Personal financial management is increasingly important for people from all walks of life. With rising interest rates and prices, it’s become ever more common for people to use new tools, many of them digital, to help them budget and save. However, there are segments of the population, predominantly low-income and younger, who still struggle to put aside an amount consistently every week, month or year. For these groups and anyone else looking to boost their savings, rounding and cash-forward tools are excellent to build and sustain healthy saving habits.
In this article, we define and provide examples of rounding and cashforward, and review their roles in reshaping financial habits, and finally, we discuss how money and wealth management companies can best offer these programs.
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Traditionally, savings has meant putting aside spare coins in a kitchen pot or piggy bank somewhere at home or under the bed. By the 17th and 18th centuries, savings accounts were opened by banks with the express purpose of helping lower income individuals and families put aside money safely for a rainy day. It wasn’t until later that the banks started offering interest on those savings accounts.
Nowadays, savings accounts are most often housed within established banks where they gain modest interest rates.. However, digital-only banks are growing in popularity by offering higher interest rates on deposits in lieu of brick-and-mortar services.
In today’s fast-paced, high-inflation reality, having savings left over after paying the rent or mortgage, debt, grocery bills, internet bills, transportation costs and more is incredibly difficult for many. It always seems like another purchase or purpose has more urgency and priority over savings. Due to this, we need an easy-to-implement and simple-to-follow solution.
Rounding is a concept most often taught in elementary schools and it’s equally as straightforward in the context of personal finance. With rounding, spare change is gathered from each purchase and put towards a dedicated cause, like a savings or investment account.
If a person spends $2.50 on a cup of coffee, that transaction is rounded up to $3.00. The difference of $0.50 is automatically sent to that person’s savings account. Over time, that spare change adds up. Best of all, there’s no purchase behavior change required. The experience is seamless.
Consider the following story:
Alice is a busy person. Having just graduated from university, she has student loans to pay off. She’s just started working so her salary is on the lower end. Most of her budget is allocated to her rent as well as her debt, and the rest goes to groceries and the occasional dinner with friends. She knows how important it is to save, but between everything she needs to spend on - she can’t imagine where she can get savings from.
Enter rounding. With rounding, Alice creates opportunities for micro-savings. At the end of the month, on average, she will have saved $30. At the end of the year, she has an additional $360. Furthermore, she’s earning interest on that amount. She hasn’t had to change her budget, and she hasn’t had to alter her spending habits.
Alice and others can do this on money and wealth management platforms and apps that offer rounding services. What these platforms know is that there’s an incredible amount of friction for people to start saving if they haven’t before. Rounding reduces that friction. Now someone who may not have started saving until their late 20s or early 30s is now saving much earlier, solidifying that habit and building personal financial health.
Creating accessibility is key to adoption for young demographics. Removing sign up friction is step one, and can be accomplished by providing for open enrollment of any credit card. No need to carry a certain card or spend in a certain way. Making it easy to harness the spending already being done, on a card a user already has, can make all the difference in removing the intimidation factor of investing.
Rounding is reshaping financial habits. It allows for consistency towards building emergency funds, reduces financial stress and encourages regular saving. But there are potential challenges that money managers should be aware of.
First of all, whatever technology or API one chooses to work with should have clear and strict privacy and security standards. A big question to ask is how the data required to run rounding programs is gathered. Screen-scraping, or web-scraping, whereby providers require customers’ online bank account credentials may prove unreliable and insufficiently secure for many customers.
Secondly, rounding programs should be run with financial literacy programs. Money managers can and should remind customers of the need for budgeting and controlling spending, and not to overspend just because a rounding program has been implemented.
There are several ways to run rounding programs in the market.
One way is the digital wallet. Take the digital bank, Koho, as an example. Koho is a prominent digital bank in Canada that offers mobile banking. Users deposit money into their Koho app and then use their Koho card to pay for transactions. In the app, Koho also offers a variety of other features, including rounding. Every time Koho users make a transaction, the rounded amount is set aside in the app and gathers interest.
This is very convenient for users and for Koho as the deposits remain with them. The main drawback is that customers must use Koho-issued cards for the rounding feature.
A second way is through data aggregators. The positive aspect of this method is that customers can use whatever card they want, but the main and the largest drawback is that data aggregators predominantly depend on screen-and web-scraping technologies. These technologies have frequent failures as the bank UX may often change, and many users are hesitant to share online banking details.
Finally, the third way is with API providers with direct integration with the payment processors. For example, Olive (full transparency: that’s us!) is an embedded finance platform. We work with fundraisers, financial wellness organizations (like money and wealth managers, wallets, etc.) to provide the APIs needed to create a seamless rounding program. As we are integrated directly with Visa and Mastercard, we can help enroll any customer who has a Visa or Mastercard-issued card(s) - no need for a newly-issued card. Enrollment takes 10 seconds, on average, and the customer can start rounding right away.
To learn more about how Olive works for financial wellness, check out our website here.
Rounding is a critical tool for transforming financial behavior. It allows everyone, and especially those who are low-income or younger, to start and continue saving and investing by seamlessly creating additional saving opportunities.
This underscores a compelling incentive for financial professionals, wealth managers, and institutions dedicated to cultivating sound saving and investing practices to embrace the potential of a robust rounding program. To learn more about how to get started, reach out to Olive today.
To learn more about how Olive is helping drive this transformation, visit Olive Solutions for Financial Wellness, or talk to an Olive specialist today.