Even: Friend or Foe

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Can you find financial stability in an app? Even, an alternative to payday loans, thinks you can. The application provides a money management tool for those with low or fluctuating incomes.

THE GOOD:
Jon Schlossberg, Even’s CEO, believes it is expensive to be poor. His company started on the basis of wanting to help those in poverty from being tricked into further debt from unfair fees and high interest rates. According to Schlossberg’s blog, over $100 billion is spent annually on items such as payday loans, overdraft fees, low balance fees and late bill fees—and the average working class American spends 10 percent to 20 percent of his or her salary on these items. Premised on the idea that you get “extra money when your pay is low, interest-free” and “intelligent savings when your pay is high,” this tool should immediately appeal to low-income workers or those who find it difficult to manage their money through peaks and valleys.

THE BAD:
The industry that Even seeks to disrupt is worth $100 billion a year—no small amount of revenue displaced. While many charges such as overdraft fees that consumers pay could be unreasonable, we are willing to bet there are many customers whose spending patterns are routinely careless. Even is basically providing interest-free loans in exchange for $3 per week. For Even’s sake, we hope there is some accountability forced upon its customers to ensure quality spending behaviors, and a safety net catch for multiple offenders. For a customer without a guilty conscience, $3 per week may be worth the price to overspend, and for Even, this could be a business model killer.

OUR VERDICT: FRIEND
Even has set out to be a “different” kind of bank…but the catch is, it’s not really a bank, by traditional terms. Although customers’ savings are insured by the Federal Deposit Insurance Corp., Even itself is not a bank; rather, it’s a partner to banks. While Even may not add significant financial reward to your institution, its contribution to a healthier consumer (and economy overall) should appeal to digitally savvy consumers that want to be part of a more financially stable population.

Max My Interest: Friend or Foe

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Max My Interest, or Max for short, offers a cash management app that enables individuals and businesses to earn additional interest on their checking and savings accounts. The advantage for consumers? Max does automatically what most people are too busy (or lazy) to do for themselves, which is to shop around for the best rate.

Customers do not have to change banks to use Max. They simply link the app to their current bank and create savings accounts at other institutions through the setup process. From there, Max automatically transfers funds as market rates change, always ensuring that the cash in their accounts is earning the maximum yield. Max charges 0.02 percent per quarter on the cash being optimized, for a total of 0.08 percent per year

THE GOOD:
In theory, this sounds great. Max allows users to save smartly and earn a higher rate of interest on cash deposits with minimal effort. Max works directly with the largest institutions, including the likes of Bank of America, Wells Fargo and Citigroup, and uses an algorithm that transfers money between banks automatically. Since Max only utilizes other banks’ savings accounts, customer funds are FDIC insured despite the fact that Max itself is not a bank.

According to the website, the average customer earns 0.70 percent to 0.90 percent more with Max than they do at traditional brick-and-mortar banks, which can be significant–particularly for high net worth clients, who Max estimates keep nearly a quarter of their portfolio in cash. In addition to individual accounts, Max offers services to wealth management professionals, and to businesses.

THE BAD:
Signing up isn’t exactly as easy as 1-2-3. A new user must create multiple savings accounts, one for each bank it wants to be able to transfer funds to, which is time consuming—although once that has been done, everything happens automatically thereafter. We are also leery of products that require the user to give a third party access to their existing bank account because that increases their security risk.

OUR VERDICT: FOE
This is a tough call. Although Max could be considered a potential friend for big banks or banks with high savings account rates, what it comes down to is this: Do they really want aggressive rate shoppers who are always chasing the highest possible yield, which is what Max will bring them. And if you do happen to be a bank that pays out a higher rate, don’t you still want a relationship with the consumer that includes more than just their deposits? If so, partnering with Max may not be the best way to maximize your interest.

Digit: Friend or Foe

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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.

The Good:
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 Bad:
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.

Our Verdict:
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.

SoFi: Friend or Foe

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At first an online alternative for student loan refinancing–but now moving into consumer lending and mortgages–SoFi has been making waves in the fintech industry. The company even ran a commercial during the Super Bowl, which could be taken as a sign that its has big ambitions.

