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Understanding the new wave of saving & investing apps

This post was originally part of my newsletter Making A Techie, an irregular newsletter Maria keeps to track her learnings in VC.

I went through a ton of research and hundreds of apps and picked the best of the best to recommend to you.

The Change.

How it’s been done

Older generations would start families earlier, buy homes in their 20s and 30s, have financial advisors and tax accountants (often recommended by family and friends) they would stick with for decades. A majority have relationships with more than two financial institutions while 20% have banking relationships with at least four financial institutions (seriously — four?!).

New attitudes

Recent generations don’t work the same. Millennials (18–34 year olds) face a whole new set of money issues that banks are not designed to address. Millennials are loaded with student debt that is difficult to refinance, live in metro areas with unaffordable house values, and are grossly underemployed without access to capital to start a business.

• They are 63% less loyal to their banks, with fewer opportunities to interact and see their value.
• Fewer than one-fifth of millennials have ever written a physical check to pay a bill.
• 1 in 3 is open to switching banks in the next 90 days with 53% of them thinking there’s nothing their bank is offering them that is different from other banks.
• 71% would rather go to the dentist than listen to what banks are saying
• All four leading banks are among the 10 most hated brands by millennials.

The Problem.

Financial Literacy

57% of American adults are struggling financially, and 43% of U.S. households struggle to keep up with their bills and credit payments (Source). I’m not exaggerating when I say the lack of financial literacy is making us miserable. In a recent Federal Reserve survey, 46% of adults said they could not cover an emergency expense of $400 without selling something or borrowing money. Not surprisingly, 23% of Americans and 36% of Millennials experience a debilitating degree of stress surrounding their finances most commonly associated with post-traumatic stress disorder (PTSD).

Savings

It’s super important to save to have a decent living standard in your later years.

• About 62% of Americans have $1,000 or less in their savings. That rate goes up to 72% when considering only millennials.
• Almost 1 in 10 millennials would opt to go to jail for a week to pay off $10k in debt (no wonder they call us dramatic, JK, I’d totally take the deal).
• 1 in 3 Americans has $0 saved for retirement. Considering the level of financial literacy, it’s not surprising that figure also includes 1 in 10 households with incomes of $100,000+ a year.

Investment

• More than half of Americans, 52% do not own any stock-based investments like mutual funds or ETFs.
• Only 5% of millennials invest, for those that don’t, 69% say they find it too confusing.
• 50% of millennials are not sure about how to invest but do feel it is important to learn.

The Vision.

Assumptions

If we have some basic human faith and look at the numbers mentioned above, I am fairly confident making two assumptions:

1. The average person is not financially ‘irresponsible’ out of recklessness but likely due to poor personal financial literacy and fewer opportunities to learn through exposure (e.g, buying a home, 401(k) supporting jobs, etc.).
2. There is an enormous amount of individuals wanting to avoid financial doom.

Out with the old, in with the new

It is unlikely banks will recover loyalty and trust to the levels of previous generations. As a result, many VCs are betting that consumers will conduct a majority of banking online and increasingly only on their mobile and hardware devices. Consumers want the convenience and speed they get from tech companies in their banking experience too. 73% of millennials said they would be excited if financial services were provided by Google, Amazon, or Apple instead of their own banks.

Betting on the future.

Part of my job requires conducting deep dives into industries and sub-sectors of tech to understand market trends, gaps, and potential projections to inform investments. I compiled all the companies I have encountered in past deep dives, curated them and include only the best of the best for you.

Saving

Digit

After connecting to your bank accounts, Digit analyzes your income and spending patterns, and then algorithmically determines when and how much is safe to save based on your lifestyle. The service will then automatically dip into your checking account and put a few dollars into a savings account (typically $2–$17 every 2–3 days). 70% of Digit’s users make between $35k–$100k a year.​

Qapital

The Qapital team works based on their psychological hypotheses that 1) humans respond to specific goals that connect to their daily habits which 2) can be achieved in about a year or less. The team includes Chief Behavioral Economist, Dan Ariely, Professor of Psychology and Behavioral Economics at Duke University and author of New York Times bestseller Predictably Irrational.

Users are encouraged to be explicit about what they are saving for ($2,500 for a vacation, for example) and add a picture of their goal. You have a single Qapital account, but the app lets you create multiple savings goals within that account. You fund your goals with rules, and rules are triggered by specific actions. When you create an account with Qapital, the money you save is deposited to an FDIC insured account similar to Digit’s. However, unlike Digit, you will not have to transfer back and forth; Qapital provides you with a Visa debit card linked to your Qapital account. An improvement over regular bank debit accounts, Qapital’s debit card has no monthly or overdraft fees, and 0.1% interest on savings.

Investing

Acorns

Users link a bank account and a debit or credit card to their Acorns account. Acorns monitors spending and rounds off customers’ credit or debit card purchases to the nearest dollar to invest the difference into stocks and bonds. Users pick among Athe products investment portfolios, which are composed of six exchange-traded funds (ETFs).

