A little startup called Digit is getting a bit of ink these days for making saving money as easy as finding loose change between your sofa cushions. But it’s also providing the latest fodder for those who say, “Can’t we all agree that PFM is dead?” You’ll get no grief from me if we put a stake in the term “PFM.” It’s a term that causes many bankers to lock up mentally because they can’t envision a way for personal finance management to escape the historical shackles of old-fashioned PFM in a tab. The simple fact is: PFM in a tab is – and always will be – a disappointment in terms of consumer adoption. I said that in first PFM report for Javelin in 2009, and I’ve repeated it in the seven reports since, most recently in Managing Money in the ‘Mobile-First’ Era: A Blueprint for On-the-Go Personal Finance Management.
But just because consumers don’t want PFM in a tab doesn’t mean they don’t want personal finance management in online and mobile banking. Americans care about their money – a lot. They want to know where it goes. They want to know how to save more of it. They want to borrow money more smartly. They want to avoid costly missteps like overdrafts. They want to spot fraud. They want a better sense of control over their bills and cash flow. They want to make smarter decisions with it. And they want the option to do much of that on the go – on a smartphone.
We see evidence of hunger for lowercase “pfm” especially among the Moneyhawks, who represent the most profitable, most digitally minded consumers in America. And the market has responded with a broad range of mobile-first personal finance apps that feature aggregated accounts, financial alerts, cash-flow management, credit health, debt management, reward oversight, motivational coaching, payment decision-making, scam protection, shopping, taxes, wealth management – and yes, even budgeting. Last week, robo-adviser Betterment scored another $60 million in venture capital, giving it a valuation of up to $500 million. In January, Capital One snatched up Level Money’s budget app. PFM granddaddy Intuit has shelled out more than a half-billion dollars to acquire Check ($360 million) and Mint ($170 million), and it’s eager to boast about its mobile Turbo Tax app called SnapTax.
And closest to home for bankers, digital-first banks like Moven and Simple, and checking account alternatives such as American Express’ Bluebird and Serve prepaid cards have woven personal finance management into the very fiber of the user experience. Despite all those threats, this is a battle that traditional banks and credit unions can – and should -- win. And that brings me to Digit. Digit is an FDIC-insured automated savings account. You link it to your primary checking account at your bank or credit union, and then Digit’s algorithm evaluates how much it thinks you can afford to squirrel away in savings from time to time.
For one user, Digit tucked away $6.50 one day, $12.68 on another, and $70.73 right before payday. Next thing he knew, he had saved $360. Painlessly. Conceptually, I am rooting for Digit to succeed. My philosophy is that the best way to save is to set it aside before you ever see it. Use direct deposit to siphon off enough to pay for rainy days and tropical vacations, and to cover the “lumpy” bills throughout the year for insurance and property taxes. The same principle is at work when you set aside some of your paycheck to fund a 401(k). This method of saving is powerful because it accounts for human behavior by minimizing the opportunities for people to have to think -- or overthink:
- You make the decision to save once – not each payday.
- The money “disappears” automatically.
- You don’t miss what you never saw.
Digit relies on this similar approach, with the possible advantage of saving more when you’re flush. Nevertheless, Digit’s success if far from guaranteed. It’s yet another direct-to-consumer app fighting for consumer awareness. You must open your account online – there’s no mobile app. It relies on SMS texts if you want to move money back to your checking account. And it pays no interest. My guess is that 29-year-old founder Ethan Bloch is following the Silicon Valley ethic of getting something to the market and then honing it as fast as he can.
But these are serious shortcomings, and the question is whether Digit will run out of oxygen and funding in the meantime. No matter what Digit’s fate is, though, banks and credit unions should embrace and replicate the concept. This is the personal finance equivalent of finding loose change in your sofa cushions – except that it is a lot more powerful than the tactic of rounding up purchases and putting the spare change into savings like Acorns and Bank of America’s “Keep the Change” feature.
The ROI for a banker is multifaceted. It bolsters retention by building trust in the FI’s advice to save, by making a connection to mobile and digital services, and, most important, by positioning the FI as the customer’s primary FI. Such features also can be acquisition tools that help FIs establish a reputation for helping young consumers establish and maintain healthy and easy financial habits that can last a lifetime. FIs will also be rewarded down the road with revenue opportunities. If all goes as planned, there will be an opportunity to start a conversation about how to put “idle” savings to work. That opens the door for a discussion about financial goals. That stash could be a down payment for a loan to buy a car or a house, or it could be the start of an investment program. And because the bank or credit union knows about this stash and the customer’s pay-themselves-first savings habit, now it has insight into the risk of making a loan. Nope, this ain’t old-fashioned PFM in a tab. And it’s about time.