The marriage of day-to-day spending and long-term financial planning has been consummated in the wealthtech industry, but the pair mostly remains in the honeymoon phase. However, existing relationships between short-term and long-term monetary matters are maturing, and more of these concepts are getting hitched.
Wealthtech apps Betterment, Wealthfront and M1 Finance have rolled out features that automatically manage users’ cash beyond robo-advisor functionality, which invests money in stocks, bonds, mutual funds and ETFs. Analysts believe incumbents like Bank of America, Fidelity and Charles Schwab will soon embrace automated cash management features as wealthtechs, banks and investment firms seek to evolve into even more of a one-stop financial shop.
David Goldstone, head of research at robo-advisor research firm Backend Benchmarking, said wealthtechs have been pioneers in “pushing the envelope of innovation,” but he believes incumbents will — and must — catch up with the upstarts in terms of cash management bells and whistles. Goldstone expects more startups and incumbents to embed automated cash management into their apps in 2021, with the pandemic-spurred rise of digital money management helping accelerate this trend.
“I think it will be rare that people do not have access to this advanced automation in five to 10 years’ time,” said Brian Barnes, founder and CEO of wealthtech startup M1 Finance, which has more than $2.5 billion in assets under administration.
M1 unveiled its automated cash management feature, Smart Transfers, on Dec. 1, 2020.
“It’s very easy to paint the picture that in 10 years, most people will be banking, managing their investments, doing their borrowing all through the internet or mobile devices — whatever it may be — and having software do the management rather than paying a percentage of their net worth every year to have a person do it,” Barnes told FinLedger.
For wealthtechs like M1, providing automated cash management pushes them beyond robo-advising and toward handling “a larger swath of people’s personal financial lives,” Goldstone said. Likewise, incumbents want to increase their share of an existing consumer’s wallet. For both wealthtechs and incumbents, this broadens their ability to sell financial products and services, he said, and diversifies their revenue streams.
Goldstone cites SoFi as an example of a fintech that has aggressively pursued the goal of becoming an all-around platform for financial services. Founded in 2011 as a vehicle for refinancing student loans, SoFi has expanded its offerings to include cash management, investments, personal loans, home loans, small business lending and insurance. Its newest product is a no-fee, cash-back credit card. In the case of SoFi, it expanded into wealthtech after establishing itself as an online lender.
For non-incumbents — especially given the high cost of customer acquisition — “it’s a game about growth and it’s a game about scale,” Goldstone said. “Any one of these services are very low-margin services. You need to provide these services at scale to be profitable.”
Goldstone said automated cash management isn’t “a game changer,” but it does differentiate wealthtechs from incumbents.
Here’s how Betterment’s, Wealthfront’s and M1 Finance’s automated cash management technology works.
Betterment Two-Way Sweep
Betterment’s cash management feature, Two-Way Sweep, automatically monitors a customer’s linked checking account each day. Introduced in December 2018, the technology aims to minimize the amount of idle cash in the account while constantly ensuring there’s enough money to cover ongoing expenses. Within various parameters, Betterment “sweeps” extra cash — up to $5,000 per sweep — from the linked checking account into an interest-bearing Betterment “cash reserve” account. Cash is swept back into the checking account if the balance falls below a certain level.
Danielle Shechtman, a spokesperson for Betterment, said Two-Way Sweep relieves the headache of manually managing everyday cash.
“Two-Way Sweep is just the beginning of what can be done with innovating cash management,” Shechtman told FinLedger. “At Betterment, we see a future where you don’t have to lift a finger to figure out what money should go to which accounts like retirement and savings. It should all be done automatically and intelligently.”
Autopilot monitors either your non-Wealthfront checking account or your Wealthfront cash account each day to ensure you keep only the amount of cash on hand that you really need. When your balance exceeds your prescribed amount by $100, Autopilot automatically deposits the money into the account of the customer’s choosing, either an interest-bearing Wealthfront cash account or a Wealthfront investment account.
Kate Wauck, vice president of communications at Wealthfront, said that within the first 48 hours of launching in September, Autopilot transferred more than $3 million within the platform. She said 70 percent of the clients enrolled in Autopilot are moving excess cash to a Wealthfront investment account.
“Our clients don’t want to spend their free time managing their money and monitoring bank accounts,” Wauck said. “That’s why people are so excited about Autopilot. It acts as your own financial assistant. They call the shots and know all of their money management needs are being taken care of behind the scenes.”
M1 Finance Smart Transfers
Among wealthtechs, Smart Transfers is the latest entrant in the arena of automated cash management. Within preset thresholds, Smart Transfers lets a member of its M1 Plus subscription service (which has about 500,000 users) automatically shift money among M1 accounts so that their cash reaps gains and doesn’t just sit idle. M1 provides investment, checking and lending accounts.
“Smart Transfers is another layer of automation that we’ve built into the product so that every dollar coming into the platform can be automatically and intelligently directed toward where it can be best used for your personal finances,” said Barnes, M1’s CEO. “The ethos for M1 is imagining the personal finance experience that someone would get if they worked with Goldman’s high-net-worth services and had $50 million with Goldman.”