In the world of fintech, Ethan Bloch, CEO of the personal savings website Digit, has the three of the four important keys to success. He has the experience of creating a successful company, Flowtown, and selling it to a scale player, Intuit. He has brand name investors: General Catalyst and Google, among others, and they have given him enough capital to have a decent runway to grow the company. And he has what many fintech start ups do not—real live customers. In the last few months Digit has been adding 20 million dollars a month into Digit accounts. It is easy to see why everyone is eager to invest. What he does not appear to have 100 percent nailed down at this moment is a business model for his automated algorithm-based savings fintech.
Bloch made a bet that he could make savings painless and almost fun. The market is full of planning tools that are hard to use or do nothing to help a consumer actually save. Digit is the opposite. A customer signs up, gives Digit their login and password to their bank checking account and the firm’s algorithm watches the account and identifies the cash flow of the account. It times withdrawals that the customer won’t miss, and then places the excess money in their Digit account.
This may sound like a traditional micro saving program such as “Keep the Change,” but there are several features that differentiate Digit’s platform from that model. For starters, it’s all centered on text communications. Also, consumers don’t have to set a specific amount to set aside to save, and that they can access their savings or withdraw at any time. Digit savings accounts are FDIC insured up to $250,000. The best part: It’s absolutely free, and it intends to stay that way. This is certainly a convenient and helpful feature for consumers as the amounts deposited into these accounts can be significant for high earners, and it can help create crucial rainy day funds that all consumers will appreciate later.
The immediate worry is that Digit’s app is a consumer data security risk. Digit says that account data is anonymized, encrypted and secure. This is probably not the place to try to settle the bank/fintech divide on data access and protection, but it is certainly a major concern.
The large number of deposits starting to build in Digit accounts are not rewarding consumers with interest. There is a very modest rewards program, 5 cents on every $100 saved–but it is certainly a long way away from compounding interest. Imagine a bank offering what amounts to a .0005 interest rate.
Digit is currently able to make money by earning interest on its deposits. While this may be an attractive vehicle for millennials’ convenience-and-mobility needs, it is not an investment account. For banks, it’s taking consumers money away from traditional institutions. Anytime one of your customers is depositing money, it should be with your bank—not a third party account.
Foe. Bloch says Digit will remain independent. Some big scale player will potentially want to buy the the firm, and if that happens all banks may need this kind of automated savings feature. The problem for banks is that Digit is draining deposits from banks and creating avid fans. If it expands into wealth management or other financial services, Digit could become a real competitor to a bank’s core business.