When the future of savings accounts is a mere swipe
We’re not wired to save money. Behavioral economics demonstrates that human beings, all things being equal, would rather consume their money today than save it and have more money to spend in the future. Today’s average American saves 5.1% of his or her personal disposable income. This number is close to a historical low — the only period since 1959 that clocks lower than this was recorded during the financial crisis of 2007-2008. Our inability to sufficiently save is caused by poor behavior. Western culture encourages consumption — that’s even how growth is gauged in economic terms. The result is that millennials have historical amounts of debt. So, if behavior is part of the problem, it must also be part of the solution. Smart entrepreneurs have found technological ways to overcome our behavioral biases to make it easier to increase our savings. One way to do this is by encouraging people to make micro-deposits. Instead of asking for a percentage of a paycheck or to transfer large sums of money, these micro-savings apps make it easy for users to make repeated small deposits. Acorns is the most popular of these apps. The award-winning app makes it as easy as a swipe on a smartphone to save spare change from purchases. It works like this: an Acorns user makes a purchase say at a coffee shop and after completing the transaction, the Acorns app asks the user to round up the purchase (like from $3.25 to $4.00) and deposit the remainder in his or her Acorn account. Users can schedule bigger, more periodic transfers of money into their Acorns account but the mechanism to round up seems to be the most salient part of the user experience. It’s here that our struggle with saving for the future is met head-on and dissected into small, repeated actions, making it easier and habitual to sock money away for the future. "People generally associate investing with lots of dollars," said Jeff Cruttenden, CEO and co-founder of Acorns in an interview with CNNMoney. "Once [people] find out that you can invest spare change, it's a really attractive concept." Digit takes a more automated approach than Acorns. For this mobile savings app, there’s very little interaction with the user. Every couple of days, Digit scans a user’s checking account and if a user can afford it, deposits $5-50 via a transfer to Digit’s savings account. There’s no need for a user to swipe as the monitoring and action of depositing money happens in the background. By scanning spending and income history, Digit takes away the need for any human decision making by automating the savings process. “I'd never struggled with understanding the importance of saving, but hated the exercise of doing it regularly and having to anticipate changes in my spending and income. Thankfully, now the trustworthy robots powering Digit do all that for me,” said Alexis Ohanian, executive chairman of Reddit. He’s also an investor in the young company. Getting money into the savings account, from a financial planning perspective, is the hardest part because you’re going against the grain of human nature. But once the money is deposited into these accounts, users have different options. For Digit users, their Digit account is a way station, a bucket to keep dollars saved for the future and ensure they aren’t spent. With a simple text message to the company, users can transfer that money back to their checking account. Acorns, on the other hand, is really an investment platform at its core. Once a user deposits money into his account, much of the experience is similar to other online investment advisors like Wealthfront and Betterment. Acorn users can choose from a handful of different portfolios and begin investing their spare change in the stock market with a particular investment horizon. Both savings apps are transparent with their fee structures. Digit doesn’t charge for its service (yet) while Acorns does. Acorns charges a flat monthly fee ($1) for accounts under $5k and a 0.25% fee on assets for accounts bigger than $5k. The AUM fee is typical in the roboadvisor world. And as this article points out, the small nominal monthly account fee for smaller accounts ends up being kind of expensive if the account stays small. What’s different about this generation of savings apps is that they’re mobile only. The entire savings process, from depositing to asset allocation to transferring back to a savings account, occurs on a smartphone. The user interface has to be clean and simple for a small form factor and much of the success these apps have had in attracting new users has come in no small part from their good design. If successful, the market potential is large for savings apps and that’s why both Acorns ($32m) and Digit ($14m) have raised a lot of investment capital.