How do you make money when your job is to help people save?
The savings app Qapital had its best day for new accounts since its 2015 launch this week, while Chime saw new-account openings jump 20% over what it typically does.
Those firms can thank fellow savings app Digit — and their own marketing teams — for some of the bump.
Digit announced earlier this week that it would soon begin charging its customers $2.99 a month for its service, which uses technology to spot opportunities to tuck away small amounts of cash for customers. Consumers have taken to social media to voice their disappointment and Qapital and Chime have joined the Twitter conversation by promising to never institute such fees.
Digit, which says it has helped people save $500 million so far, has described the decision to charge a fee as part of its maturation. As it eyed how to become a self-sustaining startup, it decided that it would rather charge a monthly fee than sell its customer data, peddle credit cards or take other steps.
The move speaks to a broader challenge for fintechs everywhere, and specifically ones focused on cash management versus lending where the business case is much more evident. Even the well-funded savings apps that are gaining traction with consumers have to determine a way to transition from rounds of venture funding into businesses that make money.
"It's interesting that they said they don't want to sell data or make money on referrals,” said one digital-banking executive, who asked not to be named.
“I think that's great,” the executive added. “In many ways they are doing what several other fintech startups will be forced to do: figure out how to become self-sustaining. By not being a bank — by not having multiple sources and products for revenue — it's a tougher path forward unless you find profitability early on.”
Several observers sympathized with the issue fintechs like Digit face in building profitable businesses. Still, many viewed Digit’s specific tactic as a major misstep.
“I’d say it is almost suicidal on the face of it to start charging for this tool,” said Mark Schwanhausser, director of omnichannel financial services at Javelin Strategy & Research, though he acknowledged the challenge that deposit-focused fintechs face. “I understand why the other guys are stepping up and saying we won’t charge you, but I’m sure they are praying like hell they come up with a way to make money.”
Chime, which has 300,000 accounts, largely makes its money via transaction fees when customers use their Chime debit card.
“Our business model is aligned with the consumers’ interests,” Chris Britt, Chime’s CEO, said in an interview. “We only make money, we only profit, when our users commit to using us.”
Qapital, which has 190,000 accounts, is ramping up toward a similar business model. It plans to release a checking account later this year, said CEO George Friedman.
“We are using the savings app as a go-to-market product to reach those people who need help putting away $2,000 to $5,000 to have some cushion,” Friedman said in an interview. Following the release of the checking product, “we’ll make money on interchange. We won’t charge you as a customer. We want to be aligned with you as a customer.”
Qapital is free and does not have any monthly charges. We want users to feel BETTER about their money, not TAKE their money. #Qapitalapp
— Qapital (@qapitalapp) April 11, 2017
Acorns, a savings app that moves the difference between the amount of a purchase and the nearest dollar into an investment account, charges $1 a month for its service. It boasts 1.7 million users. It declined to comment for this story.
Perhaps the heart of the issue is that people will be willing to pay for the assistance if they value it.
“Companies like Digit have solved a real problem in the lives of their customers and they need to find a way to get paid to solve that problem,” said Ryan Falvey, managing director of the Financial Solutions Lab, which is managed by the Center for Financial Services Innovation and supported by JPMorgan Chase. Digit was the 2015 winner of the lab’s annual competition; as a result, the lab owns a stake in the firm.
“If people are willing to pay for that help is the question,” Falvey said. “The details — how much? when? — the market will solve that.”
Bankers have an addiction to giving things away for free, said Jim Marous, co-publisher of The Financial Brand and a digital banking expert.
“Overall, I’m a proponent for charging for value. … Our industry just loves to give things away,” Marous said. “A lot of bankers will say, ‘Why should we charge for something when others are doing something for free?’ Well, people pay an ATM fee for the immediate access to cash, and I think the concept is valid for charging for a budgeting tool.”
Besides banking, tech at large has groomed people, particularly millennials who tend to be the target audience for savings apps, to expect free services.
“Millennials like free. Unless the product is that much more valuable, most people will just switch to a free option,” said Ramona Ortega, founder and chief executive of My Money My Future, a mission-driven financial tech company currently in its beta phase of testing.
Marous is not a fan of Digit’s approach. He said the company would have been better off using gamification in the fee structure. In other words, charging a fee but offering users incentives to avoid the fee by, say, hitting a savings goal or limiting withdrawals from their rainy-day funds in a given month.
“It was a good concept, but they could have implemented it better,” Marous said.
Digit’s goal “is to be as transparent as possible about pricing, so we don't want to create an obfuscated fees situation,” a company spokeswoman said in an email.
The spokeswoman declined multiple requests to make a Digit executive available for an interview. In the same email, she said the company is expecting some fallout.
“We're changing expectations for people, and that's painful,” she said. “We believe the way we're going about it is the right way to build an independent financial services company.”
The Digit savings app is charging a $2.99 monthly subscription fee in a couple months lol *deletes*
— Air Ric (@MisterEG3) April 11, 2017
Alongside the fee announcement, Digit also said it would pay savers 1% on their deposits, compared to the previous 0.2%. Several critics have pointed out that customers would need to save $3,600 a year in order for the interest rate boost to offset the monthly fee.
Several observers said the fallout could be significant. Still, others said there might be a better way to view the fallout. Essentially, it will separate the real users from the casual ones.
“It’s too early to say if they did it the right way,” said Alex Davidov, a vice president at Core Innovation Capital, a values-based venture firm. Core is not invested in Digit.
“They are certainly going to get a lot of churn and many will use that churn to say it was a bad decision, but I’d offer a more nuanced view,” Davidov added. “What if they are more valuable with half the users? … The result would be a user base that you can say dramatically values your product. There is no validation the other way.”
That’s Davidov’s optimistic opinion of what drove Digit’s decision. He said the cynic in him chalked the move up to Digit's effort to make itself a more attractive acquisition candidate.
Indeed, banks will likely pay more attention to what happens next for Digit. Many are beginning to look more closely at budgeting tools and the ability to charge a fee for it could be attractive to them. Or at least they should be watching what happens closely, Marous said.
Marous also cautioned that the other savings apps ought to be careful in promising to never charge fees.
Britt, however, doubled down.
“We’re never going to charge a monthly fee,” he said, but added that there could be other things that its customers would be willing to pay for.
Chime’s decision to join the conversation wasn’t a swipe against Digit, Britt said. Rather, the company saw people who were complaining about the juxtaposition of paying to help save.
“When we wake up, we are not trying to crush the other savings apps. We love all the innovation and we have tons of respect for Digit,” Britt said.
“We are very active on social media and we are watching how consumers are reacting to the fee change. … We were simply responding to people saying, ‘this stinks,’ ” he said.
Bummed about Digit's new monthly fee? Switch to Chime and enjoy 2x round up bonuses for 12 weeks. NO monthly fees. https://t.co/SQrof40s8q
— Chime (@Chime) April 12, 2017
Falvey said the reaction by the other savings apps to disheartened consumers was a major win for people who struggle to save and those who are focused on it, like CFSI.
“It’s unbelievable — there are companies competing to help people save. That’s really a good thing for the market,” Falvey said. “It’s a positive thing that fintech is evolving in a good direction; you have companies competing to improve the financial lives of their customers.”