What are Embedded Savings?

In recent years, embedded savings have emerged as a powerful tool to help individuals create a financial safety net. But what exactly are embedded savings, and why are they gaining traction in the personal finance landscape?

Defining Embedded Savings

A key aspect of embedded finance, embedded savings refer to savings mechanisms that are seamlessly integrated into everyday financial transactions or products. This innovative approach aims to make saving money an effortless, almost invisible process for consumers. Instead of requiring active decisions and transfers, embedded savings work in the background, capitalising on regular spending habits to accumulate savings over time. 

In our white paper, Financial Super-Apps: Reshaping Consumer Behaviours in the Digital Era 75% of respondents claimed that they aim to consistently allocate funds for savings purposes, a clear indication that an appetite for embedded savings - a function which makes the process of fund allocation frictionless, exists amongst different cohorts.

The Mechanics of Embedded Savings

The core principle behind embedded savings is to leverage existing financial behaviours to foster positive savings habits. Common implementations include:

1. Round-up features: When making a purchase, the amount is rounded up to the nearest pound, with the difference automatically transferred to a savings account

2. Percentage-based savings: A small percentage of each transaction is automatically set aside as savings

3. Automated micro-transfers: Based on spending patterns or predefined rules, small amounts are regularly moved to savings

The Psychology of Embedded Savings

Embedded savings tap into several behavioural economics principles:

1. Automation: By removing the need for active decision-making, it overcomes inertia and procrastination

2. Pain-free saving: Small, frequent savings feel less impactful than larger, less frequent deposits

3. Default bias: People tend to stick with pre-set options, making automatic savings more likely to persist

The Growing Popularity of Embedded Savings

The embedded savings market has seen significant growth in the UK in recent years.  A survey conducted by Huawei found that the use of banking apps for savings utilisation purposes had grown significantly, rising 10% from 2020 to 2021.

The financial benefits of this shift are substantial. Nearly half of the app users reported improved savings, with an average of £173 saved monthly, potentially accumulating to over £2,000 annually. This success is attributed to several key features of mobile banking apps:

1. Immediate access to account statements 
2. The ability to establish savings targets
3. Upcoming payment reminders
4. Spending analysis tools with customised savings recommendations

The rapid adoption of these tools in the UK underscores the appeal of effortless saving mechanisms, particularly in a financial landscape where traditional savings rates have been low. As more fintech companies and traditional banks introduce these features, the trend is likely to continue growing.

Impact on Customer Wellbeing

substantial. Michael Stemmle, CEO at the Zurich-based embedded finance platform additiv, claims that round-up savings can allow a person to save an average of $1,000 per year, painlessly. The impact that this can have on customers’ wellbeing extends far beyond the financial. Lloyds Bank Savings Report (2018) highlighted that 74% of consistent savers said they were happy, compared to just 36% of non-savers, while 53% agreed that the presence of savings had a positive impact on their psychological state.

Embedded Savings in Action

Several financial institutions and fintech companies in the UK have introduced embedded savings features:

1. Moneybox: This popular app rounds up purchases to the nearest pound and invests the difference in stocks and shares ISAs or lifetime ISAs
2. Plum: An AI-powered app that analyses spending habits and automatically sets aside small amounts. It offers both savings and investment options
3. Starling Bank's Round-up: This digital bank offers a round-up feature that automatically transfers the difference to a separate savings space within the account.
4. Revolut Vaults: Users can set up rules to round up transactions and transfer the difference to a Vault, which can be used for saving or investing.
5. Chip: An AI-powered savings app that calculates how much a user can afford to save and automatically transfers it to a separate account.

These services demonstrate the growing popularity and diversity of embedded savings options in the market, all of which cater to different preferences and financial goals.

The Future of Embedded Savings

As financial technology continues to evolve, we can expect to see more sophisticated and personalised embedded savings solutions. Some potential developments include:

1. AI-driven savings: Using artificial intelligence to optimise savings based on individual spending patterns and financial goals.

2. Integration with investment platforms: Automatically investing saved amounts into diversified portfolios.

3. Gamification: Incorporating game-like elements to make saving more engaging and rewarding.

Conclusion

Embedded savings represent a significant innovation in the fintech space, offering businesses a powerful way to enhance their audience reach. By integrating automatic saving mechanisms into existing platforms, companies can provide added value to their customers while potentially increasing engagement and loyalty.

However, it's crucial to recognise that embedded savings are just one aspect of a comprehensive financial wellness ecosystem that businesses can offer. While they provide an excellent entry point for encouraging good financial habits, offering a range of embedded financial tools creates a more holistic offering.

For instance, while embedded savings help users build a financial buffer for unexpected expenses or short-term goals, products such as income protection insurance not only serve as a replacement income for people if they become too unwell to work, but in doing so, they also protect hard-earning savings.

As financial technology continues to evolve, we anticipate the rise of increasingly sophisticated, integrated solutions which combine various aspects of financial management and protection. The opportunity for businesses lies in creating a unified experience that addresses multiple financial needs simultaneously.

In conclusion, while embedded savings features are a valuable starting point for enhancing financial platforms, they represent just one piece of the puzzle. By considering a broader range of embeddable financial products, including income protection, businesses can create more robust, attractive, and comprehensive financial ecosystems. As these integrated platforms continue to evolve, they have the potential to revolutionise how individuals interact with financial services, offering unprecedented convenience, security, and peace of mind.

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