Providing a fresh take on a still relatively fresh idea (direct savings accounts), newcomer SmartyPig has earned significant attention thanks to its high interest rates and unique savings plans. Add to that a recent investment from Red McCombs that, according to American Banker, significantly enhances the firm’s marketing reach, and SmartyPig is suddenly a firm to watch in the online savings arena.

Below, we take a quick look at SmartyPig’s offerings and list some of its relative strengths and weaknesses. It bears mentioning that we have not opened an account with SmartyPig, and as such we have not yet viewed SmartyPig’s private site.

What is SmartyPig?

SmartyPig itself is a Web startup, not a bank. (The firm outlines its ambitions here.) SmartyPig partners with an existing bank in each country in which it operates, and it is these partner banks that actually administer the accounts and hold the deposits. SmartyPig provides the front-end software for managing the accounts. Here in the U.S., SmartyPig has partnered with Iowa-based West Bank.

SmartyPig offers just one savings account. The account currently offers 2.75% APY - a very good rate, especially these days. There is no monthly fee.

How does SmartyPig work?

Here’s SmartyPig’s basic pitch: we help people save for the stuff they want. The idea is that people shouldn’t just be saving, but rather saving for something. When a user opens an account, they create a savings goal (or maybe several goals), and a recurring transfer plan is set up to help the user meet this goal.

Recurring transfer plans are nothing new, of course, but SmartyPig adds an interesting wrinkle. Users can publicize their savings goals through email and social networking sites, allowing friends and family to make contributions towards the goal. Some might call it social saving, others might say it’s just a different way of asking for a gift. Either way, it’s a new take on peer-to-peer payments.

Customers can withdraw their money in three ways:

• ACH transfer (back to the funding account)
• SmartyPig Debit Card – The firm deposits the saved money onto a MasterCard debit card, which is then shipped to the customer.
• “Best-in-Class” Gift Card - This is another unique offering from SmartyPig. SmartyPig has forged partnerships with several retailers, and users can have their saved money deposited on a gift card from one of these partner companies. The appeal here is that each partner company adds a little extra when the gift card option is chosen (one to six percent of the total amount saved, depending on the company).

What’s the catch?

There are a few, actually, and they’re not too well publicized:

• West Bank controls the interest rates, not SmartyPig. This is never explicitly mentioned anywhere. Nor is it ever fully explained that SmartyPig is not actually a bank.
• Interest payments only post quarterly; most direct savings banks post interest monthly. This information is mentioned briefly in the FAQs (#10).
• Friends and family making contributions via credit card (which is the only way for non-SmartyPig customers to make a contribution) must pay a service fee of 2.9%. This fact is buried within the Terms and Conditions page. The Terms and Conditions also contain key information about minimum initial deposit and monthly transfer requirements; this information receives little or no mention elsewhere.
• Partial withdrawals are not permitted. In order to remove funds from SmartyPig, users must cancel their goal and remove the full amount. We learned this only by calling customer service.
• West Bank actually offers an account with a higher yield – a 42-month Relationship CD, which earns 3.00%. This, of course, is not mentioned anywhere on SmartyPig’s site.

The final take…

Overall we’re impressed with the SmartyPig idea. It’s a clever product with some unique features, and it’s gaining momentum at a time when people are keenly interested in finding safe ways to grow their money. So long as the firm’s partner banks keep interest rates high, they will continue to draw new deposits. No matter how many bells and whistles a firm offers, interest rates are still the key selling point of a direct savings account.

We have legitimate concerns about transparency, though. Too many important facts are placed in out-of-the-way places. A simple product overview page listing key facts in a chart or bulleted list would likely solve this problem. Nobody wants to feel they’ve been duped, especially by a pig.