The Thing that Puzzles Me About SmartyPig
SmartyPig, the new savings tool with a social networking component, has utilized some interesting marketing tactics to create brand awareness. I’d be hard pressed to name a bank product developer or personal finance blogger who isn’t aware of the product (seems like every other blogger out there has done a $50 SmartyPig giveaway at some point in the past month). I think it’s clever, innovative, and a great way to save towards a specific goal.
So, what’s my problem with SmartyPig?
My issue with SmartyPig is that I don’t understand how it is a profitable business venture for the founders. Everyone has a hand in their pockets.
First of all, there is the bank. From my days as a product developer I know what kind of average collected balances it takes for regular and high-yield savings accounts to be profitable. SmartyPig is currently paying 4.30% on all balances.
Nice rate!
This is significantly above what most banks are paying in my area on Savings and Money Market deposits under $10k (today’s Bankrate search shows Zion’s at 3% and ING & Capital One paying 2.96% - everyone else if far below). West Bank’s rate on its premium money market is 1.0% APY for deposits under $50k - now that sounds more like a competitive rate.
I’m just having a hard time figuring out how West Bank is able to pay 4.30% on such small balances. According to this article in the Des Moines Business Record, the average savings goal SmartyPig customers is $4700 - I bet that their break even balance on these accounts is around $3500 at that rate (I’m making some big assumptions about how much it costs West Bank to open the account, run the “know your costumer” checks, overhead allocations, account closing costs, etc - I could be totally off). So, clearly, they are going for a loss leader status, much like ING and Schwab - I get that. The bank can make it work under the assumption that these accounts will become profitable on a pure volume basis. Get enough of these accounts and the people saving for $20,000 ticket items will offset the costs the bank will incur subsidizing those with $300 goals.
Next, is the card vendor. I think that we all understand how store and gift cards make money (interchange income from Visa/MC, dormant fees, etc). While the printing and mailing of these cards is far from free, I totally see what’s in it for them - even if the margins are small at the start, there is a lot of room for growth potential here.
Then there are the other web build costs - the expenses incurred by the data capture firm and the website designers. Perhaps these vendors provided their services for free in exchange for advertising space on the SmartyPig site, but I doubt it.
This is where I am having trouble with the SmartyPig business model. If I was approached to be an investor or partner, I would have a hard time understanding how SmartyPig itself is making money, especially since eliminating the contribution and check fees (see this piece from Flexo at Consumerism Commentary). Is West Bank providing a finder’s fee for every account opened? I doubt it considering they are paying that high interest rate and have pretty much waived the rights to all of the fee income. Are they getting a piece of the interchange income, or perhaps the “partner” retailers are providing some kind of incentive? I just don’t see how there is enough profit to go around.
Don’t get me wrong, I think that SmartyPig is smart - especially with the planned roll-out of ACH to external accounts - I am just trying to figure out how SmartyPig is going to make it as a stand-alone firm.
Maybe the founders are hoping to sell the platform (and accounts?) to a major bank once it’s a proven success.
It really isn’t any of my business - but it makes me wonder…
Stumble it!
April 16th, 2008 at 8:12 pm
While I haven’t reviewed it I think they’re heading in a good direction from all the feedback they’ve been getting. And I’m glad I’m not the only one who wonders where the returns are coming from.
April 17th, 2008 at 8:00 am
I’m guessing that there are positioning fees for participating “Best In Class” vendors on the reward side. A user may be saving for a “flat screen t.v.” but I imagine Best Buy has to pay a decent fee to SmartyPig to grab direct promotional access to that user.
So revenue sources are a combination of deposits and vendor participation fees, would be my guess. I don’t know if those make it profitable, but I would imagine that they’ll also develop some sort of limited advertising element, too. Most high-traffic sites of any sort incorporate some level of advertising and/or cross-promotion.
But what do I know? I thought ACH was half a sneeze.
April 17th, 2008 at 2:30 pm
If it is too good to be true. . .
I am going to wait a little longer before opening an account
April 17th, 2008 at 4:07 pm
I guarantee you that the are not getting a faction of the interchange fees - the credit card companies make huge profits off of those and they aren’t about to share them. I’ve done some work with unfaircreditcardfess.com on these fees before and they are a giant cash cow for the credit card industry that eat into merchant’s profits and hit consumers at the same time when businesses are force to raise prices in order to recoup the loss.
The fees have actually been in the news a fair amount recently because Congress has finally started taking a look into them because people are starting to catch on to the process which currently has zero accountability. CNN just ran a story on it a little while ago actually: http://money.cnn.com/2008/04/17/news/economy/credit_cards_hearing/index.htm?cnn=yes
April 17th, 2008 at 6:20 pm
Thanks for the link to the CNN story, kal - I didn’t see that when it was published.
April 21st, 2008 at 2:53 pm
No problem Heidi. Heck, I’m sure you could write a whole post just on interchange fees themselves if you wanted to. I didn’t see them in the news that much, but all of a sudden credit card reform is a big deal and its like “how have you not heard of them before - they’re terrible.” Of course I’ve never been a merchant that had to deal with them before either so…
April 23rd, 2008 at 10:31 pm
I kick myself now for not speaking up then but last week I was at the Annual Shareholder’s Meeting for West Bank (the bank that SmartyPig deposits go into) and the two guys behind SmartyPig gave everyone in attendance a pretty good brief. I really, really wanted to ask what the ownership arraignment was for SmartyPig (if the three main business partners, West Bank and two other firms, had equity stakes) and basically what was in it for West Bank besides a new stream of (relatively) expensive deposits.