How Micro Investing Apps Are Evolving
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They say that the only way an alcoholic can cure their condition is to decide that they want to stop drinking. The same can be said for any sort of addiction that you want to kick, though there are some exceptions. Instead of trying to convince the more than 30% of obese Americans that big isn’t beautiful, we can just trick them into losing weight by creating a low-calorie sweetener and substituting it for sugar in ready-made foods. Lose weight without having to change your habits. So why not help people save money without changing their habits? That’s precisely the idea behind the latest craze called micro investing.
What’s Micro Investing?
As defined by Investopedia, a micro-investing platform is an application that allows users to regularly save small sums of money. You’ve probably heard the phrase “to be nickled and dimed to death” but in this case we’re talking about being nickled and dimed to a better life in the future. That’s exactly what micro investing is about. It’s an app that sits there and skims off the top of your spending in order to slowly save money for you over time. It figures out the optimal time to contribute funds to your savings account and then skims off the top during everyday transactions. When the cashier asks you if you want to “round up for charity,” don’t. Just use a micro-investing app and round up for the person that matters most in your life. You.
Micro Investing vs. Recurring Payments
Some people confuse the ability to make small recurring payments from a checking account into a savings account as micro investing. That’s not some great fintech innovation, it’s been around for years. We also saw a number of cases where the ability to purchase shares in fractional amounts is referred to as “micro investing” because the term fits. Again, nothing groundbreaking there. A proper micro-investing app is one that pulls the trigger on when and how much you should save at variable intervals as opposed to fixed intervals. This is a form of predictive analytics and shows some level of innovation in getting people to save without knowing they’re doing it. If it also includes the ability to set up recurring payments, all the better.
Micro-Investing Apps: The Business Model
Micro investing doesn’t just help you save money, it also helps other companies make money. The ability to track all your expenditures in real-time is every marketing ninja’s wet dream. The value of this data is self-evident by the volume of venture capital money that’s being thrown at micro investing right now in order to land-grab as much big data as possible. But your transaction data isn’t the only thing that’s lucrative. There are other revenue streams in the micro-investing business model:
- Fees you get charged – usually $1 a month or something trivial like that – but it adds up
- Fees from managing your money – this is why robo advisors have done so well
- Fees from selling you financial products or commissions from selling those of others
The evolution of the micro-investing business model probably went something like this:
- Let’s get the customer to connect their bank account to our app then sell their data
- The customer will get pissed off if we sell their data, so let’s use it to sell them other people’s financial products and take a commission
- Let’s stop taking a small piece of the pie and just create our own products to sell the customer
That last bullet point seems to be where we are at today with micro investing. The two biggest micro-investing apps out there are evolving from simple apps to full-service banking platforms. Let’s take a closer look at each one.
Stash Your Cash
Founded in 2015, New Yawk startup Stash has taken in just over $181 million in funding to develop a “digital investment platform” that has helped more than 3 million people save money. Around a third of that funding came in the form of a $65 million Series E that closed just a week ago. Their app helps you save using a number of ways like setting a schedule of recurring payments, the aforementioned “roundups,” and also some algorithms that figure out your earning patterns over time and set aside money as they see fit.
Last year, Stash partnered with Green Dot Bank to offer bank accounts with debit cards, no overdraft fees, and a large network of free ATMs nationwide. Stash’s stated plan is to “provide personal guidance across every aspect of a client’s finances – from spending to saving, to retirement and investing.” Our next startup wants to do pretty much the same thing and also raised some big money this year.
Update 04/29/2020: Stash has raised $112 million in Series F funding to continue expanding and adding more services. This brings the company’s total funding to $301.3 million to date.
Spend Money to Make Money
We first came across this next startup in our article on The Easiest Way to Save Money on a Tight Budget. Founded in 2012, Los Angeles startup Acorns has taken in $207 million in funding from a slew of investors that include corporate names like Blackrock, PayPal, Comcast, and Bain. Nearly half of that funding came in the form of a $105 million Series C round which they said will help “facilitate a strategic partnership with CNBC aimed at creating content to help improve financial literacy.” Since the last time we looked, Acorns has also positioned themselves as a full-service banking solution or “full Acorns financial solution” as they call it. They’ve also introduced this concept of “found money” which means when you spend money with certain merchants, they’ll give some of it back to you in your Acorns account.
