Perhaps you have heard about this nifty new "savings" program that Scotiabank is offering to its customers. It's called "Bank the Rest". The way it operates is like an electronic change jar. Every time you do a debit payment, such as when you buy groceries, it can round up your purchase amount to the next dollar or five dollar level and transfer that additional amount into a savings account. The way Scotiabank spins this, is that by spending money you can actually end up saving a bit, and will hardly notice that little extra amount per transaction.
Well, what is really going on here? Banks exist to make money, often by taking it away from you without you realizing it. Hmmmm. Out of the goodness of their hearts they are creating a way for you to transfer a bit of money over to an account where they are going to pay you more interest. At first blush, it sounds like the bank is going to lose money on this scheme while helping their customers save a bit of money. Well, let's dig into this a bit further.
To whom is this savings scheme really targetted? Well, it really is a nickel and dime approach to getting a tiny bit of money set aside. Is somebody with a fat bank account going to bother doing this? Is somebody who already knows how to save 10% or more of their paycheque going to bother doing this? The answer is a resounding no. This scheme is targetted at people who normally drain their bank accounts all the way to zero or close to zero between pay periods. They're led to believe that they can get ahead by tossing aside a bit of money into another account where they won't have easy access to spend it. But what is happening here is that a large number of these people have their accounts drifting into overdraft between paycheques as it stands today. This extra bit of so called savings is really coming out of their overdraft where they are paying a bit over 10% per annum interest. And it goes into an account where the bank is paying them just 2.75%. The bank itself is pocketing the approximately 8% difference on this money. Even though the "bank the rest" amount will not be taken once the account is in overdraft or will send the account into overdraft, don't be fooled. It's all about grinding the accounts down to the overdraft limit faster in a clandestine way.
Let's crunch a few numbers just to get a handle on this. Let's say the average person using this scheme saves about $20 a month. Over the course of a year, the pot ends up at say $250 to make the math easier. For the sake of the calculations, assume that it all comes out of overdraft. It doesn't really, since the user's regular chequing account will drift in and out of overdraft as paycheques arrive and payments come out (ie. the 10% overdraft rate isn't being paid all the time), but for the sake of the numbers just say it all comes out of overdraft. How many such customers might the bank sucker into this so called savings scheme? Well, the country has 35 million people in it, let's say that Scotiabank has a million customer chequing accounts. It's probably a conservative number but let's go with it. Let's say that of those million customers, they can convince 5% (all overdraft drifters) to go with this scheme. So that's 50,000 chequing accounts that are likely in overdraft for quite a bit of the year. So $250 x 50,000 accounts = 12.5 million dollars. At 8% (difference between overdraft rate and the savings rate) that amounts to exactly 1 million dollars per year. This also doesn't take into consideration the juicy service charges when overdraft is triggered in accounts that wouldn't normally hit overdraft except for these greater amounts now coming out. It also doesn't take into consideration all the new services charges that will be triggered out of the new savings accounts. If you look into those new "Money Master" savings accounts you can't dip directly into them via ABM or direct payments without it costing you $5 per transaction. You can transfer to your chequing account for free, but how many of these customers are going to bother to do that or accidentally trip over the fee the first time?
So, Scotiabank, you found a new way to pull at least a million dollars out of your poorest customer base by spinning it as something good. Wow, way to go, you are my new hero. Pat yourselves on the back.