SmartyPig: A Simpler Way to Save Or A Fee Trap?

The following is a guest post from The Finance Buff.

Smarty what? That was my first reaction when I read about SmartyPig on Netbanker. It sure has a catchy name. What's it about then? From SmartyPig's web site:

"SmartyPig is a simple, smart, fun way to save for a specific goal. Using groundbreaking technology and the latest in security standards, SmartyPig allows you to invite family and friends to contribute to your account, gives you additional incentive boosts from top retailers who sell exactly what you’re saving for AND *4.30% (APY) interest on the money you’re saving."

"*Annual Percentage Yield (APY) is effective as of 3/9/2008. Rates may change at any time without prior notice."

SmartyPig wants to offer a service which encourages people to save for a specific goal and then make the purchase when the goal is reached, as opposed to charging the purchase now on a credit card which adds to one's debt. I'm all for that. Want that new car or vacation? Save up. In a nutshell, here's how SmartyPig works:

1. Save for a Goal. You open an account with SmartyPig. You create one or more savings goals, minimum $250 per goal. You have to set up automatic monthly electronic fund transfers from your bank account toward these goals, minimum $25/month per goal, although you can also add more money on top of the automatic transfers by doing a one-time transfer. While you are saving toward the goals, your money earns interest in a FDIC insured savings account.

2. Get Help from Family. You can keep the goal private to yourself or make a goal public and solicit help from friends and family. They will have to pay a $5 fee every time they contribute to your goal. The SmartyPig founders said they got this idea of collecting money from family members from 529 plans where it's common for grandparents to contribute to their grandchildren's account, although I don't think 529 plans charge fees to the contributors.

3. Redeem Your Savings. You can't get your money back unless you close your goal. You can close your goal at any time, either because you reached your goal or because you changed your mind. You get a prepaid MasterCard debit card from SmartyPig. You can either withdraw money to the debit card or use the money to buy gift cards from SmartyPig's partner retailers. Some retailers will add an up to 5% bonus if you buy their gift cards. They may charge you a shipping fee if it's a physical gift card. It's possible to get a check from SmartyPig but you will have to pay a $25 fee per check. From the terms and conditions:

"At no point in time can the funds in your SmartyPig Savings Account be transferred to a third party or a bank account outside of SmartyPig. Funds can only be redeemed on a SmartyPig MasterCard® Debit Card, a Best-In-Class Retail Gift Card or cashiers check."

If SmartyPig achieves what it's supposed to achieve, i.e. getting people to back off from charging their credit cards, it would be a great benefit to the consumers. Netbanker thinks it's "the most innovative financial service we've seen since Prosper launched two years ago" and they gave it a Best of the Web award. However I doubt it will have a material impact on people's behavior, because I think people who want to save will save and people who want to charge will still charge. It's not like people who want to save don't have a good way to save now. Online savings accounts are everywhere. Industry pioneer ING Direct lets you set up multiple accounts for tracking different goals. With ING, there is no minimum balance, no mandatory requirement for automatic transfers, and no limitation on getting your money back. Or does SmartyPig think people who want to charge their credit card now will give up instant gratification just because there is SmartyPig now? Letting family members contribute to a goal is touted as an innovation but they can do it today easily by sending a check or by PayPal.

The SmartyPig service also has quite a few fee traps. Hey, they've got to make money somehow! You want to contribute $100 to your sister's wedding? They will charge you $5 every time you do it. How come you can add money to your SmartyPig account by electronic fund transfer but you can't pull your money back the same way when your goal is reached? Because they want to earn the interchange fees from the debit card. If it takes 1 year for a typical goal to be reached, they pay you 4% interest on an average of 50% of the ending balance (because money is added to the account over time), but they take back 2% interchange fee from the merchants when you use the debit card. That's smart business (for SmartyPig, not you)! They get to recoup their entire interest cost. What a deal. If you ever lose your debit card, they will charge you $20 for a replacement. Don't want the debit card but want a check instead? $25 fee for producing a check. Are the gift cards with up to 5% bonus such a big deal? You can buy gift cards today from eBay and a few other places at a discount which translates to a bigger bonus. How did SmartyPig become a roach motel where your money can check in but it's so hard to come out? What's wrong with just crediting back to the same checking account the money came from? I'm afraid it's because they don't make any money that way. Breakage from prepaid debit cards and gift cards is a big deal.

