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Navigating the paradox of choice: FinTech savings overload in the UK

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by Efi Pylarinou Advisory
| 28/03/2024 14:00:00

Cash has become an asset in the current economic environment due to the high interest rates. Consumers are presented with a dazzling choice of savings options from traditional high street banks to FinTech challengers and specialised savings marketplaces. However, this abundance of choices has also created a new information asymmetry, making it challenging for consumers to make optimal decisions.

The rise of savings marketplaces
In the UK, several savings marketplaces have emerged, offering consumers a centralised hub to compare and manage their savings accounts. Platforms like Hargreaves Lansdown’s Active SavingsSavings Champion’s Savers HubRaisin UKAJ Bell Savings HubAviva Save are some of the popular choices, allowing users to shop around and switch between different providers with ease.

These platforms not only provide transparency and enable discovery but also offer exclusive deals and competitive rates than those offered by traditional banks. For instance, Hargreaves Lansdown currently offers the highest one-year fixed-rate account, paying 5.15% AER. [1]

Embedded finance and the democratisation of savings
Digital banks like Monzo have introduced features like “Pots,” which allow users to create separate savings accounts within their main account tailored to specific goals. Starling Bank offers visual Saving jars to set money aside from your main balance, for example, for a holiday, a bike, rent or bills, but these are budgeting tools and do not pay interest. Revolut offers interest-bearing Vaults with rates that vary by membership (Plus, Premium, Metal membership).

Moreover, savings products are being embedded as we speak into other places, from your car, your retailer, your BigTech wallet provider, your asset manager, your insurance broker, who all want to create superior customer experiences. However, this increased accessibility and variety are contributing to a new kind of information asymmetry, making it more challenging for consumers to make informed decisions. Democratisation, savings as a service, and embedded finance are ironically resulting in suboptimal behaviour. It is a result of a more complex and distributed optimisation problem.

The suboptimal savings behaviour
Despite the democratisation of savings choices, the overwhelming number of options and the lack of standardisation in terms and conditions have led to a new suboptimal savings behaviour among consumers. The dazzling array of products, coupled with their distribution across multiple channels, has created a complex landscape that can be difficult to navigate for end users.

This information asymmetry raises the question of whether an independent, personalised AI companion could help consumers navigate this new savings landscape and optimise their savings strategies. Analysing individual goals, risk profiles, and preferences, such an AI assistant could provide tailored recommendations and guidance, helping consumers make the most of their cash assets. A personalised AI companion is not selling any product and hopefully is not getting a kickback from the consumer’s choice.

The rise of cash hubs in wealth management
Beyond the savings platforms, the trend of offering cash management solutions is also gaining traction in the wealth management space. UK providers like Wealthify and Quilter have launched cash hubs and savings accounts, recognising the growing demand for high-yield cash products amongst their clients.

UK wealthTech Wealthify[2] for instance, has introduced a savings account with an interest rate of 4.91% AER (tracking the Bank of England’s base rate) supported by ClearBank. Wealthify customers can now hold cash savings alongside their investment portfolios on the same platform. That means that wealth tech is now competing with neobanks and savings marketplaces, and every other provider that embeds savings in their business. Consumers have too many choices.

Quilter[3] a publicly traded UK wealth management player (ex-Old Mutual Wealth mgt), has launched its Cash Hub service, allowing advisers to view their clients’ cash savings alongside their platform investments, catering to the growing perception of cash as an asset class.

“Clients now think of cash as an asset class they want to hold. They want to hold 32-day notice deposits, six-month fixed deposits, and 12-month fixed deposits, so we have added that to our platform” says Quilter.

Quilter’s digital transformation has resulted in overtaking Abrdn last year and becoming the largest advised platform in terms of both assets and fees.

Cash has indeed become a valuable asset. While the democratisation of savings choices and the rise of embedded finance have created new opportunities, they have also led to new information asymmetries and suboptimal savings behaviour among consumers.

In 2022, Hargreaves Lansdown conducted a survey that showed that only 6% of people in the UK use an online savings platform. The Savings Guru estimates that cash held in savings platforms represented less than 1% of the entire market. The money sitting in current accounts and easy-access options earning no interest is huge.

In Feb 2024, the FCA urged Brits to ‘make money work harder’ by shopping around for savings rates. While high street banks failed to pass on the interest rate increases, the market once again confirms that ‘build it and they will come’ does not work. Savings marketplaces, vaults and pots, embedding savings solutions, have yet to move the needle of what I used to call back in 2016 ‘unadvised assets'- the cash sitting in current or easy-access accounts earning nothing. Robo-advisors did not manage to move that needle and reduce these sizable amounts. Can savings marketplaces, vaults and pots, embedding savings everywhere, make a difference or are we creating a new information asymmetry and a more complex optimisation problem for end users? [4]

FinTechs have clearly created a “choice overload”. I think it is time for innovators to reflect on Richard Thaler's research (Nobel laureate and pioneer of behavioural economics), who wrote about choice overload in the context of retirement savings plans, showing how limiting investment options can increase participation rates.

The increased complexity of the savings landscape highlights the need for personalised guidance and choice architecture that simplifies decisions by limiting overwhelming choices, which is exactly what Cass Sunstein and Richard Thaler discussed in their work “Nudge”.

Similarly, the research by Shlomo Benartzi and Richard Thaler on the “Save More Tomorrow” program showed how automatically enrolling employees in retirement plans with pre-set contribution increases helped overcome choice overload and improve savings outcomes.

FinTech continues to create more choice overload. The role of personalised AI companions creating trustworthy shortlists and optimising continuously for various financial wellbeing time frames can be the solution. Who can solve this data riddle?

[1] Best online savings platforms in the UK — Money To The Masses

[2] Best online savings platforms in the UK — Money To The Masses

[3] Quilter, was formerly known as Old Mutual Wealth Management, is a British multinational wealth management company formed to take over the UK wealth management business of Old Mutual plc after its separation of business. It is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index.

[4] Nudge-Budge banking software lagging in the attention economy

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