Many online investment and other fintech firms have introduced checking or savings products in the past year. Based on their consumer facing marketing, they typically market this service as an alternative to traditional savings or checking accounts.
In reality, these programs are actually “low-risk” investments in a brokerage account typically composed of short-term or ultra short-term bonds. They state that their “savings accounts” could earn a much higher yield than the typical savings account, as defined by the national average savings account rate provided by the FDIC. At the time of this publication, some of these firms advertise rates of up to 3%. Thus, they reason people should invest extra unused cash in these programs.
On the surface, this sounds like a great ideal. The average interest rate at brick and mortar banks are dismal. At the time of this publication, Chase Bank, the largest bank in terms of assets in the United States, offers rates as low as 0.01% for their checking and savings accounts. This is despite the Federal Reserve steadily raising interest rates over the last few years.
Although it is reasonable to want to maximize the yield on your unused cash, I do not believe treating your savings account as an investment is a smart choice.
Consider the following points.
FDIC or NCUA Insurance
Low-risk or short-term investments still carry risk as they are not covered by the FDIC (Bank) or NCUA (Credit Union).
FDIC or NCUA insurance covers depositors’ accounts, dollar-for-dollar, including principal and any accrued interest through the date of the insured bank or credit union’s closing, up to the insurance limit. The standard insurance amount is $250,000 per owner, per insured bank or credit union, for each account ownership category.
For example, pretend you have $100,000 in a savings account at an FDIC insured bank. If that bank goes out of business, the FDIC guarantees you will receive your full $100,000 balance.
If you use one of these fintech “savings accounts”, when the value of your investment goes down, there are no guarantees.
The typical transfer time from an investment account is around 3-5 business days. This is not as liquid as other alternatives. For example, if you transfer money between a checking and savings account at the same bank, it is usually instantaneous. Also, if you transfer money between two different financial institutions it usually takes a few business days.
In my opinion, the point of a savings account is to be able to have access to money quickly in the event of an emergency. Although 3-5 business days is reasonable for an investment account, it is not appropriate for money marked for savings.
At the time of this publication, some fintech firms are advertising expected yields between 2%-3%. Compared to a traditional brick and mortar bank, this is great yield. However, when you put it in context with alternatives, it does not make much sense in my opinion.
Nerd Wallet wrote an article that showcases the highest yield online savings accounts. Online savings accounts are banks that have no physical presence. Thus, they are able to offer higher rates because of low overhead costs. Note, that these yields are similar or slightly lower than these new “savings accounts”. Since these high yield savings accounts are FDIC/NCUA insured, the risk on these accounts are much lower than these new programs. Therefore, from a risk-adjusted standpoint, online bank accounts are superior.
Nerd Wallet also highlights the highest Certificate of Deposit rates in the market. By sacrificing some liquidity, Certificates of Deposits typically offer higher yields than online savings accounts. For short-term goals, this may be sufficient.
In my opinion, the investments that make up these new fintech “savings accounts” can compliment a diversified portfolio. Nevertheless, if the intention of your money is for savings, it should not be commingled with any sort of investment.
I believe that the marketing for some of these fintech “savings accounts” may mislead people to think that there are no other viable options like high yield savings accounts. From a risk-adjusted return viewpoint, I do not think there are any advantages to use these new programs over high yield online savings account at this time.
Generally, with some exceptions, I believe investors should invest as much money as they can into their main portfolios and put any unused cash into a proper savings account for emergency savings or short-term goals. Also, investors should shop around for the best savings account to maximize their interest yield instead of investing it in a conservative portfolio.
If you feel like you have too much cash at the bank, I would have a review with your financial advisor to determine what is appropriate.