Call me old fashioned but I see a lot of smoke and mirror in SmartyPig. I also don't see how it solves any problem that's not being solved today. Announcing a goal and sharing the progress with family members is nice. Being charged $5 for the privilege of chipping in is not. Separating the savings account balance into specific goals is nice, but not being able to get the saved-up balance back to your bank account is not.

Comments

[Cheap Like Me]

Oy vey, that is complicated. There's no way my family would chip in to anything at $5 a pop. I wouldn't either. I'd just give the person the money. I'll stick with my ING Direct, which makes it very easy ... or my envelopes of cash, even easier.

[Susan]

Sounds like a legitimate scam.

[rambkowalczyk]

I may be stating my age but this reminds me of the Christmas Clubs banks used to do in the 70's. You would open up an account in December, get a free gift, and you would deposit a set amount each week and by next October, voila they would mail you a check for Christmas. Back then these accounts were earning 5% interest so it was a good deal for the customer.

We don't need SmartyPig. Any one can start a savings account and add to it regularly. The only down side would be the minimum balance requirement.

Also it seems a bit tacky to be soliciting friends and family to reach your financial goals.

[Anon]

This is off-topic, but I just read an article at cnn money about a single mom who was living with her folks until she had a better job, opportunities were there, she moved her and her two sons out, and a week later she was laid off...she gets unemployment but feels that any job she takes will result in a pay cut (and she's been looking for quite some time now, I'm sure we've all heard the news stories about unemployment and it being really hard to find a decent job right now)...

anyway, so she can't find a decent job and is turning to family/friends/church to stock the fridge and help pay debts, INCLUDING THE CABLE BILL. ...a cable bill? And you can't hardly make ends meet? Why haven't you canceled cable?

The two kids attend after-school programs that cost $300/month for each child. The fact of the matter is, she doesn't have the money for it. It is not a necessity. Why not have the kids do something creative at home with the family?

http://money.cnn.com/2008/03/12/news/economy/mcgreevy/index.htm?postversion=2008031816

Has anybody else read this? Am I wrong for losing sympathy the moment I read she still indulged in luxuries yet couldn't make ends meet?

[moneyandpf]

Doesn't sound like a scam but it doesn't appear to be a very effective product. I'm not going to repeat all of the points made in the post by the author but it clear that you can acheieve goals in a much easier way for less fees and more flexibilty to withdrawal.

I would consider it a "scam" if you lost the money you put in or if you weren't paid back the money you invested.

In conclusion, use a different method to save up for large purchases and skip Smartypig until it delivers better options to the consumer.

[Jon Gaskell]

Thanks for the post. I wanted to clear up a few things for your readers, as well as let them know about a few changes we have coming out in the next few weeks regarding fees:

Opening an account on SmartyPig is absolutely FREE. In fact, you can open your account, create a goal, reach your goal, and redeem your goal, and SmartyPig won’t charge you a thing. This includes receiving a gift card from one of our retail partners. You do not pay for shipping when you choose that option. Nor are there any costs associated when a customer chooses the debit card. There is also no breakage on our debit card, as it is tied to a deposit account and can be reloaded.

We have minimal transfer options because we want to help people keep their savings in savings. SmartyPig was created to help people sensibly save for certain goals, which is why we tried to come up with unique options for redeeming your funds – yes, kind of like the old Christmas Club accounts. We’ve had great feedback so far from our customers who like the idea of setting a goal and sticking to it… and having their friends and family be able to follow them as they do. You are correct that ING does what it does well. I have an ING account myself. But we want to be different than ING. Mainly we want to help people reverse the mentality of “buy now, pay later” that had Americans charging $2.2 trillion in purchases and cash advances on credit cards with $18.1 billion in late fees in 2007 alone. We also think it’s possible to get some of those people who “charge” to pick up the better habits of people who “save.” They have to really, as we can no longer afford to live on credit. That said, we are nimble enough to react to suggestions from our consumers that will make the SmartyPig experience more user-friendly, including ideas of redemption.

