If you’re a millennial, there’s a good chance you’ve been targeted with ads for savings apps, like Digit and Acorns, that connect to your bank account and promise to do things like start your investment portfolio with just $5, or help you save for a vacation without having to budget. Some apps save by monitoring your spending and skimming a bit off the top into a savings account. Others round up your purchases to the nearest dollar and put the extra aside.
These apps all work differently, but they’re based on the same idea: If millennials won’t — or can’t — save and invest money the traditional way (by buying into financial products like CDs, money market funds, and Roth IRAs), maybe they can be tricked into doing it by a computer.
Setting aside a rainy day fund, or its PG-13 cousin, is always a good idea. But an automated finance app isn’t necessarily the best place to stash your cash. People who use these savings apps could be missing out on the extra money they could earn from more traditional banking products, like high-yield savings accounts with better interest rates, retirement plans, or even from investing in money market or index funds.
The creators of these apps say that automating savings is a lifesaver for people who would otherwise struggle to put aside any money at all. And because these popular apps seem to have succeeded where traditional banks often fail — at getting young people interested in saving — legacy financial institutions have started investing in and acquiring these finance upstarts. Finance industry leaders see these apps as a gateway drug that could get younger customers hooked on more lucrative financial products down the line.
“There's a lot of smart venture money,” said Digit CEO Ethan Bloch of the savings app investment ecosystem, “and a whole lot more dumb venture money.”
George Friedman is the CEO of Qapital, an app that allows users to write their own rules for savings, such as putting $10 toward a trip abroad every time they order takeout or setting a budget for alcohol spending and squirreling away whatever’s left at the end of the week. Friedman said it’s obvious that old fashioned banks see apps like his as a cheap and easy way to onboard new customers. The perspective of a “big bank,” he said, is, “‘Oh my god, foot traffic is down to our branches, the cost to acquire customers is like $500 … here comes the guys with a fraction of the cost to acquire a checking account.’”
Qapital hasn’t yet taken any funding from traditional banks, but others have. Albert, an app that monitors your spending, rates your financial health, and makes recommendations for changes in behavior, received funding from JPMorgan Chase’s Financial Solutions Lab in 2017, as did Digit in 2015. (The Lab is managed by the Center for Financial Services Innovation, a nonprofit consultancy group.) Meanwhile, that same year, Capital One acquired Paribus, an app that helps users save money by negotiating refunds for online purchases when prices drop or deliveries are late. Capital One also acquired budgeting app Level Money in 2015, only to shut it down in 2017, much to the dismay of its fans. And PayPal is a major investor in Acorns, an app that rounds up each payment you make to the nearest dollar and puts the leftover change toward an investment portfolio.
These many apps offer would-be financial planners a bevy of options, each with its own eye-catching Instagram ads promising financial health with almost no effort. The question is whether autonomous, algorithmic banking in the name of helping you save is as effective as traditional options.
“You need to think about where your money would be put best to use,” said Arielle O'Shea, an investing and retirement expert with NerdWallet.
For example, money in savings accounts earns interest; the more money you set aside, and the greater the length of time you set it aside for, the more interest you will earn. Savings apps, by and large, don’t offer interest.
But the people behind them say that doesn’t matter. First of all, interest rates are at an historic low right now, meaning that even if you have a ton of cash just sitting in the bank, you won’t earn much anyway. Qapital gives new users a $5 bonus for signing up; to earn that in interest in a single year with an average savings account, you’d have to have a balance of $8,500. When it comes to long-term savings, said Qapital CEO Friedman, “Whatever interest you make is not going to make any difference whatsoever.”
Digit, which is one of the most widely used savings apps, offers users a “savings bonus,” about 1% of however much money they’re keeping with Digit. But its CEO argues that without Digit most users wouldn’t be earning interest anyway because they wouldn’t have saved the money in the first place.
“Sixty percent of this country doesn’t save, period,” said Bloch. “They use Digit, and they save $1,000 in their first year, and they look at that and they say, ‘I thought I was someone that couldn't save’... The notion that they would have gotten the interest is off base, because they wouldn't have had the money to begin with to earn that interest.”
