Despite net zero outflows, banks should closely watch the impact that micro-savings firms have on their financial statements.
There are a number of fintech firms chasing bank customers with innovative features, all aiming to disintermediate customers from their financial institution. Scores of new and established companies in the savings and wealth fintech sectors offer services across three areas: micro-savings, micro-investing and macro-investing. The leading players in these three areas combined are responsible for net annual outflows of about 5% from retail banking accounts.
Micro-savings firms, like Digit and Qapital, use algorithms to automatically transfer small amounts of money out of banks and into goal-based savings accounts. Micro-investing firms, like Robinhood, Stash, and Acorns, also move small amounts from bank accounts into low cost, self-directed or automated brokerage accounts. The final group, macro-investing, includes mature robo-advisory firms like Betterment and Wealthfront, as well as more established firms like Vanguard, Fidelity, and Charles Schwab, whose efforts in technical automation allow them to offer services with zero-dollar starting balances.
The lion’s share of net outflows from bank accounts — about 75%, by our calculations — go to the macro-investment firms; the remaining 25% is directed to micro-investing firms. Given that these are net outflows from the bank, one can assume that the money isn’t coming back anytime soon.
What about the micro-savings firms? If the micro and macro-investment companies consume 100% of net outflows, why do the net outflows for micro-savings total zero? The same amount that is going out is evidentially coming back. If that’s the case, are these companies even worth worrying about?
Net outflows to the microsavings firms are zero almost by design: when people finish saving for whatever it was that they were saving for, the micro-savings fintechs don’t have an easy way to fulfill the actual goal.
Most bank customers already hold a debit card from their existing bank, and most micro-savings firms don’t offer a debit or prepaid card as a vehicle to spend the saved sum. Even if it is offered by the fintech, there’s no guarantee that consumers will opt-in for yet another new card product.
It’s also incredibly easy for customers to transfer the amount out of their micro-savings account back to their bank. If it wasn’t extremely simple for customers to transfer money back to their bank, micro-savings firms could find it very difficult to attract new customers.
But banks should still worry about these companies, even if there is ultimately zero net outflow.
Consider the typical distribution of funds for a micro-savings customer. Say a bank customer named Jen opens a micro-savings account to save for a $1,000 bike. Every month, she moves $100 from her traditional checking account to the micro-savings account outside of her bank. At the end of 10 months — after she has transferred a total of $1,000 from her bank — Jen moves the money back to her bank in order to buy the bike.
Over those 10 months, the micro-savings firm held the slowly building $1,000, earning whatever interest and fees they could. The bank earned nothing. If Jen kept the returned $1,000 in her bank account for a month before she purchased the bike, the bank would have earned only about 15% of the potential net interest margin they could have earned if they held the total deposits for the entire eleven months.
Even though there were zero net outflows for the bank — since $1,000 did a roundtrip from the bank to the fintech and then back again — the impact to its net interest margin was significant. This is the key threat banks face from direct-to-consumer micro-savings firms.
It’s not enough for your bank to only think about the tools you’ll use to combat the micro and macro-investing fintechs as you craft its digital savings and wealth strategies — such as your robo-advice offerings. Those offerings are important, given the large outflows to competitive fintechs.
However, goals-based micro-savings companies are growing as a direct-to-consumer offering. Even with today’s zero net outflows — which could change in the future — their impact on bank net interest margins is significant and worth your attention.