Currently, the company boasts more than 2 million investment accounts (with 600,000 opened in 2017 alone) and is on track to do 1 billion trades in 2017.

Stash Invest

Allows users to start investing with as little as $5. It offers users the ability to buy fractional shares in a curated selection of exchange-traded funds (ETFs). Fractional share means you buy just a small part of a more expensive ETF that would be difficult to afford otherwise. You can choose from a selection of over 30 ETFs selected by Stash’s team. Investments are chosen based on a model driven by factors including historical performance, expense (fee) ratio, risk profile and asset allocation. Stash also tries to educate customers on investment basics by offering guidance and tips.

Stash organizes your investments in terms of what you believe, want, or like. Those are literally the three categories the Stash team have organized their ETFs into; “I Believe”, “I Want”, and “I Like”. Examples include:

• “American Innovators” allows you to invest in American companies changing the world.
• “Clean & Green” option that puts your money into companies producing solar, wind, and other forms of renewable energy.
• “Young Money” (companies such as LinkedIn, Amazon and Ebay that benefit from millennial purchasing power)
• “Roll With Buffett” (invest in Buffett’s holding company, Berskhire Hathaway)

Robinhood

Robinhood allows anyone to buy and sell stocks or ETFs without fees. No more paying your broker or being charged for each indiviudal trade. You can buy one share in a stock or ETF today, and five more shares next month, to slowly build a portfolio. The fees at larger firms would make such a strategy pricey. Big brokerage firms like Schwab, Fidelity and E-Trade typically charge $7 to $10 per trade.

• There is no minimum deposit to register an account, and there are no trading fees for customers who buy and sell US-listed stocks and exchange-traded funds.
• A Gold subscription lets users borrow up to double the money in their account to trade on margin with leverage, plus skip the three-day waiting period for deposits allowing instant trades.
• Gold costs $6 to $15 per month for smaller account sizes with less borrowing power, but higher prices of up to $200 per month to let people borrow up to $50,000.

Since its introduction in December 2014, the app has attracted a million users and executed more than $30 billion in trades, an increase from $2 billion in 2015. 78% of Robinhood’s more than 2 million customers are between 18 to 35 years old. Active customers check the Robinhood app 10 times per day.

Wealthfront

Most sophisticated and recommended for older millennials and beyond. Wealthfront is an automated investment management and financial planning service that truly allows anyone to be an investor, making it simple, cheap, and hassle-free. Wealthfront invests your money in 11 ETFs: four stock funds, five bond funds, real estate, and natural resources.

Through its new financial planning feature, Path, Wealthfront hopes to replace financial advisors at Goldman Sachs. Unlike Goldman, Wealthfront does not require a $1 million minimum from clients. Path monitors all of a user’s accounts and assets, including 401(k)s, college savings accounts, checking accounts, IRAs, Roth IRAs, joint investment, trust investment, 529 College Savings plan, Company stock selling plan, and mortgages. You can toggle through various “what-if” numbers and scenarios to explore how savings today will affect your long-term outcome.

Wealthfront also offers automatic portfolio rebalancing by continuously monitoring your portfolio based on how risk adverse you are. It also means that you do not have to go in and tinker every time there is a market change.

Wealthfront has a minimum deposit of $500 and is free for the first $10,000 invested, after which a 0.25% annual fee applies. Actively-managed funds in traditional services can have a fee of 1% or more.

A comparison table.

Other

Clarity Money (budgeting)

Most budgeting apps are really good at giving you a dashboard of your past spending behavior but do not give you actionable items; however, Clarity Money accomplishes that. Clarity Money uses machine learning and AI to identify actions its users can take to reduce spending or lower their costs. After downloading the app and linking checking and credit card accounts, the app provides suggestions for unused subscriptions you should cancel, recommends credit cards best suited for spending habits, and identifies bills the app can potentially negotiate lower. By doing all of this directly from the app, Clarity Money aims to reduce the friction associated with reviewing finances, such as manually searching through statements.

Although the app is completely free to use, Clarity Money will charge you a one-time fee equal to 33% of the annual savings you receive from its bill negotiation service. For instance, if they lower your cable bill by ten dollars a month, saving you $120 a year, you will be charged $40.

Tally (credit card repayment)

Tally is for anyone who enjoys credit cards for the convenience and rewards, but dislikes the high APRs, annoying late fees, and the hassle of managing multiple cards. Users can scan all of their personal credit cards into Tally, go through a brief credit score check, then authorize the startup to pay those bills from a Tally-issued line of credit. Tally will automatically pay your cards using your Tally credit line. Instead of paying various cards every month, you simply go to the Tally app once to pay. Tally isn’t a credit card, you can continue to use your credit cards as usual. Tally keeps track of all your due dates and minimum payments for the credit cards you’ve added. As long as you pay Tally on time, Tally will pay your credit cards on time.

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