While anyone could purchase a Certificate of Deposit (CD) that paid over 5% APY just a decade ago, the average rate for a 12-month CD is now just 0.59%. Worse, the average savings account rate is only 0.10%, which adds up to almost nothing regardless of how long you let your money grow.
This just goes to show that low interest rates can be good for housing and borrowing but terrible when it comes to preserving capital and growing wealth — at least a good part of the time.
Fortunately, an array of online banks have saved the day by offering better-than-average rates over the last few years. This includes the CIT Bank Savings Builder Account, which offers a 2.30% APY on balances of $25,000 or more or on accounts that post a deposit of at least $100 each month. This amount of interest won’t help you grow rich, but it’s definitely better than nothing — and more than you’ll get with the average savings account.
Funny enough, several online financial advisors, also called robo-advisors, have launched their own online savings account products in the last year. If you’re trying to keep your savings from dwindling due to inflation, new offerings you may want to consider include:
- Personal Capital’s Personal Capital Cash™ and Savings Planner™: This high-yield savings account comes with FDIC protection with insurance up to $1.25 million along with tools that can help you plan your retirement savings and pay down debt. There is no minimum balance requirement and you can qualify for a 2.35% APY if you use Personal Capital. Non-clients can also score a 2.30% APY return.
- Wealthfront Cash Account: This savings account, which is sponsored by robo-advisor Wealthfront, gives you 2.57% APR with no fees, unlimited account transfers, and FDIC insurance on accounts up to $1 million. You can also open an account with as little as $1 to start.
- Betterment Smart Saver: A Smart Saver account from Betterment lets you earn a 2.0% APY on your savings, although you are required to pay a .25% account management fee to Betterment. This account lets you withdraw your money for free and comes with a cash analysis tool that aims to help you manage your money.
Why Are FinTechs Launching Savings Accounts?hose are just a few of the interesting new savings products now offered by fintech firms, but there’s an underlying question that desperately needs answered: What is the point?
Why are robo-advisors and other fintech companies bothering with savings accounts? And what do they have to gain?
While it may seem obvious, we interviewed some financial experts and advisors to get their take. Here’s what they said:
New Customer Acquisition
Jeff Silberman, who serves as counsel in Reed Smith’s Financial Industry Group, says that, in the competitive space where robo-advisors exist, getting new customers is the name of the game. Offering eye-popping banking products is an easy way for fintech companies to get their name in the news and to stand out among the crowd.
Getting a new customer to sign up for a high-yield savings product could help with customer acquisition, plain and simple. And with more and more big brands launching online financial products with similar perks, gaining new customers is a crucial piece of the puzzle.
Diversification of Revenue
Ron Shevlin, who serves as director of research at Cornerstone Advisors, a banking consulting firm, says that lending is crucial in banking, and to lend you need deposits.
Firms like Personal Capital and Wealthfront have enjoyed strong account growth over the past few years, but they are now in need of diversification of revenue and profit sources to maintain their current level of growth.
“Lending is a natural area for growth, but to go this route they must first build up a base of deposits,” he says.
In other words, we may see robo-advisors like Wealthfront and Betterment jump into the lending game in the future, but for now, they need money on deposit. And high-yield savings accounts add yet another tool to their virtual arsenals that make future business opportunities like lending a real possibility.
Gain Market Share
CNote’s CEO Catherine Berman, who previously served as Managing Director at Charles Schwab, offers another explanation that makes a lot of sense. Not only do fintech companies want to acquire new customers, but they need to compete and take hold of their market share.
Not only are these companies looking to create new opportunities for different types of revenue, but they are striving to engage more customers and build loyalty. Banking products — and especially ones that pay well — offer a smart way to achieve that goal.
Since each fintech company knows that their competitors are heading the same direction in terms of grabbing their share of potential customers, they have to follow suit by launching their own competitive products that lure consumers in.
Get Access to More Customer Data
Finally, don’t forget that getting ahold of more customer data can be fruitful on its own — and this is despite the fact that robo-advisors like Personal Capital don’t sell or rent their customer data out.
The more data they have, the more they can tailor their offerings to your unique financial situation — or even come up with new products to serve their existing customer’s needs.
Why are fintechs setting their sights on banking? At the end of the day, it’s all about the benjamins in one way or another, and this should surprise no one.