With the start of each new year, resolutions & goals are made — get in shape, eat less junk food, read more, learn a new language, call your parents … you get the picture. For some, the focus for 2022 is to improve their financial health. This hits differently based on the person — lowering debt (from credit cards and/or loans), or building long-term wealth (through 401K, IRAs, annuities, etc.) are both heavy commitments.

The lack of financial habits education from an early age (via family and/or school) puts many at a disadvantage. For families living paycheck-to-paycheck and struggling financially, its difficult to be a strong example for the next generation.

National and local non-profit organizations (such as SaverLife, Khan Academy) address these issues head-on with educational and assistance programs in the last decade. Financial institutions are also stepping up to share insights of their clients towards improving money habits. Despite these efforts, there’s still a gap with underserved consumers building a savings pool from $0.

BANKS MISSING THE MARK

In the aftermath of the Financial Crisis (2008-2009), big banks were under fire for poor operating practices and the economic downturn. The amount of bank fee revenue generated annually (from monthly servicing, overdrafts, minimum balance, and late fees) was no longer tolerated. Financial institutions were winning at the expense of their customers. Both government officials and the general public filed complaints. Numerous customers of big banks emptied accounts and looked for alternative banking options.

The initial wave of fintech aimed to capture this migrating market share by offering no-fee banking relationships. These first-generation neobanks & challenger banks operated without physical branches, leveraging the latest financial technology to open checking accounts digitally and service clients remotely. Cost and user experience were the early drivers of user growth in online-only banking platforms.

How about first gen savings accounts?

The fintech savings account on its own wasn’t a compelling product. ING saw short-term success by offering a high APY, but only until rates started falling. Fintech platforms could no longer rely on digitizing the same product at a lower cost — instead they opted for an innovative spin on savings products from the past.

What’s Old is New again

There are two savings programs that have been revitalized by FinTech in the last 5 years: Prize-linked Savings (PLS) and Rotational Savings (aka ROSCA).

Prize-LINKED SAVINGS

The earliest form of PLS goes back to 1694 in the UK as a way to repay military debt. For banks and individuals in the US, prize-linked savings have for about a decade.

PLS programs provide entries into drawings for cash bonuses (‘prizes’), based on deposits (i.e. 1 entry for every $25). Winnings are paid out into the customer’s savings account. There’s no cost to enter and the deposit balances aren’t at risk of losing value. For households that enjoy playing the lottery, these programs offer a similar ‘feel’ while growing savings.

Some of the popular PLS platforms include:

• Save to Win: The original PLSA (and nation’s largest program) is available in 22 states via credit unions. Each entry is $25 (capped at 10 per month for each customer) and prizes earned range between $25 - $5,000 on a monthly or quarterly basis;

• WINCentive: A program available in 9 states offers prizes (monthly, quarterly, and annually) with each entry of $25 (capped at 4 per month);

• Prize Pool: a new program created by a FinTech company in which entries are $1 each per day in the month (e.g. $100 kept in a month equals 3K entries) with no caps in the number of entries; up to $50K is available for winnings monthly;

• Yotta Savings: another FinTech program with over 350K users competing for $10M; $4M has been awarded since the company launched. Yotta also added debit and credit products to their core offering.

Even with an innovative approach, there are drawbacks to PLS:

• Low monthly interest: the interest rate can be lower than comparable bank offerings. With rates projected to increase in the next 12-18 months, PLS may not be a worthwhile option.

• Prizes are random: Similar to the lottery, participants have no direct control or clear notion of when or how much they may win. Customers can’t predict winnings into their financial goals for the year.

• Lack of immediate access to savings: Some programs come with delayed access to balances. With standard bank savings, funds can be transferred at any time (usually to a checking account at the same institution). Customers usually have a standalone PLS account, which would require an external bank transfer request (with 1 - 3 business days to process and settle).

As more states and financial institutions increase their comfort level, new offerings and sweepstakes programs will continue rolling out.

