SmartyPig: A Simpler Way to Save Or A Fee Trap?

[This post first appeared as a guest post on Free Money Finance on March 19, 2008. Last updated on March 26, 2008 with two footnotes. This is NOT a "sponsored" post. I've had no private contact with anybody related to SmartyPig. ]

Smarty what? That was my first reaction when I read about SmartyPig on Netbanker . It sure has a catchy name. What’s it about then? From SmartyPig’s web site :

"SmartyPig is a simple, smart, fun way to save for a specific goal. Using groundbreaking technology and the latest in security standards, SmartyPig allows you to invite family and friends to contribute to your account, gives you additional incentive boosts from top retailers who sell exactly what you’re saving for AND *4.30% (APY) interest on the money you’re saving."

"*Annual Percentage Yield (APY) is effective as of 3/9/2008. Rates may change at any time without prior notice."

SmartyPig wants to offer a service which encourages people to save for a specific goal, and then make the purchase when the goal is reached, as opposed to charging the purchase now on a credit card which adds to one’s debt. I’m all for that. Want that new car or vacation? Save up. In a nutshell, here’s how SmartyPig works:

1. Save for a Goal . You open an account with SmartyPig. You create one or more savings goals, minimum $250 per goal. You have to set up automatic monthly electronic fund transfers from your bank account toward these goals, minimum $25/month per goal, although you can also add more money on top of the automatic transfers by doing a one-time transfer. While you are saving toward the goals, your money earns interest in a FDIC insured savings account.

2. Get Help from Family . You can keep the goal private to yourself or make a goal public and solicit help from friends and family. They will have to pay a $5 fee every time they contribute to your goal [note 1 ]. The SmartyPig founders said they got this idea of collecting money from family members from 529 plans where it’s common for grandparents to contribute to their grandchildren’s account, although I don’t think 529 plans charge fees to the contributors.

3. Redeem Your Savings . You can’t get your money back unless you close your goal. You can close your goal at any time, either because you reached your goal or because you changed your mind. You get a prepaid MasterCard debit card from SmartyPig. You can either withdraw money to the debit card or use the money to buy gift cards from SmartyPig’s partner retailers. Some retailers will add an up to 5% bonus if you buy their gift cards [note 2 ]. It’s possible to get a check from SmartyPig but you will have to pay a $25 fee per check. From the terms and conditions ,

"At no point in time can the funds in your SmartyPig Savings Account be transferred to a third party or a bank account outside of SmartyPig. Funds can only be redeemed on a SmartyPig MasterCard® Debit Card, a Best-In-Class Retail Gift Card or cashiers check."

If SmartyPig achieves what it’s supposed to achieve, i.e. getting people to back off from charging their credit cards, it would be a great benefit to the consumers. Netbanker thinks it’s "the most innovative financial service we’ve seen since Prosper launched two years ago" and they gave it a Best of the Web award. However I doubt it will have a material impact on people’s behavior, because I think people who want to save will save and people who want to charge will still charge. It’s not like people who want to save don’t have a good way to save. Online savings accounts are everywhere. Industry pioneer ING Direct lets you set up multiple accounts for tracking different goals. There is no minimum balance, no mandatory requirement for automatic transfers, and no limitation on getting your money back. Or does SmartyPig think people who want to charge their credit card now will give up instant gratification just because there is SmartyPig now? Letting family members contribute to a goal is touted as an innovation but they can do it today easily by sending a check or PayPal payment.

