Smarty Pig LLC's most recent update not only speeds the process of moving money into its savings accounts, but also could hasten the day it needs a new, larger bank partner in the United States.
Smarty Pig offers high-yield online savings accounts coupled with social networking features. It is not a bank, but partners with one bank per country to keep the deposits and set the rate for those accounts.
In the United States, its partner is West Bancorp Inc., a West Des Moines company that also has a stake in Smarty Pig.
Though Smarty Pig, of Des Moines, is not actively looking for a new partner, it knows it will eventually outgrow West Bank and has developed a new payments system with that day in mind.
This payments system "allows us to plug-and-play very quickly into different banking partners," Mike Ferrari, a Smarty Pig co-founder, said in an interview.
Already this approach to technology helped Smarty Pig launch in Australia last year, where it partnered with New Zealand Banking Group Ltd.
"We saw some of that [benefit] when we launched into Australia in a very, very short amount of time," Ferrari said. "That certainly could never have been done had we been ingrained in lots of different legacy systems of banks and third-party providers."
Most recently, this strategy came into play as part of Smarty Pig's desire to reduce the time it takes to fund its accounts through the automated clearing house network. Using a system from PayPal Inc., a unit of eBay Inc., it took three days. But after developing in-house a new payments system to link Smarty Pig directly to its bank partner, it takes two days.
This was done by linking directly to West Bank, cutting out the middleman, as Ferrari said in a blog post Monday that announced the change to customers. West Bank handles its ACH payments through Fiserv Inc.
Ferrari said the reaction to the speed improvement has been strong, but varied since he posted news of the improvement over Twitter Inc.'s microblogging service.
"Half the people are saying this is the greatest thing in the world," he said, but "I'm just reading one that says … 'will real time happen in our lifetime???' "
Even though Smarty Pig accounts are meant for long-term savings — the average savings goal is set at four years — customers are sensitive to the time it takes to move money, Ferrari said. They know they could be earning more interest if the money moved even a day faster.
Doug Gulling, West Bank's chief financial officer, said that with the recent changes, Smarty Pig is now moving money as fast as it possibly can over the ACH network. "I think we've got it squeezed down as far as we can get it," he said.
Aside from the speed benefit, the new system for handling ACH transfers is also less expensive.
Smarty Pig's move to a larger bank partner is inevitable, he said, but there is no specific time frame or deposit threshold that would trigger such a move.
"We're a $1.5 billion bank in terms of assets and $1.2 billion in terms of deposits," Gulling said. "At some point in time, Smarty Pig will outgrow West Bank, and that's been known from the beginning."
When Smarty Pig finds a new bank partner, it will move its deposits there, but West Bank would likely retain its investment, Gulling said.
West Bank took an 18% stake in Smarty Pig when it launched last year, though that was diluted this summer with a new investment from McCombs Enterprises Inc.
Ferrari said that Smarty Pig has received calls from potential bank partners, so there is definite interest, even though he said he is not actively soliciting such inquiries.
One of the key features Smarty Pig would want in a bank partner is a large number of affinity relationships, which could enhance Smarty Pig's goal-oriented savings system, he said. Smarty Pig customers can use their savings to purchase gift cards, and Ferrari said he is interested in a new bank partner that could help his company expand the number of retailers whose cards it can offer.
Marc DeCastro, a research manager at IDC Financial Insights in Framingham, Mass., said any bank that partners with Smarty Pig wil need a specific strategy.
Because of Smarty Pig users' long-term savings goals and the high interest rates the accounts pay, West Bank has likened its accounts to certificates of deposit. DeCastro said, "banks aren't exactly knocking doors down to get CD deposits … they want to get core deposits."
Even so, Smarty Pig can be very effective to "appeal to a different generation than maybe your traditional bankers are going after," he said.
DeCastro likened Smarty Pig to components of PNC Financial Services Group Inc.'s Virtual Wallet, a product also aimed at Web-savvy consumers and that has been successful in attracting younger customers to PNC.
Indeed, younger consumers may be far more sensitive to money transfer times than older consumers who grew up expecting check float times, he said. Whereas shaving just one day off a multiday process might seem trivial to older consumers, it could be meaningful to younger consumers who grew up with different expectations, he said.
George Tubin, a senior research director at TowerGroup Inc., a Needham, Mass., independent research firm owned by MasterCard Inc., said a two-day transfer time is an improvement, but it may not be fast enough to the people who were most concerned about it.
"I think next-day would satisfy most people," he said, but the "expectation for everything on the Internet is: instantaneous. I click on it now, I buy it now, I have it now."
Tubin said there are many banks that would be interested in serving as Smarty Pig's partner.
"Right now, funding sources are hard to come by for financial institutions. … Smarty Pig is going to bring with it a wealth of deposits," he said.