In the next few weeks we will be updating our public contribution and gift card fees. SmartyPig customers will be able to make contributions to other SmartyPig users’ goals and buy gift cards at NO cost if they use their existing SmartyPig funding source, i.e. their checking or savings account. Our fee to make a contribution or buy a gift card using a credit card will be set at a flat 2.9%, and we are also planning on releasing a few other payment options in the future, as well, so that using SmartyPig will be economical for all users.

Lastly, it is important your readers understand that SmartyPig is not a “scam.” I welcome them to visit our security page here http://www.smartypig.com/security and see who are strategic partners are here http://www.smartypig.com/about/strategic-partners. I also encourage anyone who has a question or wants more information to contact me directly at jgaskell@smartypig.com. Much appreciation.

Jon Gaskell, Co-Founder SmartyPig

[Heidi]

I've done a lot of reading about SmartyPig - the only real benefit of going with SmartyPig vs. a direct bank is the "social networking" aspect. I'm sticking with my ING account.

The people that I've talked to that were a part of the pilot all had positive things to say about it - but these were individuals that didn't save regularly to begin with.

[James Clark]

Hmm, I think you're missing the point on SmartyPig. To say those that want to save will already find ways, is like saying those that want portable music did it without the iPod. The iPod didn't solve the problem of getting music on an MP3 player - that was already available. But it in combination with iTunes and downloadable music it put the idea of easy, simple, fun into the common vernacular.

I look at SmartyPig in much the same way. They are taking a proven idea, and making it simple, easy and fun to set goals for purchasing. What's wrong with that?

I have been fortunate to be a SmartyPig beta user and I can say that it is not complicated. I've told many friends and family about it and they are excited and have themselves signed up for the service.

SmartyPig has changed the way I look at purchases and use of credit. That in and of itself is personally revolutionary.

[Evan]

If I were a SmartyPig Executive (I love the fact that the co-founder read this thread)I would not focus my business model on the people that read finance blogs.

MOST people reading these blogs understand that one can save their money, in a separate, labeled account using ING, then transfer that amount to and ING Orange Checking Account, and use their debit card. ALL WITH ZERO FEES and NO "WASTE" (i.e. SMARTYPIG'S PROFIT).

With that being said, I do not think there could be a debate on the fact that it is a great business model with a very good mission statement - just not right for THIS particular market.

[Craig]

I got slammed with CC bills after Christmas and I can't afford to let it happen again. Call it "smoke and mirrors" if you want, or say I am forced to save until I reach my goal, but I won't have any high-interest balances for the stuff I want from here on out because I'm using SmartyPig. I don't want easy access or the ability to shift cash around. I already have that with my regular bank account. I want ZERO debt when I buy something. I think that's what SmartyPig is all about.

[Jim @ FreeBy50]

Personally the only problem I see with it is the $5 fee for friends/family to contribute to an an account. That part seems really unnecessary to me. Otherwise from the consumer perspective its just a different way to structure your saving towards a goal.

Jim

[Brian]

I think we’re all missing the point. This is something new for people who already are savers and want more for being responsible, like me, or for people who want to get on the right track. If those fees go away like the executive guy says, I don’t see how you could shoot holes in an idea that concentrates specifically on something you’d need three other entities to replicate like the writer suggests. I signed up. It was easy. I’m going to get more money for my money when I’ve reached my goal. Is that a bad thing?