The Good:
SoFi CEO Mike Cagney (who sneakily once worked at megabank Wells Fargo & Co.) has declared that “Our average borrowers are around 32 years old, they’ve got a 780 FICO, they make a $150K a year pre-bonus, over $5,000 a month of free cash flow.” As you can imagine, this make SoFi’s customers very desirable—and it also makes SoFi very attractive to investors, including banks and other large players that want to buy their loans.

For consumers, the rate that SoFi charges for loans is much cheaper than most traditional banks, and it doesn’t charge an origination fee like other website lenders such as Lending Club. And unlike a traditional bank you can apply online. In addition to the loan itself, SoFi also provides career counseling, wealth management services and even social events. It offers help if you are laid off, and says it wants to “be there” for their customers in time of need.

The Bad:
For a bank, it should be noted that Cagney has been very outspoken about his desire to lure consumers away from their banks, and if numbers speak the truth, the fact that they have funded over $2.5 billion in loans up through April of this year certainly shows some solid traction in the marketplace Cagney has said that he hopes to have his customers only rely on SoFi in the future, not just “in addition to” their primary institution. It is rumored that SoFi is looking at expanding into direct deposits and more, but it is important to note that these will not be backed by the FDIC, nor will they use deposits to fund their loans.

As of May 4, SoFi also announced that its subsidiary, SoFi Lending Corp also became an approved service/seller by Fannie Mae in the mortgage industry. This is just another step into the millennial market, as they offer greater speed and convenience throughout the entire process.

Our Verdict: Foe
As SoFi is starting to operate in other areas of lending, banks should certainly be taking note. If a fintech company can create a bond with millennial consumers at the beginning of their financial lives—such as when refinancing their student loans or buying their first home–the goodwill will certainly carry over. It’s not just that banks risk losing millennial customers to fintechs like SoFi—they might never get them in the first place.

Venmo: Friend or Foe

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Venmo, a P2P leader that focuses on the millennial market, processed over $7.5 billion in transactions in 2015, and over $1billion in January 2016 alone. Now owned by PayPal, Venmo may not be a direct threat to banks, but it’s certainly worth paying attention to. Let’s dig in a little deeper_

The Good:
Venmo is a great example of the ease and convenience that consumers are looking for when it comes to payments. With the ability to connect by Facebook, phone number or email, anyone is able to transfer money within seconds once they have registered. Not only that, but users can insert emojis and comments for their friends to see. CEO Dan Schulman says that this social feature is what keeps the typical user visiting the app between four and five times a week without any intention of transferring payment. The opportunity for users to see what their friends are up to, not to mention the ability to pay anyone in their contacts or social circles with a process that’s both free and easy–now that’s any millennial’s dream.

Perhaps these social and convenience factors are two attributes banks should look at from an emulation standpoint.

The Bad:
Uncertain about the demand and worried about the costs, banks have been slow to add P2P payment to their consumer products arsenal. If Venmo is indeed making significant progress in providing payments for their customers, this poses a serious threat to their growth and profitability. Give the recent partnerships announced with companies such as Papa Johns and HBO, and Pay With Venmo–a new retail payments program rolling out just now thanks to PayPal—banks have a real problem on their hands as the fees they are used to receiving on credit and debit card transactions could soon be funneled right into Venmo’s pockets, leaving traditional FI’s out to dry.

Venmo has had its share of critics and bad press–and just recently it was announced that the Federal Trade Commission is investigating it for “deceptive or unfair practices,” so stay tuned.

Our Verdict: Foe
Any brand that customers choose to trust their money with over a bank is quite simply a threat to the traditional bank model. How should banks respond? Payveris or Popmoney, offered by Fiserv—a large provider of core processing services to the banking industry–are two examples of fintech solutions that offer up the same consumer proposition. But if banks really want to compete in this market–and not to be reduced to the dumb pipe that transactions flow through, they better act quick and work hard on promoting this feature to their audience. Loyalty is something earned–and right now, Venmo is doing just that. It’s time for banks to catch up!