ROTATIng SAVINGS AND CREDIT ASSOCIATION (ROSCA)

A rotational savings account is the modern-day version of a savings club, in which a group of individuals each pay an equal, fixed amount in installments over a specified term. Each member gets one (rotating) opportunity during this term to receive the sum of the group’s payments. The order of which members receives the pooled amount is typically random. There is no interest paid/accrued or fees charged to be part of group.

The history of this savings program dates back to 200 B.C. in China, but is common to many cultures globally in Latin America (known as tandas), Africa (susus), and Muslim countries. In developing economies that lack a a banking or credit system, rotational savings filled financial gaps especially for emergency or large expenses. For those with lower income, this social structure was an opportunity to stabilize their finances.

The common theme for each group is a social, family, ethnic connection — every member knows one another. To miss a payment would cause distrust and reputational damage. The longer the installment term or more members that were unfamiliar, the higher the risk. No legal recourse or collections practice exist in ROSCAs.

FinTech platforms took aim at innovating on this classic model, but lacked the similar traction and success that came with prize-linked savings. Tanda, eMoneyPool, and Twine launched apps as early as 2018, but are no longer operational. The only one from this initial cohort still going is Esusu, who offers an individual savings account in addition to the group option. Their differentiator is that participation in the rotational savings program can boost individual credit scores (as payment history is reported to the credit bureaus).

The downsides of ROSCAs that made them a difficult product to scale (even with FinTech):

• Default by members: there’s no way to guarantee each payment being on time for the duration of the term; a member that scores the first pick for the group pool can decide to no longer participate right after — a loss for all other participants;

• Lack of financial growth: there are no added benefits (besides savings) from participating in ROSCAs; completing a rotation doesn’t provide rewards or new products for members of the group. (Esusu addresses this by reporting activity to credit bureaus;)

• Program lacks monetization: this is the main reason why banks didn’t offer a similar product type; no management or membership fees are charged as target users come from a lower socio-economic status (who avoided banks and fees);

The challenge in replicating the ‘honor system’ in a FinTech version of ROSCAs proved extremely difficult. Many startups are still optimistic in designing a stable offering that deters bad actors, builds strong savings habits, and generates revenue. Without an established community of trusted users and other incentives rewarding the right behavior, there doesn’t seem to be a sustainable path forward.

A NEW ENTRANT in THE FIELD

The latest option for building savings month-over-month?

Cryptocurrency. Not the high flying tokens that get all the headlines (e.g. BTC, ETH), but stablecoins. The name comes from the value of the coin staying fixed. Popular options are pegged to a fiat currency (i.e. USDC is pegged 1:1 to USD).

Through Decentralized Finance (DeFi) and Centralized Finance (CeFi), these stablecoins provide a yield up to 8% APY — higher than fiat deposits sitting in an FDIC-insured bank account (paying 0.20%). USDC (used in CeFi) and DAI are popular stablecoin options that provide these returns simply by holding crypto in a wallet. The funds aren’t currently eligible for FDIC or SIPC insurance, but many platforms provide a guarantee.

Some of the firms with these products are Dharma, Argent, and PoolTogether. Other brand name platforms have started to offer their version for crypto deposits yields, such as Coinbase and BlockFi.

Like other areas in the cryptocurrency sector, there’s no accepted framework for DeFi and CeFi. Government agencies in the US overlap in terms of jurisdiction and responsibility, which makes it difficult to find concrete regulatory guidance.

LONG-TERM FOCUS: SAVINGS AS A HABIT

Overall, the actual product being used for savings should matter less than making progress towards the right outcome. Helping individuals increase the amount left over from each paycheck (after covering essential costs) is the first critical step. Making sure this extra income available to save makes it into a separate account (where it doesn’t get spent) is the second step.

For fintechs to overcome the savings challenge, platforms will need to combine behavior & product structure strategies. Budgeting, financial goal setting, multiple account options — all areas need to be customized to the individual. Specific rules and progress reports would also help platforms iterate on what to improve for their users. The next gen savings fintech will be a mix of community-driven org and tech powerhouse.

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