It’s a widely held belief that hardly anyone under the age of 35 has much in the way of savings. A university education saddles the under-35s with huge student debts, while out-of-reach house prices make it impossible to save enough for a deposit. And why save into a pension when it’s unlikely you’ll ever be able to retire? Yet the truth is a little different. According to Charter Savings Bank, 18- to 34-year-olds saved more last year than any other age group.
What is true is that many younger people feel badly served by existing financial institutions. They don’t want to go to a branch, or even use clunky online banking tools on a laptop; they want to organise their lives and finances through their smartphones.
To serve this need, a whole crop of smartphone apps dedicated to getting younger people to save more is coming to market. All are free to use (they aim to make money by eventually offering a range of financial services such as utility switching and other products, and claiming an introduction fee; or by charging a management fee for more sophisticated investment products).
And all are being enthusiastically backed by investors. Folio was founded in 2015, boasts over 4,000 users, and is currently raising money on equity-crowdfunding site Crowdcube, with a target of £320,000. Chip has been around for a year or so now, and is available as an app on both Android and iOS. Oinky raised $1m in seed capital earlier this month. And Plum, which went live towards the end of last year, has just exceeded its crowdfunding round on Seedrs, hitting its £700,000 target in just five days.
The apps all work in remarkably similar ways, too. You link the app (or in the case of Plum, an AI bot working in Facebook Messenger) to your bank account and sign up for a direct debit or link your debit card. The app then pulls information on your spending habits from your account, and builds up a profile of your financial life.
Every few days an algorithm quietly siphons off money into an instant-access savings account. All but Oinky use Barclays (Oinky uses ING). In most cases, there is no interest payable, although in the case of Chip you can earn up to 5% by recommending friends – the interest rate rises by 1% for each friend you get to sign up. The idea is that, by saving small amounts regularly, you won’t even notice, but you will be steadily building up a tidy sum.
The big banks are dipping their toes in too. HSBC is trialling its Smartsave app, a virtual coppers-jar that will round up purchases to the nearest pound and move the change into your savings account. A “guilty pleasures” feature will put a small amount in your savings account every time you spend on pre-determined “guilty pleasures”. The advantage is that it allows you to save in any HSBC account, including an individual savings account (Isa), so you at least earn some interest.
For the more adventurous, Plum has partnered with peer-to-peer (P2P) lender RateSetter, claiming a return of 3% with instant access to your cash. Folio aims to roll out a similar partnership this year. One concern is that the target audience for these apps is individuals with no habit of saving, let alone investing.
While RateSetter is certainly very popular, it is by no means without risk – P2P platforms are still a relatively new way to invest, and almost none have been in existence long enough to see out an economic cycle. It won’t take a massive rise in loan defaults to test the provision funds and other emergency measures put in place by such lenders.
That said, the basic idea – automating your budget and savings – is a good one, and with the arrival of the EU’s second payments service directive (PSD2) in January 2018, traditional banks will have to allow fintech companies and others access to customers’ accounts. So expect to see more of these apps in the very near future – especially as traditional banks play catch-up.
From saving to investing
A variation on savings apps is Moneybox, a smartphone “micro-investment” app aimed at first-time investors. Connect a debit card and it will round up payments to the nearest pound and invest the sum in a mix of cash, global shares and property shares, depending on your appetite for risk. Investors can choose one of three portfolios: cautious, balanced and adventurous.
All three portfolios use different weightings of the same funds: the Henderson Cash fund, the Vanguard Global Equities fund, and the BlackRock Global Property Securities fund. It takes just £1 to get started, but for it to be economical, you will need rather more than that: it charges £1 a month, plus a 0.45% platform fee and fund provider fees of between 0.22% and 0.24%.
In the news…
• The hype surrounding blockchain, cryptocurrencies and initial coin offerings (ICOs) continues, with $327m being raised through ICOs in the year to 9 June, according to CoinDesk. Many are issued on the smart-contract platform Ethereum, promising investors huge gains for backing the latest blockchain-enabled enterprise. One of the latest and more interesting is the “Useless Ethereum Token”, or UET.
Its creator is refreshingly transparent, billing it as “the world’s first 100% honest” ICO. “You’re going to give some random person on the internet money, and they’re going to take it and go buy stuff with it,” says the anonymous creator. “Probably electronics, to be honest. Maybe even a big-screen television.… (Seriously, don’t buy these tokens).” Despite these warnings, the ICO raised 310 ether, or $62,750, in just one week.
• Challenger bank Monzo released its annual report last week. It now has 240,000 customers using its pre-paid card, growing at a rate of 5% a week, with transaction volumes growing by 7% a week. Pre-tax losses widened considerably, however, rising to £7.9m in the 12 months to the end of February 2017, compared with £1.6m the previous year.
It is currently losing around £50 a year per customer on its pre-paid scheme – around 40% of that is attributable to international cash-machine usage outside the UK and EU, it says. As a result, Monzo will “explore ways to reduce this cost” – which could mean charges – but it “will not be a profit-making exercise”. The bank hopes to roll out its current account to customers later this year.