Round-ups are going mainstream.
The latest financial institution to introduce the feature is online bank ING Direct, joining fellow bank P&N, investment app Acorns and superannuation product GROW Super.
I'm talking about the innovation that lets you "round up" the virtual change from a card transaction and sweep it into a savings, superannuation or investment account. So if you buy a coffee for $3.70, it will charge you $4 and the remaining 30c will be automatically saved for you.
It's a powerful tool for savings because it taps into insights about behavioural finance - the study of how people actually behave around money as opposed to the way they ought to.
Most people have a bias to "loss aversion", which can make saving uncomfortable and therefore something we tend to procrastinate about.
Round-ups let you save a little bit often, so the missing money is less noticeable than a regular standing order or direct debit. For many people, saving $5 a day is easier than $35 once a week.
Another advantage is round-up products generally won't try to take money if the account balance is below a certain level. Direct debits on the other hand can send you into overdraft and incur fees.
'Pleasant surprise'
ING Direct launched Everyday Round-ups two weeks ago. This lets customers sweep the spare change from their Orange Everyday transactions account into a Savings Maximiser high-interest savings account.
ING Direct reports it has 770,000 customers with Orange Everyday accounts, and 40,000 of them signed up for round-ups in the first week, saving a collective $200,000. A bank spokeswoman described the uptake as a "pleasant surprise".
Right now round-ups are only available for the Savings Maximiser, which earns 2.8 per cent if you deposit at least $1000 a month. There are a handful of competing savings products that pay more - up to 3.05 per cent with RaboDirect - but terms and conditions vary. In its favour, ING does not charge account-keeping fees and refunds the fees for using any ATM in Australia.
It would be good to see ING Direct extend the feature so you can sweep savings directly into their superannuation or mortgage accounts - that still has to be done manually or through direct debit.
To the best of my knowledge, the only other Australian bank offering true round-ups is P&N Bank, which pays maximum interest of 2 per cent.
CUA has a similar feature called Savings Top-up but it's only available for transactions over $10 and you have to select how much you want to save each time. CUA currently pays 2.7 per cent interest if you deposit $1000 a month from an external source.
There's also Ubank's "sweep" technology for a linked transaction and savings account. This lets you set the minimum and maximum amounts you'd like to have in your transaction account. If the balance falls below your minimum, the sweep function will top it up from your savings and if it goes above your maximum, it will send the excess money back to savings.
That's effective for making sure that the majority of your money is earning the optimal interest rate at all times, but it doesn't do anything to change your spending behaviour. Whereas with round-ups you have to consciously transfer money back to your transaction account before you can spend it. Admittedly that's not hard, especially when it's the same bank.
The round-ups concept took hold in the US a few years ago and reached Australian shores in February last year, with the launch of the Acorns investment app. Acorns now has more than 300,000 users with $100 million between them invested into exchange-traded funds.
Brickbats and bouquets
Acorns has attracted devoted fans but also criticism for the $15-a-year fee to access the platform, in addition to any underlying investment fees. However, unlike most ETF products, Acorns lets you invest with as little as $1.
Now that banks are getting into the game, consumers will have the option of amassing savings through round-ups for free until they have enough to transfer a lump sum to any ETF of their choice.
There's a competing investment app in the works called FirstStep, but launch has been repeatedly delayed.
Another financial product using round-ups is GROW Super, which launched in May 2017. GROW offers a superannuation product through an app pitched at Millennials. While super research company Rainmaker says GROW is expensive, with fees of 1.85 per cent, a company spokeswoman says GROW will soon announce a "significant reduction in fees" and other improvements.
Meanwhile, you can now make lump sum deposits directly from your Acorns account into super.
Voluntary super deposits of this kind are a lot more appealing since July 1, when the law changed to allow tax deductions for personal contributions. Previously employees had to use salary sacrifice arrangements through their employer to get a tax deduction.
If you have a financially stable and scrupulous employer that offers a salary sacrifice program, the advantage is that you get the tax deduction immediately. However, even many good employers only pay super every quarter, meaning you're potentially missing out on months of compound growth. You can't fix this for the 9.5 per cent compulsory super, but there's no reason to cop a delay for any voluntary contributions.
Resisting temptation
Of course, anything you deposit into super will be tied up and untouchable until you reach your preservation age, which is currently 60 for anyone born after June 30, 1964. At least you won't be tempted to spend it!
If you're in your 20s and you're yet to start saving for a house, it's actually a great idea to make extra contributions into super so you benefit from the magic of compound interest.
If you're saving for a house or another big medium-term goal then I'd recommend ETFs. If you're just saving for Christmas or a holiday, perhaps stick with the bank.
Expect to see more in this space.
