The power of microsavings: taking the effort out of saving
Over the past year we have seen new players join the savings market. More recently, these market challengers caught our eye in our latest Savings Dashboard. Their main feature: automated microsavings.
The issue of saving
Saving money is important. This view has been ingrained in us since childhood, when our parents gave us a piggy banks to help us save for something we really wanted. The hope was that we would adopt this habit when we grew up. And, in theory, saving up before buying makes perfect sense. But in reality this is rarely the case.
Of course, this is not a completely sustainable theory. If we had to save up the full amount for every purchase, most people would have to wait until old age to buy a house or a car. In fact, some might never be able to afford to buy a house or a car because of unexpected costs popping up along the way. But while saving up for a house is not always a viable option, saving up for unexpected costs should be. Despite this, 9.61 million households in the UK have no money saved up.
The problem is if you don’t have any savings and – like most – have some form of debt, how can you afford to save whilst paying off that debt?
Incentivising keen savers
In an attempt to promote saving, the UK government introduced a new policy earlier this year – the tax-free personal savings allowance (PSA). This means that basic rate taxpayers can earn up to £1,000 in savings income and higher rate taxpayers can receive £500 without incurring any tax. Additional rate tax payers are not eligible.
Prior to the launch of the new policy, it was anticipated that 95% of taxpayers would not have to pay any tax on their savings income. An example was given of a basic rate taxpayer. With a 2% interest rate on a non-ISA account, they would need around £50,000 in savings before they had to pay any tax on the interest.
What about people without savings?
This policy rewards people who already save regularly. However, for those who have little to no savings, gaining any significant return from their savings will seem far away. What’s even more discouraging is that UK banks have continued to lower their interest rates: Nationwide, NS&I and Santander, to mention a few.
Using automated micro-savers
Some providers have spotted this as an opportunity to grab a share of the market, by targeting those with little or no savings. Our latest update of the Savings Dashboard noted the arrival of a new micro-savings player in the UK, Plum. Somewhat unconventionally, the software doesn’t have an app. All regular communications are conducted over SMS.
The technology looks at regular income and expenses, available balance and daily spend. Every day, it monitors these factors and then, every few days, it “automagically” transfers small amounts of money from your current account to your Plum savings account. The savings amount is always adjusted to your spending habits, Plum reviews and recalculates them daily.
In addition, Plum has employed the same clever queuing system for people waiting for an account that our favourite pre-paid card, Monzo, did.
There are of course plenty of other microsavings players worldwide: Digit in the US, or Savedroid in Germany. Some have been added to existing banking propositions: Bank of America’s Keep the Change program, which rounds up each payment to the closest dollar, transferring the difference to a savings account.
The idea at the heart of the concept is giving people the ability to save a little at a time without even noticing – and in a way that won’t have a significant impact on their spending habits.
Though more and more banks are introducing features such as savings goals and money management features, many of these focus mainly on communicating progress – giving a financial overview as you log in to the app or reminding you of how much you have saved and how close (or far) you are from reaching your savings goal.
Our analysts at Mapa advocate these as a useful and potentially motivational tool for those who like a challenge and the ability to track progress towards a goal. But for first-time savers, while their amounts are still small, progress may seem frustratingly slow.
Automated microsavers combine regular balance and savings updates with engendering a seamless easy savings habit that gets people started along the savings path, with minimal impact on their ability to spend as they wish.
With a potential market of 9.61 million households in the UK alone, it is easy to see why new players are challenging the traditional approaches to saving money. Perhaps it’s just me, but the concept of saving money without noticing sounds very appealing.