Of course, there are much better ways to earn money off your savings than interest. To that end, some apps, like Acorns, Robinhood, and Betterment, also help people invest the money they’re saving. This is slightly more risky, but also potentially more lucrative. Qapital’s Friedman said the company is working on an investment product in hopes of attracting customers interested in maximizing the earning potential of their savings; Qapital Invest is supposed to roll out in early 2018. “It's a fair point,” he said. “Some millennials do pay attention and move from ING to Ally, and we lose out on those customers.”
Another thing to look out for with these apps is fees. For example, while Digit does offer a savings bonus, it also charges $2.99 per month; Acorns charges $1 a month for accounts under $5,000. Bloch says customers so far are willing to pay for the service. But NerdWallet’s O'Shea said flat, recurring fees charged to accounts without much money in them can quickly eat into the savings people are trying to build.
“It really depends on how much money you have. One dollar a month sounds cheap, but when you have just a little money in the account, it's a large percent,” she said. “Do $2.99 as a percent of what you have in your Digit account. If it's helping you save three, four, or five hundred dollars a month that you wouldn't otherwise, great. If it's helping you save $10 a month you wouldn't otherwise, just think about putting that $10 aside yourself.”
Ultimately, whether or not using one of these apps is the smart thing to do depends on what you want to use it for. If you’ve never saved a dime in your life, or if you just want a little help saving up for something like a new bike, it could make sense. But if you’re saving long-term, for something like a down payment on a house, there are potentially more lucrative options out there.
Another thing to be wary of when allowing an app unmitigated access to your bank account is what, exactly, you’re agreeing to when you sign up to use it. The data users are granting these apps access to — how much they save, how much they spend, and on what — is potentially enormously valuable. Some of the apps, like Digit, explicitly say they don’t sell this data to third parties, or use it to pitch additional financial products to users. But others, like Albert, do “receive compensation from ... marketing partners for promoting their products and services.” As always, when the product is free, its best to read the Terms of Service and make sure you’re comfortable with what you’ve agreed to.
For young people, turning over the work of balancing a checkbook to an algorithm is understandably appealing. Emily Brauer Gill, director of communications for Varo Money, an app that could replace a traditional bank account, said internal research shows millennials “don’t like spreadsheets, don’t like to budget,” and are typically “hands-off with their finances.” For companies like Varo, the fact that young people would rather get an automated alert about overspending than actually track their finances themselves is a business opportunity.
But it also means losing insight and control over your money. “Technology is great,” said O'Shea, “but it doesn't mean you can take your eye completely off the ball.” In other words, you can’t automate adulthood.
Ted Gonder, who runs a nonprofit called Moneythink that helps low-income young adults understand personal finance, said technologically aided savings can help people feel more ownership by actually putting a lump sum of cash in their hands. Talking about money is really boring for young people, Gonder said, until they’re faced with an immediate financial question, like which student loan package to accept. He thinks automated savings apps have the power to change how users behave by altering how they view their financial identity.
“You wouldn't expect something that's passive to spur more ownership, but I think it does,” he said. “They make it really easy to get started, and then easy to continue. All of the sudden you have an asset. You've been passively behaving in a way that's advantageous to your long-term prosperity, and you start to think of yourself that way.”
Digit CEO Ethan Bloch echoed this sentiment, saying that passive saving actually gives users a sense of “control and empowerment” without having to read financial planning blog posts or hire a financial adviser. If wealthy people have “money helpers” to attend to their personal financial needs, he argued, there’s no reason poor people shouldn’t get help, too — especially when their needs, like figuring out when is the best time to pay a credit card bill to avoid excessive interest, are complicated too.
“We really believe that finance, the day-to-day management and understanding of the fine print and how interest rates work, humans shouldn't have to deal with,” Bloch said. “God help us if we have drones that kill people halfway around the world, and I still need to figure out when to schedule my fucking credit card payment. Something is broken there.”
But just because you can automate your financial life doesn’t mean you shouldn’t think about it.
“At the end of the day, if something is getting you to save money, and you haven't been able to get yourself to save, I would call that a win. But use it as training wheels — once you get into the habit of saving, you need to go out on your own,” said O'Shea. “We talk a lot about putting your savings on autopilot, but you don't want to go too far down that road.” ●