The penny jar is a classic, painless way to save for a rainy day. When people get home from work or school, they can simply empty their pockets of change and put those coins in the jar, where they will soon amount to enough for a shopping trip or a night at the movies or a new bike or whatever “extras” the person wants to enjoy.
Of course, the success of the penny jar relies on an assumption that is no longer always true – that is, that people are carrying and paying for things with cash. In an age of credit cards, eCommerce and contactless payments, it’s going to take a lot longer to fill up that penny jar with actual coins. And sometimes, the things people want to pay for cost a little bit (or a lot) more than spare change can cover.
That’s the challenge that startups like Digit and Acorn aim to address with digital tools. However, getting someone to adopt healthy financial habits can be a bit like getting someone to adopt healthy eating and exercise habits: They may know they should be doing it, but that’s a world away from making good on their better judgment.
Qapital CEO George Friedman says savings tools must fold in equal parts of behavioral economics with their literal economics if they really want to stick with customers. There’s a psychology to saving, and by tapping into it, Friedman said Qapital is able to help even first-time savers set and meet financial goals.
In a recent interview with PYMNTS, Friedman explained how the goal-based savings program works, how the addition of debit functionality will round out the platform to make it even stickier, and the secret sauce for motivating people to seek help managing their personal finances.
“Behavioral economics” refers to the psychology of money and the thought processes behind financial decision-making, Friedman explained. Qapital’s platform is inspired by and founded upon these social sciences surrounding money, as researched and presented by behavioral economist Dan Ariely – a researcher, professor, author and now, a member of Qapital’s board.
Friedman said Qapital is different because it acknowledges that people are different. Its goal-based approach sets it apart from competitors, he said, and that’s the very first point where the platform taps into users’ behavioral economics.
Customers are immediately asked to name their goal and attach an image to it, a strategy that Friedman said establishes emotional significance and real-world potential for what could otherwise remain a distant and unattainable dream in the customer’s head.
Then, he said, the platform establishes a real savings account separate from the user’s primary spending account. Friedman said it’s not enough to layer savings assistance tools on top of existing accounts. Separating the funds – virtually placing them into a jar marked “vacation” or whatever the goal is – moves the vision one step closer to reality.
From there, Friedman said, the platform takes on a paternalistic role depending on the rules the user has set. It becomes the friend people hate but love, the guy who drags his buddy to the gym after a long day of work – holding him accountable so he can achieve the gains he envisions.
Maybe a customer directs the platform to do something as straightforward as setting aside a certain percentage of each paycheck. That’s a rule the platform will enforce even if the customer really, really wants that nice pair of shoes or one more bottle of wine at dinner.
The paycheck allocation approach works well for freelancers, Friedman noted, because it enables them to contribute to their taxes all year long, just like salaried employees. The difference is that salaried employees pay taxes directly to the government before they even see their paycheck, while freelancers would be putting a comparable percentage into a savings account that is only for taxes – then paying them off in one fell swoop from that account when April rolls around.
Or, maybe the customer has set rules that make saving more of a game. He may decide to set aside a certain amount for each swipe of his credit card, penalize himself for excess trips to Dunkin’s or reward himself for spending less than his budget on Uber.
All of these micro-contributions are added to the savings jar automatically and painlessly, said Friedman, and before users know it, these small, incremental steps add up to something they never realized they could achieve.
Why It Works
When all of a customer’s funds are mixed together – bills with discretionary spending, credit card payments with student loans – then the mental structure holding all those payments in place falls apart. People only have so much willpower, said Friedman.
It’s funny, because banks are always talking about how they need to get rid of their silos – but for customers, putting their money into self-made silos can help them grasp what they actually have, and from there, they can optimize spend and satisfaction.
Users do have the option to reallocate saved funds to cover other expenses. For instance, Friedman said it’s okay to decide to go out to dinner and reduce this week’s contribution toward the goal. Customers know what they have and what they’re sacrificing.
However, it turns out that the prospect of moving money out of the “vacation” jar makes people more reluctant to do so.
At first blush, it would appear that telling someone how to manage their finances, or suggesting they need help doing so, is a bit like telling someone to lose weight or stop drinking so much. One might expect, then, that a platform like Qapital’s could face some challenges with adoption.
However, Friedman said it’s a very different scenario. When someone comments on a person’s weight or health, it puts that person on the defensive, saying, “Who are you to judge?”
But with money, he said, people want to be held by the hand – that is, as long as the hand-holder is a trusted, credible source, like a bank. He said it actually surprised the company to learn how paternalistic customers felt about money management. They are looking for someone (or something) to be firm and say, “No, we are saving 5 percent of this paycheck whether you like it or not.”
That “something” may make all the difference, added Friedman. Instead of a person sticking their nose into the customer’s business, Qapital offers a tool, which is very different from a human.
“You stop feeling bad about yourself,” Friedman said. “You realize you’re not dumb; personal finance really is that complex and hard to calculate.”