The SmartyPig service itself also has quite a few fee traps. Hey, they’ve got to make money somehow! You want to contribute $100 to your sister’s wedding? They will charge you $5 every time you do it [note 1 ]. How come you can add money to your SmartyPig account by electronic fund transfer but you can’t pull your money back the same way when your goal is reached? Because they want to earn the interchange fees from the debit card. If it takes 1 year for a typical goal to be reached, they pay you 4% interest on an average of 50% of the ending balance (because money is added to the account over time), but they take back 2% interchange fee from the merchants when you use the debit card. That’s smart business (for SmartyPig, not you)! They get to recoup their entire interest cost. What a deal. If you ever lose your debit card, they will charge you $20 for a replacement. Don’t want the debit card but want a check instead? $25 fee for producing a check. Are the gift cards with up to 5% bonus such a big deal [note 2 ]? You can buy gift cards today from eBay and a few other places at a discount which translates to a bigger bonus. I can get all kinds of gift cards with a 5.26% bonus if I buy them from a grocery store using a credit card which gives me 5% rebate on grocery store purchases. How did SmartyPig become a roach motel where your money can check in so easily but it’s so hard to come out? What’s wrong with just crediting back to the same checking account the money came from? I’m afraid it’s because they don’t make any money that way. Breakage from prepaid debit cards and gift cards is a big deal.

Call me old-fashioned but I see a lot of smoke and mirror in SmartyPig. I also don’t see how it solves any problem that’s not being solved today. Announcing a goal and sharing the progress with family members is nice. Being charged $5 for the privilege of chipping in is not [note 1 ]. Separating the savings account balance into specific goals is nice, but not being able to get the saved-up balance back into your bank account is not.



(1) According to the SmartyPig blog , due to customer complaints, they removed the $5 fee for funding someone else’s goal if the money comes from a SmartyPig member using a linked bank account. However there is no indication that they will allow free withdrawals to a bank account after the goal is reached or closed.

(2) Without opening an account, I’m not able to see a detailed listing of the gift card bonus rate for each retailer. All we have is a vague footnote:

"Incentive rates and card terms vary based on merchants and are subject to change."

Amazon gift cards are probably the most desirable because Amazon has a wide selection of products and competitive prices. But for all we know, you may not get any bonus at all if you redeem for an Amazon gift card. According to the comment below from Jon Gaskell of SmartyPig, the bonus on Amazon gift card is 2%. There is still no info for other retailers. If someone knows exactly what these "incentive boosts" are for each retailer, please post in the comments. SmartyPig insiders care to comment?

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  1. Jon Gaskell says

    Would appreciate it if you could direct your readers to our new blog post at regarding our new fee structure. Currently the boost on an Amazon gift card stands at 2%, which will be added to the total amount saved plus interest. We fully expect incentives boosts from all retailers – and each one does have a boost – to increase with our traction, as they have indicated as much. Again, I really appreciate your interest.
    -Jon Gaskell, Co-Founder, SmartyPig

  2. Anonymous says

    Seems like a terrible idea all-around. A measly 2-5% discount on gift cards does not justify the hassle and the restrictions on transfers. But more importantly, what happens if SmartyPig goes out of business? Even if the underlying account they use is FDIC insured, there is an extra layer in there that makes me nervous. I want total control of all of my deposit accounts, and that includes being able to make ACH transfers, both in AND out, at will.

  3. Anonymous says

    Here is how to do your own SmartyPig thing, while maintaining total control over your accounts:

    1) Open an account with your favorite high-interest-paying bank.

    2) Deposit money therein.

    3) Repeat step 2 until you have reached your spending goal.

    4) Use the money to buy a gift card at a discount on eBay.

  4. Anonymous says

    Nice steps. Only one problem… people don’t do this kinda stuff on their own. They just don’t. They don’t have the willpower, financial acumen or time to follow through with a plan.

    Put it out on the Internet, package it with a cute name, get some branded partners, require people to do it the right way “or else” (fees) and you’ve got a goldmine.

    Don’t hate on these guys for making money. Capitalism, people. I think it’s super smart.

  5. Anonymous says

    How does it take more willpower, financial acumen, or time to set up an online savings account with recurring monthly transfers than to set up a SP account with recurring monthly transfers?

    Either account can be closed at any time. The difference is that the SP account encourages–actually, necessitates–spending the money by allowing transfers only to a debit card. Not exactly ideal for someone who lacks willpower or financial acumen.