When disruptive technologies come around, they arrive with a loud crash. And history is full of examples — the telephone, the Internet, tablets, social media, electric transportation — the list is exhaustive. But when disruptive services come our way, they tend to sneak in more quietly and gradually, but the impact on our lives is just as significant (or even more so).
Disruptive services you couldn't live without
Think ATMs, drive-throughs, movies-by-mail, 2-day shipping and mobile banking. Certainly not as sexy as new mind-blowing technology, but once these services take hold, you can’t imagine life without them. Six to eight-week shipping? Cash withdrawals from a teller? Service companies wouldn’t dream of competing effectively without keeping up with these market expectations in their business models.
HMBradley disrupts savings
We may just be in the midst of one such disruptive service. A new startup bank called HMBradley has decided it's time to turn the deposit account world upside down with a totally new service proposition:
Link the returns you get on your deposits to the percentage of the money you directly dedicate to savings from your paycheck. If you commit 20% of your direct deposits (salary) to savings, they’ll give you a 3% annual return (APY). They offer a sliding scale down to 5% of savings that will give you 1% APY. Compared to the banking industry average of 0.09%, this sounds like a compelling business proposition.
It’s not hard to see the rationale behind this disruption, but the fact is, HMBradley is doing it while others aren't. And it makes sense, with today's savings environment being so restrictive to work around.
Fixing the less-than-intuitive savings experience
Americans are criticized as being “bad savers.” But let’s take a look at the current savings experience for salaried workers. The age-old, employer-sponsored 401K savings mechanism allows you to save money (with some tax advantages) and tap into it when you’re 59 ½. Wait, 59 ½? Otherwise you’ll pay a 10% withdrawal penalty.
So, if I’m 25, I get to look forward to a payout in 35 years? Won’t I probably need a house or have some kids during that time? Probably, but the 401K funds you’ve been saving aren’t going to be a viable option for those expenses. How’s the volatility of my money going to be managed during all those years? What kind of fees will I be paying? All valid questions, and good luck getting easy answers.
Back to HMBradley. Since the 401K savings channel already skims off so much of workers’ savings, banks have been happy to receive your weekly paychecks and give you (almost) nothing back for the deposits you leave behind with them. But is this really the best customer experience for people today?
HMBradley seems to think not. They want to tap into the “automated savings” habit to deliver an experience in which people will sign up in exchange for real financial returns and nearer-term access to funds when needed.
Crazy or brilliant?
They might be on to something. Sometimes disruptive services can seem a bit off the wall. When Netflix’s movies-by-mail came on to the scene it was essentially laughed at by Blockbuster. Time has told. It turned into a streaming service powerhouse being chased by the world’s biggest entertainment players.
Two-day shipping seemed like an outlandish promise when Amazon made it a standard for its Prime subscription, but generating $14 billion in annual subscription revenue in 2018 doesn’t seem so bad in return. The point is that for service disruption to catch on, the proposition has to be really attractive, otherwise it won’t take hold and force others to follow suit.
At the moment, the numbers are on HMBradley’s side: The top 5 US banks alone hold almost $6 trillion in asset deposits. That’s a pretty big pie. Only 31% of Americans are investing in 401Ks, while 69% have access to one through their employers. That’s a pretty big gap. Are 2.91 percentage points of return enough to pull people into a new savings experience? Time (and money) will tell.