
bear a cost if I don't follow throughwith the commitments that I've made,
in this case about what I'm puttingaside for, for Christmas spending."
(06:01):
Now, Christmas Club accounts are not asquite as restrictive as they once were.
At some of the, the banks I looked atthat offer them, they do pay interest.
They pay competitive rates of interest.
One of them, one of the banks I looked athas a policy that if you want to get the
interest on your Christmas Club account,you actually do have to leave it in
all the way until the withdrawal date.
(06:21):
And so if you withdraw early, you'renot going to gain the interest that
you otherwise would have gainedfrom having it in the account.
And I think that's a useful wayof saying, hey, there's some pre
commitment here in this product.
And so that's the story behindthe Christmas Savings Club.
As a voluntary form of forced savings,Christmas savings clubs took advantage,
(06:41):
even without knowing it, of behavioralscience research on mental accounting and
pre commitment in order to help consumershack their own psychology to prudently
prepare for their Christmas shopping.
So with that, I want to thank youvery much for being a listener to the
ABA banking journal podcast in 2024.
We will be back in the newyear with new episodes.
(07:01):
Until then, Merry Christmas,happy holidays, and a very
happy new year to you.
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