Analysis: "Bank the Rest" program

The Bank of Nova Scotia recently introduced the “Bank the Rest” program, designed to link spending and saving. The program, in theory, helps individuals become more disciplined, frequent savers. Bank the Rest is timely given the financial troubles that many Canadians are experiencing – recent statistics indicate that nearly 16% of families have a net worth of under $5,000 and debt has soared 47.5% during the past six years, adjusted for inflation. Unfortunately, the program’s benefits are minimal and there are several important disadvantages.

How the Program Works

Bank the Rest (“BTR”) links a client’s debit card, chequing account, and savings account. Each debit card purchase is rounded up to the next $1 or $5 (as selected by the individual during enrollment). The actual amount of the purchase is withdrawn from the chequing account. In addition, the excess of the rounded amount over the purchase price is transferred from the individual’s chequing account to their high-interest savings account, on a daily basis.

For example, if a Scotia client purchased a meal for $5.64 and a book for $16.94, those purchases would be rounded up to $10.00 and $20.00, respectively. (This assumes they selected to round up to the next $5). The bank would withdraw $22.58 from their savings account for pay for the purchases. In addition, the bank would transfer $7.42 (the excess of $30.00 over $22.58) from the chequing account into their savings account. The gist of the program is that the more frequently an individual spends, the more money is transferred into their savings account.

Advantages

[01] “Forced” discipline. Many people have difficulty understanding key personal finance issues. Others struggle to maintain discipline and control their spending. The BTR program is beneficial in the sense that it essentially forces people to save. If a person lacks financial understanding or discipline, they can let the BTR program automatically help build their savings.

Disadvantages

[01] No new wealth is generated. It’s important to emphasize that the BTR program doesn’t generate any new wealth; it simply transfers money from one account to another account. Clearly, an individual’s net worth doesn’t change regardless of if the dollar is kept in their chequing or savings account. Even the interest generated on money transferred to the savings account isn’t new wealth, because the client easily could have transferred their funds into the savings account without ever enrolling in the BTR program.

[02] Minimal interest. Even frequent debit card users are unlikely to earn significant interest on the funds transferred to their savings account. Assuming a client makes one debit card purchase per day, and $2.50 is transferred to their savings account each time, they will earn just $10.27 after one year (based on the current savings account rate of 2.25%). To earn just $100 in interest, before tax, a client would need to make nearly 10 separate debit card transactions, every day of the year!

[03] Additional fees. The bank states that there are “no additional fees” for the BTR program in bold text. However, keep in mind that a chequing account must remain open while the BTR program is used; chequing account fees range from $47.40 to $143.40 per annum. The fees from even the cheapest account will almost certainly exceed any interest income earned through the BTR program! (There are some chequing accounts without fees but they have restrictive conditions (i.e. minimum balances) or are only available to certain people (i.e. seniors and students)). This is a non-issue if a client already had a chequing account open (since they paid the annual fees regardless of if they used the BTR program); however, the annual fees are both significant and incremental for any clients that opened a Scotia chequing account for the first time. Additionally, withdrawals from the high interest savings account cost $5.00 each. Furthermore, most chequing accounts only allow a certain number of inter-account transfers per month, so any automatic BTR transfers in excess of the specified limit costs $0.65 each.

[04] Less responsibility. Perhaps the biggest issue with the BTR program is that users reduce their financial independence. Intelligent consumers should transfer funds from their chequing account to their savings account on a regular basis anyway—the BTR program fails to do anything that consumers can and should be doing on their own. Indeed, it’s possible that the program will make some individuals have a negative attitude towards savings (i.e. some consumers think that “the BTR program will take care of everything” and fail to properly monitor their finances).

Conclusion

The BTR program does not generate any new wealth, the service fees are likely to exceed the interest earned, and the program provides less incentive for consumers to take responsibility for their own finances. Indeed, the BTR website’s claim that “you don’t have to change your spending behaviors to become a saver” is terribly misleading. Consumers can’t get something for nothing, and the BTR program is no exception.