OBSERVATIONS FROM THE FINTECH SNARK TANK
While traditional banks advertise a 0.05% interest rate for deposits in their savings accounts, a growing number of consumers have turned to a new crop of mobile apps—automated or “self-driving” savings apps—to help them save.
In a recent consumer study, Cornerstone Advisors found that savings apps like Acorns, Digit, and Qapital help consumers save an average of $600 a year above and beyond their regular level of savings—and one in five users saves more than $1,000.
At a 0.05% interest rate, you’d need $1.2 million in a savings account in order to earn $600 in a year.
These new apps help consumers figure out how much they could save (above and beyond what they’re already saving)—and then take the money out of the user’s checking account and put it in a savings account.
The popularity of these tools shouldn’t come as a surprise. According to Cornerstone’s research, only one-third of consumers are very confident that they’re maximizing the amount of money they save.
Automated Savings: A New Competitive Necessity
The 13% of consumers using the new automated savings tool are generating nearly $17 billion in additional deposits—which is the last thing banks want right now.
But banks need to look past short-term considerations regarding deposit gathering. Looking ahead, AI-powered savings apps will become a competitive necessity for banks and credit unions because they’ll help financial institutions:
1) Attract young and affluent consumers. Not surprisingly, a larger percentage of younger consumers—including nearly one in five Gen Zers and 16% of Millennials—use automated savings tools.
In addition, among Gen Zers, Millennials, and Gen Xers making more than $100,000, about one in four use automated savings apps, in contrast to just 14% of those earning less than $100,000.
2) Create meaningful customer engagement. As a non-transactional account, there’s little engagement between banks and consumers relating to savings accounts. Automated savings tools give banks new opportunities to engage with customers by advising them on how much more they could be—and are—saving.
3) Demonstrate commitment to financial health and performance. When Cornerstone asked consumers to what extent their financial providers helped them improve their financial performance and health, less than 40% said their banks and credit card issuers were helpful—in contrast to 60% of savings tools users.
4) Generate revenue. Apps like Acorns, Digit, and Qapital charge users for the service to automatically save, and in fact, all have tiered pricing structures based on the number of services a user opts into. Providing self-driving savings tools will enable banks to either generate addition non-interest income, or better justify the monthly fees they currently charge.
5) Prevent deposit displacement. Not all automated savings tools work the same way, but many move money from users’ checking accounts to savings accounts in other financial institutions (or fintech company accounts).
As use of automated saving apps continues to grow, banks risk seeing an increasing amount of deposits displaced from their customers’ accounts—and with them, opportunities for engagement and relationship growth.
Banks Need a New Business Model For Savings Accounts
While banks sit back and enjoy the income that overdraft fees provide (while it lasts), fintech startups have come to market with different—and more consumer-friendly—business models.
Acorns, Digit, and Qapital make money by delivering a service that provides value to consumers who pay for the service. It’s hard for consumers to see what value a $30 overdraft fee provides them.
Automated savings tools aren’t new to traditional banks—Bank of America has offered a “round up your change” program for years. It’s done so, however, by bundling the capability into its existing checking accounts.
Fintech startups provide similar capabilities—but as a standalone service.
Interestingly, charging for the service doesn’t stop consumers from thinking that the savings tools providers are improving their financial health and performance.
Young consumers don’t want savings accounts—they want to save more money. Advertising high yields on savings accounts will help bring in hot money—funds from affluent consumers who will move that money as soon as rates move, and who will be unlikely to expand their relationship with the institution.
AI-powered savings apps and tools, on the other hand, attract consumers who want to save more money—at whatever rate they’re getting.
Bankers: Which customer would you rather have?