Fintech seeks to help customers avoid overdrafts — with assist from a big bank

The savings app provider Digit on Tuesday unveiled an instant withdrawals feature that will let users move money from their Digit account to their bank account instantly. This can help them meet emergencies and avoid incurring overdraft fees and resorting to payday loans.

The move is significant for a few reasons.

• Digit's Ethan Bloch joins a panel discussing how neobanks and fintechs are rethinking financial services to help consumers, at Digital Banking 2019

One, it's a response to the backlash against overdraft fees among congressional lawmakers, consumer activists and consumers themselves. As the ranks of the working poor grow and the idea of having lower-income customers pay fees that subsidize free banking for higher-income customers with higher balances becomes less palatable, apps like Digit’s — which help people save each month, alert them when their balances are low, and now let them quickly transfer money from savings to checking as needed — are being heralded as useful ways to avoid overdraft fees.

Two, it’s an early, real-life use of the real-time payments service JPMorgan Chase has built based on The Clearing House’s RTP service. For those wondering what the early adopters are getting out of this new payment rail, the ability to support fintech clients is one answer.

“It’s been exciting working with Digit to help its customers improve their user experience by directly accessing the RTP network and receiving instant payments,” said Greg Kerwick, head of treasury services client solutioning and commercial banking at JPMorgan. The bank is providing real-time payments this way to other customers including PayPal, which now lets customers quickly transfer funds from a PayPal account to a bank account. JPMorgan is investing more than $11 billion on technology this year, Kerwick said.

Third, Digit is an example of a fintech identifying a true need consumers have and meeting it with small innovations, leapfrogging traditional banks that cling to old business models. Huntington Bank offers a 24-hour grace period on overdrafts, and some banks say they are taking steps to minimize overdraft penalties. Still, those fees are a major revenue generator. Banks with assets of more than $1 billion collected $11.5 billion in overdraft fees in 2018, the Federal Deposit Insurance Corp. says. Moreover, in the previous year, overdraft fees accounted for at least 30% of service charge income at seven of the eight largest banks, the Center for Responsible Lending said in a report last August.

Digit has offered the ability to transfer funds from its savings account to a checking account all along. But in the past, they were dependent on the automated clearing house. Though Nacha rules have imposed same-day clearing on many banks, often ACH transactions do not clear for several days — for instance, if they are initiated just before a weekend.

“The weekend is a pretty big pain point for ACH,” said Ethan Bloch, CEO of Digit. “If our customer comes in on a Friday afternoon and knows they have something going on this weekend, they're not going to get the money until Monday or Tuesday with the way ACH clears. So that's a big customer pain and one of the biggest requests we've had generally around speeding up the time of withdrawal for the people who really need the money when they need it.”

Under the instant withdrawal feature, the funds will be moved within 30 seconds. Digit will charge customers 99 cents per transaction. (Its overall service — including the app and account with the automated savings and other features — costs $2.99 per month.)

What Digit is doing is a partial answer to the overdrafts incurred by people who live paycheck to paycheck, Bloch said.

“The more nuanced answer is, it is a complex cash flow problem,” he said.

Digit helps people set aside money over the course of each month. If they have accumulated savings for a few months and a car or medical expense suddenly comes up, they can draw on that stash to cover it. Digit has offered that kind of savings help for four years.

The average customer saves over $2,500 a year with Digit, Bloch said. The ability to access that cash quickly will start to help in the event of emergencies.

“It's not going to solve it,” Bloch said. “It's such a complex, hard problem, but it will help.”

Digit also offers low-balance protection. This feature monitors a customer’s checking account, and if it gets to an unsafe level, say less than $100, it will automatically move money from Digit into checking via the ACH.

“The intention is to preempt you going negative,” Bloch said. “About a third of our customers turn this on in their first week on Digit.”

Once the instant transfer feature has been “battle tested” and appears to be working well at scale, Bloch said, Digit might connect instant transfers to low-balance protection; so if a customer runs dangerously low on funds, a fast infusion of cash could take place automatically.

Bloch said Digit is adding users at its fastest rate ever but declined to share any numbers. The app has 103,000 ratings in the Apple app store that average 4.8 stars.