Chip: the robot banker trying to pull millennials out of their overdrafts
A robot banker who can pull you out of your overdraft sounds like the premise of a – dull, admittedly – sci-fi story, but Chip promises that it’s here right now.
Just finishing its first year in existence, the start-up has a compelling pitch: plug it in to your bank account, and it will analyse your spending, moving money you don’t need into a savings account, and slowly helping you hit financial security.
But even the best technology can’t overcome the iron law of budgeting. There are ultimately only two ways to fix your finances: spend less, or earn more. So which does Chip do? And how much does it actually help?
Simon Rabin, Chip’s chief executive and co-founder, says that the company’s goal is to “help people spend their money in a better way”.
“Younger people find it notoriously difficult to focus their spending on the things they care about,” he says. If you ask a typical millennial – Rabin, who is 30, includes himself in this – what they want to use their disposable income for, they’ll say holidays, deposit for a home, a new wardrobe, and so on.
“But if you exported your bank statements and went through it, you’d see you’re not focusing your spending on those things,” Rabin says. “And you’ll probably focus it more towards stuff you wish you weren’t.”
Chip’s solution is to peer over your digital shoulder at your bank balance, and when it’s looking particularly full – shortly after payday, or when you haven’t been out for a while – siphon a small amount off into a separate savings account. Over time, that savings account swells, and, hopefully, you don’t notice the difference to your current account.
Spending a little less but without having to think about it
Of course, the money still comes from somewhere. In practice, one of two things will happen: either you’ll carry on spending the same as you did before, and your savings account will grow at the same rate as your overdraft; or Chip’s model will work for you, and you’ll begin to spend less without really thinking about it.
You’ll scrape the bottom of your bank account slightly earlier each month than you would have done otherwise, and the slight sense of panic at running out of money will force you to cut down on spending. At least, until payday.
It’s not a system that will work for everybody. For one thing, your outgoings need to be flexible enough that cutting down on them is actually possible: if your extra few days scraping the bottom of your account means you don’t go out to the pub, fine; if it means you don’t eat, that’s less helpful.
For another, you need to be just the right sort of irrational: bad enough at financial restraint that simply making a budget and sticking to it hasn’t worked, but good enough at it that when you do run out of money in a given month you don’t just transfer money back out of the Chip savings account and carry on partying.
But for 10s of thousands of people, it does work. “It’s all about using technology to make better decisions, rather than using technology to give you the discipline to make the decisions yourself,” says Rabin. “It’s not necessary. The technology can make the decisions for you.”
Getting people out of their overdraft
And yet their spending habits are atrocious: the typical Chip user spends a third of the month in their overdraft, every month, constantly fluctuating between feeling moderately well-off and unable to make ends meet.
Those users, who are throwing upwards of 100 pounds a year at a problem which is so easily solvable, also provide the wider motivation behind Chip, as well as a guide to the service’s future growth: Rabin wants to destroy the overdraft.
“The first big problem for us to solve with this is pulling people out of this overdraft behaviour, and help them live their lives in the black,” he says. “Overdrafts are the sleeping dragon of the British banking industry: 40% of Brits use their overdraft every month, 20% are perpetually in them.
“It’s the crack cocaine model. You go to university, you get a free overdraft, and you keep it once you’re a graduate … then, suddenly, you’re 25, and there’s a pound a day charge, a 15% APR, and a fee every time you hit the bottom. It’s funny, there’s such outrage about the payday loan industry and high APR credit cards, but overdrafts – no one’s really woken up to them.”
For Chip users, the battle to leave their overdraft is such that they even pushed the company to institute a feature which, on the face of it, makes no sense: the option to carry on saving while they’re in their overdraft.
At first glance, borrowing money to put it in a savings account with a worse rate of interest is … not great financial planning. But it works: those savers who swing between feast and famine save more, quicker, if they carry on stashing away cash even when they’re technically overdrawn. And then, when they’ve saved a month’s salary, they can transfer it back all in one go and be free.
For those who can’t quite stomach that tier of irrationality, Chip is also working on another solution due to arrive this month: a different form of overdraft. The company will offer users “Smart Credit”, transferring £100 into their accounts just before they would otherwise hit their overdraft. “The average rate for an £800 overdraft is 37% APR, which is outrageous. We want to protect our customers from that and charge them half the price.”
There’s a chance such a move could leave a sour taste in the mouth – replacing a bad thing with a slightly less bad thing – but for now, Chip’s users are evangelical (although a £10 referral reward probably doesn’t hurt matters). “I saved £108 in a month that I otherwise wouldn’t have, and didn’t go overdrawn,” said one user, Joe Lane. “I think it’s great.”
I’d like to use it myself, but I’m one of the weird millennials Rabin can’t understand, who actually does a budget and sticks to it, saving cash the old fashioned way. “I tried that,” he said. “I couldn’t be arsed to put in the time, effort and energy … I don’t think the other products solved the problem for me.
“I don’t want to look at a pie chart showing that I’ve spent 20% of my money on going out this month. I want it done for me.”