[FMF]

Just for the record, all the comments here defending SmartyPig are from first-time commenters and non-bloggers (at least they don't link to their blog), a rare combination. It seems odd to me that these people all love SP and yet don't have any previous ties to FMF. Now I'm not accusing anyone of trying to sway public opinion, but it does seem awful suspicious. Similar to this:

http://www.freemoneyfinance.com/2007/11/the-saladmaster.html

I LOVE free discussion/debate on a topic, but I HATE it when companies try to influence the conversation and do it in a clandestine manner. If someone is doing this, stop it. Or else I'm sure someone would love to hear about these tactics. Maybe someone like http://consumerist.com/

[TFB]

I'm the guest author for this post. First, thank you FMF for posting it. Next, I never said it was a scam. If SmartyPig makes two changes, then I'm all for it.

(1) Remove the $5 fee for funding someone else's goal using bank transfer. It sounds like they are already going to do this. That's great.

(2) When the savings goal is reached (or closed), allow the saved up balance to be transferred back to the checking account where the money originated. This is much more efficient than crediting to a debit card or a gift card. I don't see this change coming though.

[J in FL]

FMF,

lol... yea, gotta love the PR hitguys that come on (with no prev history at FMF) to drum up support.

[Tom]

Fees aside, I think what the SP people are trying to do is a great idea.

Sure you can send a check or cash to someone to be deposited into an ING or Emigrant account, but I would say more often than not that check gets spent on something other than your savings goal. This service all but guarantees that the money goes to the goal. I was reading Trent's post and the Simple Dollar and most commentors were brushing off the service as too "consumeristic". Well, yeah, Americans consume. Why not consume in a smart way? Not one reader here can honestly say that there isn't something they are saving for. Why not save for it with 4.3% APY (highest I've seen anywhere) and an added bonus of up to 5% if through one of the retailers?

Also, be creative with the service. Use it to teach your kids about setting savings goals... most kids are using the internet, and this site is kid friendly and easy to use. Use it as a community fundraiser or a wedding registry (this is where the fees become an issue).

FMF, I agree that some of the posts supporting seem like the Saladmaster, but rest assured, I've been reading this blog and other PF blogs for years now, although I don't comment frequently. Telling this audience the benefits of having savings goals and making regular contributions is preaching to the choir, but the rest of the nation can benefit from a service like this.

[Dana]

We don't need SmartyPig. Any one can start a savings account and add to it regularly. The only down side would be the minimum balance requirement.

And if you play your cards right you can get one with a low minimum balance. I have a credit union share account. If I had just opened it by itself the minimum balance was five dollars. Now, that's five dollars you can't take back out unless you close the account and your membership with the credit union, but it's also five dollars that earns interest.

(Granted, not a fantastic amount of interest, but savings accounts aren't investment vehicles.)

[evbart]

I think you guys are all missing the point. If smartypig is legit (which is why I'm currently doing research on it, and what brought me to this page), then its a very sound idea.

I saw them pitch at Finnovate, and they really have a good message. James commented above comparing it to the ipod, which I thought was spot on. Make saving cool, easy, and visible.

Yes, you can do this for free using some existing tools. But comparing the free option to smartypig really undervalues the social benefits of a public goal, and the mental focus provided by having a separate account for each goal.

I'm looking for that feature set right now, and I want to find the best tool. Im particularly interested in the public component. Is it smartypig? or is there a better tool out there?

[Mark]

From the SmartyPig FAQ http://smartypig.com/about/faq

"10. How is interest paid?

Interest is configured using a daily accrual method with quarterly postings to a customer’s account."

This is the deal breaker for me, "quarterly posting" is pretty bad if I understand that, doesn't that mean your interest is only dumped into the account each 3 months?

[Mary]

I have had a Smarty Pig account since Sep 08. This is Jun 09.

I have NEVER gotten my money placed on a credit or debit card when I reached my "goal". I just pressed a button and TRANSFERed my money from SmartyPIg back to whatever bank I had built into my SmartyPig account and there was not "fee".

www.ebates.com tried to stick me with putting my rebate on a debit/credit card and I pitched a fit and told them to mail me a check as usual and they DO IT.

This fee thing article had me closely review my Smartypig account and I was never charged any fees. Note: I do not let others put money into my account so if there is a charge for that I could care less. I would have them put transfer money to my other banks and then transfer it myself to Smarty PIg. There is always a way around things.