Saving vs. Spending: The Opportunities for FinTech Startups

An atomic blast is happening in retail banking where technology is helping people to take care of their personal finances in a painless way (e.g.: setting household budgets, controlling daily expenses, providing tips on savings, etc.). Nonetheless, lots of articles seem to be blaming people for their bad spending habits and inability to save money. That being the case for some part of the consumers around the world, there is also an explanation to why people fail to save as much as they plan/want. And technology, I believe, can become a ubiquitous solution to this issue.

Save in a painless way or Save without painful budget cuts have become frequently circulated phrases. Lots of FinTech startups are entering this space to help their customers save money (e.g. only one US-based startup helped its customers save $0.5 billion during the past three years – Digit). What are the preconditions for these trends and why is this space luring FinTech startups?

People are keen to spend

Sometimes, people tend to end up with choices that create expenses instead of encouraging savings. Imagine you are in a clothing store and there is a jacket worth $100. The next day you see the same jacket with a 70% discount tag, and the first thing you think about is that if you buy it right now, you will save $70. The reality is, however, that with this purchase, you will actually spend $30.

Researchers are just beginning to understand why people are keen to spend; 1 out of 4 adults admit they overspend regularly. The answers seem to lie in psychological impulses and blind spots that are tough for people to recognize, let alone analyze and make decisions towards better managing their expenses. This is how people make irrational decisions – it turns out that 57% of shoppers end up shelling out more cash than they’d planned.

Behavioral finance: Why do people make irrational choices?

Behavioral finance is a new area of study which combines behavioral and psychological theories to provide explanations as to why people make irrational decisions. Everywhere, the economy is making people spend every day. In public transport, on TV and radio – there are always ads and nice CTAs to make you spend. About 76% of the average shopper’s spending decisions are made in store aisles.

Simple budgeting allows customers to understand and evaluate their savings opportunities. But in most cases, they just delay saving money or simply forget to do so because there is no wide range of CTAs to encourage saving.

Banks are not always on the same page with their customers when it comes to fulfilling personal goals

The banking industry is hardly willing to change due to regulatory and other issues. On the other hand, customer requirements are changing. Customers want more personalized products and faster, easily accessible services. Banks, however, are not always up to the task. What makes it even more difficult for banks is that modern consumers are not willing to give a second chance, and, often, even don't see eye-to-eye with their banks.

In fact, 1,191 million banking interactions are made on mobile, compared to 278 million branch visits in 2016, according to data by CACI. This is predicted to rise to 3,464 million in 2021, while branch visits will fall to 185 million.

Image source: Say hello to the Robo-bankers: how AI is affecting banking and finance

Customers want easier ways to save, and also tools to help them save in this digital era. The phrase to help them save is very important here. Banking is more of a transactional business – banks focus on doing more transactions per certain time and increasing the volume of transactions. This is one of the main reasons why most banks are not providing personalized and mobile-first saving services to their customers.

In banking, there are no second chances, especially when it comes to millennials

Millennials are going to be the largest adult segment by the end of the decade (83 million, which is more than 25% of US population). Millennials are mostly in the state of creating wealth and will own more than $10 trillion by 2030. Traditional institutions do not tailor their messages to millennials. Millennials, however, have their unique way of looking at money and savings, as well as at reaching their goals and values. Millennials would save money to spend it on experiences (travel, learning new languages, etc.) rather than for retirement. They don’t save for the long term as they prefer personal goals over financial goals. 2 out of 5 millennials are not saving for retirement.

Millennials love digital solutions

My dad saw a smartphone in action when he was 50 years old, I saw a smartphone when I was 23 years old… Oh, and my kid saw a smartphone when I took him from maternity care to home. Millennials source information differently, mostly through mobile and other digital platforms. So banks need to follow these trends.

Millennials hardly use traditional banking services just because they are convenient or secure. They would use something that provides value, whether it is a saving solution or a payment solution or something else. Here are some key areas which are important from value standpoint of the financial services:

  • Personalization of services
  • Accessibility of services anywhere, anytime
  • Reduced time per each banking or insurance transaction
But these are very challenging for traditional financial institutions to overcome.

In cases when a blast of information forces irrational spending decisions that are not sustainable in the long term, technology is the solution to remind and even to insist on making the right choice sometimes – to SAVE as opposed to OVERSPEND. To reach that goal, startups need to build mobile-first and consumer-centric tools for users to save. That’s where companies are emerging to help people – millennials, in particular – to save easily, to reach personal and financial goals, resulting in long-term resilience and opportunities.