A number of banks offer programs that convert a fraction of purchases into personal savings. Take Bank of America’s Keep the Change program: it rounds up every purchase to the next dollar and transfers the difference—for example, 25¢ on a $2.75 taco—from customers’ checking account to their savings accounts. Banks do this to encourage customers to use their cards constantly; consumers enroll because they see a way to start saving automatically, even unconsciously.
Getting in the habit of socking away money is good. The problem is that at current rates, the dollars just sit there, earning almost zero interest.
A new service called Acorns essentially copies this model—tracking users’ purchases and sweeping up the “change”—and introduces the risks and rewards of investing these extra pennies in publicly traded securities. Small bank account balances are backed by the government. If you’re willing to give up that guarantee and risk losing money when the market goes down, the Acorns approach also holds the potential to give a much greater return when the market goes up.
Acorns calls this “micro investing.” The company’s chief executive, Walter Cruttenden, a former chief executive officer at ETrade’s EOffering investment bank, sees it as a way to get the card- and smartphone-wielding millennial generation invested in public markets without much friction. Acorns plans to release iPhone and Android apps in the second quarter of 2014; users would add their debit cards and credit cards and then answer questions to establish how risky or conservative they prefer their investment style to be. Then, in $5 increments, Acorns will begin siphoning the “change” from their purchases into one of five investment portfolios.
“If you break the increments that people invest into very, very tiny amounts—so they can do it on the fly and in the background of life—they never have to make this decision with $5,000 or $10,000 in a meeting with a broker,” Cruttenden says.
Acorns says it will give every new user $5 to start an account. The app will be free to download, then cost $1 a month. Acorns also plans to charge a 1 percent management fee, which drops to 0.25 percent when a user’s balance reaches $5,000. Withdrawals can be made at any time. The company says it will issue all relevant tax forms.
Acorns Grow, based in Newport Beach, Calif., says it has attracted $8.3 million in venture funding, the latest a Series B round of $5.5 million.
Cruttenden’s son, Jeff, 27, is the company’s chief operating officer. “We’re going after people who really don’t have an investment account yet,” he says. “The most important part of this is that the way we round up and invest the change, we’re [adding] investing to existing behavior—we’re not trying to change behavior.”
Investments shouldn’t be made cavalierly. But the Acorns model is worth considering. The amounts are relatively small—the Cruttendens estimate that more active card users might accrue $50 per month in “rounded up” charges—and Acorns plans to invest in low-cost, passive index funds. This could prove to be an inexpensive way of introducing young people to the world of investing at ages for which compound interest can become a powerful tool.
Or feel free to mark this down as another sign that the equity markets are dangerously overheated after returning an annual average of 21.3 percent over the last five years. It seems unlikely that a service that turns every latte and App Store transaction into an investment would find much traction launching into a bear market.