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FintechDo Debit Card Round-Up Plans Hurt Consumer Savings?

Do Debit Card Round-Up Plans Hurt Consumer Savings?

Many financial firms offer round-up plans that allow a user to round up an

expenditure to the full dollar, or to another sum, such as $5, on every expenditure made through their account. They are the digital equivalent of throwing loose cash into a big jar and making a deposit when it tops out.

Michael Stemmle, CEO at the Zurich-based embedded finance platform additiv, said that rounding up can allow a person to save perhaps $1,000 in a year, painlessly. Rounding up and loyalty points are a way to provide quick rewards and keep users in the savings app Stemmle added.

Not everyone agrees.

Rounding-up can be detrimental to financial health, warns Professor Abigail

Sussman at the University of Chicago Booth School of Business.

“On the one hand it is great to get people to be saving more. If you can get people to save in ways that are not that noticeable, that’s great — a low-cost, low-effort way to save money. The place where it is potentially problematic is if people use these methods to exclusion of other saving, and don’t pay attention to goals. If you save this way and think that is enough, you could miss your goals.”

Automated savings plans are helpful, but because they don’t require conscious action, they don’t build a saving habit.

“When you have saving goals it is important to understand what are best savings plans for you.” Automated savings plans come with risks of saving too much and not paying off debts, or they could be saving too little, added Sussman, who researches financial decision-making, how people budget.

Reddit participants offered their own advice.

“Don’t reinforce bad spending by connecting how much you save to how much you spend. You are establishing a feedback loop that goes, ‘The more I use my card, the more I save,’” wrote one.

“Instead of trickling card transactions in 50 cent installments, why not just be deliberate and earmark some income to savings every month,” said another.

Sussman suggested making savings a habit that requires a little thinking., but not too much.

“When you think about budgeting, pull that out of your paycheck for savings before you spend on anything else. The more that you automate savings the easier it will be.”

And you can automate savings that are larger than the roundup amounts.

Richard Thaler, an economist at Booth, is the co-author (with Cass R. Sunstein) of the global best seller Nudge in which concepts of behavioral economics are used to tackle many of society’s major problems, including savings.

Thaler won the Nobel Prize for economics in 2017 documenting the way people’s behavior doesn’t conform to economic models — he has helped change the way economists look at the way real people act in the real world.

Congress built on his idea to make enrollment in 401(k) retirement savings automatic; opting out requires employees to take action. The enrollment by default increased participation from 42% to 91%, according to one study.

Another program, Save More Tomorrow, developed by Thaler with Shlomo Benartzi, asked employees to commit to increasing their retirement savings by 3% a year in future years. The results were dramatic improvements in savings wrote Michael Kitces in Nerd’s Eye View, his highly regarded blog for financial advisors.

“After four years, those who accepted the recommendation to increase savings had managed to boost their rate from 4.4% to 8.8%, but those who participated in the SMarT program lifted from 3.5% (a lower base as they appear to have been less inclined towards saving in the first place) to a whopping 13.6% savings rate.”

The most important step for users is first finding the right core account in checking, a term for an account which covers paper checks, or digital banking and online banking.

A glance through Reddit entries on rounding-up suggests that users read the fine print before signing up. A comparison site like NerdWallet or Bankrate.com is a good place to start, although a Google search will turn up dozens of other sites. The comparison sites make their money from the banks and credit card providers who pay them a referral fee for any new customer who comes through the sites, which say they provide unbiased evaluations. If in doubt, check them against each other.

Zero monthly fees are pretty common these days. In a digital age, expect regular deposits like payroll to be available two days early, no charges for a bounced check and sometimes no interest for several days on a modest overdraft. Competitive pressure from neobanks, not to mention rules from the Consumer Finance Protection Bureau, has led to reduction or elimination of nuisance fees.

Also look for any transaction fees — does the bank charge for moving 29 cents from a debit to a savings account, or does it charge for adding it to an investment account? Does the account offer free access to one of the nationwide ATM networks such as Allpoint with over 55,000 ATMs or MoneyPass. The largest banks— Chase, Bank of America and Wells Fargo — operate thousands of their own ATMs across the country.


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