The $328B Missed Opportunity and Who Is Best Positioned to Capitalize
Updated: Mar 27, 2019
I keep asking myself, this really doesn’t exist?
Round-up checking products exist. They’re great because they make saving easy. If I buy something, the transaction rounds to the nearest dollar and the difference is swept into a savings account, or investment account. They’re all the rage in fintech despite being around for well over a decade when Bank of America launched “Keep the Change.” Similarly, there is a prevalence of deposit sweep products in wealth management and separately, electronic funds transfers occur likely billions of times each day.
Meanwhile, as of 2018, balances in 529 savings accounts amounted to $328B, and most traditional banks missed out entirely because 529 accounts are generally managed by broker-dealers. In fact, retail banks suffer because these funds are not held in savings accounts. The involvement retail banks generally share in this transaction is the transfer of funds outbound to broker-dealers managing the 529 funds.
This includes the new bank challengers introducing popular savings apps, with budgeting tools and debit card issuance, even round-up transfers to investment accounts or debt repayment. Even Fidelity, one of the largest broker-dealers holding 529 balances offers a checking account product, and a cash-back credit card which indirectly contributes to a 529 when users claim rewards for that purpose. Yet, all of these offerings seem to have this one gaping hole.
No one is offering a round-up checking product with a transfer to a 529 savings account.
It’s a perplexing void, so much so that I want to believe that I’m wrong, but I can’t find any offering anywhere.
Why is there no current offering?
My guess is that this involves a two-party partnership between a retail bank with round-up capability, and broker-dealer with a 529 offering, where the retail bank would do the rounding and aggregating, with the broker-dealer drawing a recurring EFT from the retail bank after a customer opt-in. This cannibalizes bank deposits, which might explain the lack of willing participants on the retail end. Though, there are no shortage of financial institutions who simultaneously offer banking products with non-deposit investment products, including 529 accounts, like Schwab and Fidelity.
From a regulatory perspective, the outbound transaction is no different than a preauthorized recurring EFT from a checking (or savings) account to the 529 like a recurring contribution. Fidelity, and surely others, already do this to fund 529s. In this case, the bank would likely aggregate the micro-transactions first into a designated customer level savings account for a recurring monthly EFT once a certain minimum is reached, rather than separate individual micro-EFTs. This once-monthly methodology would be Reg D compliant, and from a wallet share perspective, would increase the number of accounts per customer as well as savings deposit balances, however brief they may be held. The Electronic Funds Transfer Act already contemplates preauthorized transfers, including those of varying amounts. Finally, though the IRS imposes an annual contribution limit on 529 accounts, this is for purposes only of an annual gift tax exclusion.
Why is this needed?
Because the average 529 account balance in 2018 was only approximately $24,000 and the average cost of one year of college tuition currently ranges from $9,700 to $35,700 and according to Sallie Mae 75% of the expense of college was paid in a form other than borrowing. This is likely because of the eligibility restrictions on federal FAFSA aid.
Below is a discussion of those likely best positioned to deliver on such a product offering:
Existing 529 Plan Administrators With Retail Banking
This is basically Fidelity and Schwab and their existing cash management accounts or traditional deposit product offerings, which are checking accounts with debit cards. This makes the most sense for Fidelity and Schwab because the funds stay managed in-house. Another option would be SoFi. The product is a natural fit and makes their checking products more appealing, in my opinion, but none are currently offering a round-up feature. Instead of using my Fidelity 529 credit card to draw debt in order to save, I’d prefer to just go direct to saving using this easy, automated method in addition to the preexisting funds transfer that I might already have occurring from my checking account, for a dual stream.
Round-Up Investment Apps with Debit Cards
This is Acorns and Stash, who offer debit cards with checking accounts and a round-up feature for transfer into investment products. Unless you’re positioned to develop your own 529 plan offering with a state sponsor, you’ll likely need a broker-dealer partner with an existing offering to integrate into your platform. I imagine a wide array of partners already exist, but a great direct 529 partner could be MEFA in Massachusetts. In addition to their 529 offering, they have a prepaid tuition program where anyone can prepay tuition at today’s rates for Massachusetts public universities and colleges. If either Acorn or Stash were to launch this, then you can just take my money now.
College Savings Platforms
Gradifi offers a College Save Up platform which is a great way to save in an automated manner, but this requires your employer’s enrollment as a participant and it’s still not quite user driven in the manner that a round-up checking with debit offering would be. That aside, as a subsidiary of First Republic Bank, Gradifi and First Republic seem capable of adding a round-up offering to their suite of products.
So, age old question for you … what is the back-end logic in a core system for inserting oneself into a POS transaction and manipulating the transaction amount upward to the nearest dollar, and then sweeping the difference into a separate savings account while then building the rules for communicating an “IF/THEN” style EFT alert to a third party partner to draw a recurring EFT under a preauthorized agreement upon reaching a threshold amount? I don’t know, but this is why those with preexisting logic and integrated systems are better positioned than you.
There are some firms that might be able to help, (see below), because if you don’t currently have a round up savings option, you’re going to need a technology partner to break into your core system (at the risk of voiding your warranties on a multi-million dollar system) and integrate the interface that will accomplish the rounding either at the time of transaction posting or nightly ACH file to the Fed, perhaps. And then, you’ll still need an NDIP broker-dealer partner for the 529 account offering, and if you don’t currently have NDIP offerings, then you’ll first need to conduct due diligence to engage one, which will then require additional FTEs to manage the offerings, as well as expand your compliance management program, audit requirements, you may need to consult with your prudential regulator, etc., etc. And then there’s the cannibalization of your own deposits! This may not be for you.
Potential Technology Partners
My best guess for the experts in this space would be Plaid or Quovo (now one in the same by way of merger) are likely best positioned to facilitate the logic behind this transaction if you can supply the infrastructure. They’re already driving some of the best alternative banking solutions in the marketplace.
Ultimately, if this offering truly does not exist, and any one of the above players can introduce such an offering, then there is a chance to claim a slice of a $328B pie. If it does already exist, then please forward a link.