FinTechs sink into the void left by Simple

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One of Simple’s most beloved features, the neobank that Madrid-based BBVA bought in 2014, then closed recently before selling its US unit to PNC Financial Services Group, was Safe to Spend. He analyzed a client’s income, subtracted upcoming bills and money to set aside for savings goals, and calculated how much the client could safely spend.

Simple registered the Safe to Spend name and aggressively protected it. In 2015, she sent a cease and desist letter to Mondo, the British neobank that was using the name on its app at the time. This may be one of the reasons why this feature, which many Simple users lamented the loss of on Reddit and Twitter, is hard to find. But some fintechs, like Digit, imitate this service.

More banks and fintechs might want to do the same.

“It’s up to others to pay attention” to what Simple has done with Safe to Spend, said Mark Schwanhausser, director of digital banking at Javelin Strategy & Research.

“Saving has become one of the hot topics of 2021,” said Schwanhausser. “Partly that’s because it’s increasingly important to try to improve financial well-being and financial health. Banks and fintechs are all trying different approaches in this regard. Some focus on saving. Some focus on spending, others on credit scores.

The main difference between the fintech approach and that of the banks, according to Schwanhausser, is that fintechs are trying to turn this kind of help into an automated service.

The fintechs say “we’re going to be proactive and guide you to save money,” he said. “Banks are struggling to make the leap from providing DIY tools for conscious customers to the majority of consumers who care about their money but may not know where to start. “

What does Digit do

San Francisco-based Digit, the fintech that pioneered the use of artificial intelligence to help consumers frequently save small amounts of money without hampering their ability to pay their bills and manage their expenses. sustenance, recently introduced its own version of Safe to Spend. At the same time, Digit launched a fully-fledged bank account called Direct with MetaBank assets of $ 9.8 billion, based in Sioux Falls, South Dakota.

In recent years, Digit has released other related features, such as the ability to automatically pay off credit card and student loan debt in safe increments. It also increased its monthly fee to $ 9.99.

“Are we really thinking about how you make it easier to manage your day-to-day money and how you make your financial life easier?” Said Ethan Bloch, CEO of Digit. “We try to help you budget your bills. And on the other hand, we try to make it very easy for you to control your spending. “

When customers use Digit’s secure spending feature, each time a deposit arrives in the Digit account, a portion of that money is automatically transferred to an account assigned to pay bills. Another part is transferred to a savings account.

Digit displays how much is left, or “what you could spend right now without putting your bills at risk,” Bloch said.

Digit recalibrates this amount to safely spend each night while the user is sleeping.

“It will automatically adjust and make small adjustments, giving someone a little more money for bills or a little more for savings,” said Bloch. “It’s not going to make huge movements of money, but it will make some small adjustments and at 9 am you will get a notification that will tell you how much you are spending and how much Digit has set aside for bills. so every day with some idea of ​​the truth on the ground of your money.

The new feature was born out of customers asking Digit to help them budget their bills better, as well as save more and control their own spending.

It took Digit 18 months to build this, Bloch said. The hardest part was creating your own bank account and choosing Metabank as a banking partner and Galileo (now part of SoFi) as a processor.

For the new functionality to work, Digit creates three bank accounts for each Digit Direct account: a checking account, a savings account, and an expense account. The expense account is linked to the Digit debit card.

“We weren’t just building the vanilla neobank with a debit card,” Bloch said. Direct technically has three accounts behind it and the money flows between them instantly.

This way, Digit saves customers from themselves: they can’t accidentally spend money they didn’t intend to spend.

“We’re just adding a tiny bit of friction, because I might want to spend the money,” Bloch said. “But if I have to go into the app and transfer $ 30 from the Bills account to the Spend account, that little bit of friction makes me realize that by doing that, I’ll be less likely to be able to pay my rent this month. Are you OK? We hear that that little bit of friction built into the experience really helps. We design a car with seat belts and airbags because we know people have accidents.

You Need A Budget, a Lehi, Utah-based fintech, provides a budgeting app that shows users how much money they have to spend after upcoming bills, savings allowances, and living expenses. counted.

Not everyone is a fan

Critics question the effectiveness of safe-to-spend programs.

“Safe to Spend is a fairly common concept and can be useful, but it’s often not used by customers as much as it is in marketing,” said Brian Hamilton, founder and CEO of Sacramento-based challenger bank One. , California. “Algorithms are useful when they are precise and the recurring invoices are reliable and all connected and everything is working perfectly. “

If there are any disconnections or inaccuracies, people will not trust the secure number, making it useless, he said.

One offers “pockets” for budgeting for specific expense categories that can be taken from each paycheck or directly debited by each biller.

Many fintechs and banks use this concept of pockets, envelopes or buckets to help people manage their money, Schwanhausser pointed out. One envelope will be for rent, another to save for the holidays, etc.

“The human brain often feels more comfortable when it can compartmentalize itself,” said Schwanhausser. “So you see players like Chime, One, Stash, Varo and others playing with different variations of buckets.”

Hamilton is not completely opposed to the idea of ​​Safe to Spend.

“Safe to Spend, when done right, is a valuable concept,” he said. “We will probably be using similar projections in our product, but in a slightly different form based on user feedback on what they find most useful.”

Schwanhausser is also skeptical of safe spending programs.

“With safe expenses, it often comes down to saying, we started with your paycheck, we took out your bills, we took out the things you burdened yourself with, we took your expenses,” Schwanhausser said. . “And then we looked through the sofa cushions and found what was left. And it becomes your safe to spend.

Better to reverse the trend and save first: 10% go to savings, and you live with the remaining 90%, he said.

Banks remain focused on savings

This is what some banks have done, Schwanhausser said: Help people manage their cash flow with an emphasis on savings.

Some opt for the Roundup or Keep the Change approach that Bank of America launched in 2005. As the name suggests, when a customer makes a purchase, the amount is rounded up to the next dollar and the remaining currency is transferred to a. savings account. Some let people make their own rules, for example, automatically depositing a portion of each paycheque into a savings account.

The US bank’s Pay Yourself First program, which it created with Personetics and launched in March, uses AI to identify ways customers can save. It offers recommendations based on their personalized cash flow models.

In Schwanhausser’s opinion, automatically saving a portion of each paycheck is far more effective than any money-keeping program. A person participating in a roundup program could save $ 13,000 over 15 years, he said. But if that same person saved 10% of their income, the savings would be $ 130,000.

“You fundamentally changed this conversation in a way that is going to lead to this $ 130,000 saving after 15 years,” he said.

The fintechs approach to what’s left in the couch works best for a younger consumer who hasn’t yet developed overspending habits, Schwanhausser said.

But the biggest difference between banks and fintechs, he said, is in the types of tools they offer.

“Banks see it as a bunch of tools: you get it,” he said. “The fintechs are trying to say, we’re going to hold your hand and guide you. And I highly recommend it. This can lead to the use of personalization, notifications, gamifications, things that take a consumer deeper into what should I be thinking about? What should I prioritize? What should I save first for? Fintechs treat it almost like it’s a consultancy relationship – we’ll help get you going. Banks are in a transactional relationship, and they say here are some tools to help you figure it out. “

Banks don’t help people figure out how much money they’ll have after their scheduled bill payments are made.

“Help me do the mental math – we don’t even see banks doing this stuff, which is completely in their business,” Schwanhausser said.



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