The question that keeps us at ABAKA up at night is how to close the savings gap. This is not a very well-known concept but it is an important one. What is meant by the savings gap is the amount an individual will have at retirement versus the amount they will actually need.
The projected gap at 2040 (for everybody who will be retiring then) is $400trillion dollars. That is a crazy amount of money. This is also so large a number that it becomes meaningless (here is a little video to show you what $1trillion looks like – now times it by 400). The point is to emphasize that at the current rate of saving. society is in for a very unpleasant surprise in the not too distant future.
However, in order to close the gap, we first need to understand a little bit about how we find ourselves in this situation. One of the major aspects that comes into play is how financial products are currently sold. Up until very recently when pensions became compulsory in the UK, most financial products were sold by financial advisors (or their respective firms). Financial advisors make money on a percentage (of the amount they manage) or a commission basis or an hourly rate. All of which point to it being in the advisor’s interest to serve wealthier clients.
The knock-on effect of this is that because each client is worth a lot of money, the advisors are prepared to spend a fair sum to acquire new customers. It doesn’t require a huge amount of deductive power to realise that if it is costing an investment provider £800 on average to acquire said customer, they are only going to spend that money on somebody who is going to provide them with real value.
Add the fact that high-value clients are lucrative enough that they do not need to also supplement their income with lower-value customers, no advisor or firm in their right mind would spend large amounts of money to acquire a customer that didn’t already have investments.
In real terms this means financial advisors do not have a reason to go out of their way to convince everyone to start saving and the vicious-cycle effect kicks in and the roles get re-inforced. People with money get advice and improve their financial wellbeing and everybody else has to fend for themselves and most end up not saving nearly enough.
Over two or three generations, what this has meant is that for everybody who did not have financial advice as part of their lives, those negative habits have become more entrenched (and combined with the ever present effects of keeping up with Joneses), we are now in a situation where 68 % of people are struggling to save every month.
The challenge is that in the current environment, to change the behaviour of an unengaged audiences at the current cost of reaching them is impossible. Hence why we now have a situation where 52% of workers in the UK are unable to answer basic financial literacy questions.
Its not all doom and gloom, however, the technological development cycle is so fast now that with the data we already generate, new companies can plug into this and start helping people become more mindful of their money. There are a number of Personal Financial Management tools on the market and they are doing a fantastic job of making people aware of where their money is going – without the need for a real-world telling off or judgement for decisions already made.
This is where ABAKA comes in. In order to help people start saving, we encourage them to set-up a goal. Whether it is for a rainy-day or a holiday, a short-term goal or a long-term one, it is not the goal but the act of setting a goal that is the important part.
By setting a goal, customers are confirming how they want to prioritise their money and ensure that they are set-up to get the outcome they want. In other words, we ensure their goals and their money are aligned.
Unfortunately, money is complicated. It does not fit in neat little boxes (unlike the video). You have current accounts and savings accounts, credit cards and loans, mortgages, savings and investments and maybe even pensions. After setting a goal, we encourage users to link their accounts so they can keep track of all of their money in one place.
The challenge is that there is theory & reality. In theory, we all want to do the right thing every month. The reality is that sometimes it is not always possible, this is where ABAKA uses gentle nudges to help keep our users on track or get them back on it.
Whilst people all work hard and money is one of the main priorities in life– people probably don’t spend as much time as they want looking after it. Which is why ABAKA can take care of it for you.
We have seen how tech companies have disrupted everything from hotels and taxis through to advertising and retail by applying data science and new business models to a service that makes the customer’s life easier and more efficient. Combined with the innate innovation and lack of legacy revenue to protect, the opportunity for a tech company to provide financial services to those previously under-served is ripe.
We don’t have all the answers yet and we are still learning but we do passionately believe that everybody can save and we have built intelligent software to enable this and close the savings gap.