Looks like you’ve got to spend money to make money, and more than 4 million people are using the Acorns platform now.
Stash vs. Acorns
For both these firms, the micro-investing app was a useful tool in growing a user base with Assets Under Management (AUM) that can then be invested into various financial products. When comparing these two micro investing apps, we noticed a key difference in how the investment piece is being handled.
When it comes to Acorn, the savers are offered portfolios that are made up of Blackrock and Vanguard ETFs. This is no different from how some of the popular robo advisors are allocating assets. Should Acorn succeed in amassing enough AUM, perhaps they’ll be attractive for a large robo advisor like Betterment which could simply swallow all the AUM onto their own platform and then have a bolt-on banking operation left over.
On the other hand, you have Stash which wants the saver to take more control over their decisions – along with lots of guidance of course – since more than 84% of their users are first-time investors. Stash offers over 100 investment products that include “stocks you know” and ETFs. With as little as $5, you can start purchasing fractional ownership of shares on the platform. Sounds an awful lot like what Robinhood is offering except that Stash charges a dollar a month for their entire offering. With Robinhood now looking to offer a “cash management” service, it’s clear that both these companies are now targeting similar customer profiles. Speaking of cash, here’s a startup that thinks your saved money is best kept as cold hard cash.
Cash is King
This next startup first came across our radar when we wrote about 10 AI Personal Finance Assistants Helping You Save. Founded in 2013, San Francisco startup Digit has taken in just over $36 million in funding to develop an app that “automates the day-to-day worries of managing money.” It’s back-to-basics micro investing that analyzes your monthly spending and helps you save for particular goals while taking into account how each month is going. You might be tempted to think that micro investing is kind of a gimmick, but people are more easily swayed than you think. According to Digit, they now have over $1 billion in savings generated from the platform which they place in FDIC insured banking accounts – and presumably collect interest on.
Digit is free for 30 days and then you get charged $2.99 a month with a 1% savings bonus paid every three months. If you’re going to ask someone to hold your cash at a 1% interest rate and pay them for that privilege, you’re probably a millennial.
Update 09/30/2019: Digit has raised $27.5 million in Series C funding to continue to expand operations and reach. This brings the company’s total funding to $63.8 million to date.
Founded in 2012, New Yawk startup Qapital has taken in just over $47 million in funding to develop a full-service banking solution that has helped hundreds of thousands of users save an average of $5,000 annually. Customers can select from five different portfolio options which are differentiated by how conservative or aggressive they are when it comes to risk. It’s not just stocks or bonds, as these portfolios support 12 different asset classes. Sign up and they’ll give you your own debit card, checking account, and savings account.
Membership starts at $3 a month, and it only seems to make sense with larger numbers.
A robo advisor like Betterment charges .25% which equates to $25 a year for every $10,000 you have saved. That’s the cost they charge you to manage your money. Qapital charges you $36 a year fixed. If you had $10,000 invested with Qapital, that equates to fees of .36%, a number that only increases as the amount of money you put in decreases. Likewise, the fees fall the more money you put in. Of course, when you consider how much money some people spend paying the minimums on their credit cards, this fee comparison stuff seems rather pointless. The platform has helped people save more than $600 million so it clearly works.
We’ve been talking quite a bit lately about the evolution of business models, and here we can see how the initial idea of getting people to save using a micro app has now evolved into providing them with full-service banking. There seems to be an increasing clash between fintech firms and big banks as they either swallow each other up or declare war. (For example, Chase Bank suddenly decided last week to treat Transferwise payments as cash advances and charge $15 a transaction.) While it may seem like the consumer is winning when it comes to benefits – and in many cases they are – just remember that there is no free lunch. While your banking data might have been a closely guarded secret under the traditional banking paradigm, that’s just not the case anymore.
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