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Reuters/Chris Wattie
The Fed is raising rates, big banks aren’t.
BANK ON IT

Aggressive online competition means US savers can now easily get interest rates of 2% or more

John Detrixhe
By John Detrixhe

Future of finance reporter

From our Obsession

Future of Finance

New technology is upending everything in finance.

Digital competition is shaking up the banking business. This can be an opportunity for people looking to boost the rate they get on savings.

Wealthfront, the 11-year old robo-investing company, is jumping into the fray with a “Cash Account” offering a 2.24% interest rate, among the highest in the US. The announcement comes as online-only startups ramp up competition for deposits.

That could be a good thing for consumers. The US Federal Reserve has been gradually hiking interest rates in recent years—its benchmark overnight rate is now 2.25% to 2.50%—but the rate traditional banks pay on savings deposits has generally remained paltry. Commercial banks hold some $8 trillion of cash, paying an average of just 0.10%, according to Bankrate.

Online banks, which have lower overhead expenses than their brick-and-mortar rivals, are trying to win over new customers by offering better deals. (That said, Citi has an account that pays 2.36%, signaling big banks are playing along, too.) Wall Street stalwart Goldman Sachs jumped into consumer banking in 2016 with its Marcus division, and its online accounts offer 2.25%.

Savings accounts are guaranteed by the Federal Deposit Insurance Corp. (FDIC) against loss, generally up to $250,000. But Wealthfront says its cash account—it deliberately isn’t calling it a savings account—is federally backed up to $1 million. The company has white-labelled services from multiple FDIC-insured firms such as East West Bank and New York Community Bank to offer the accounts. It says these white-labelled accounts are why it’s able to offer a higher level of deposit insurance than consumers may be used to if they park all of their funds at a single institution.

An FDIC spokesperson pointed out that a company called CDARS, which operates a certificate of deposit registry service, uses a model that’s somewhat similar and offers additional deposit insurance. Another non-bank service called Max acts like a financial-control center, rerouting money among FDIC-insured online banks to get the best yield.

For Wealthfront, a digital investment service with more than $10 billion in assets under management, the new account could be a useful way to attract new customers. Unlike some higher-yielding savings products that require a minimum balance of $10,000 or more, Wealthfront says customers can open a cash account with as little as $1.

“You can expect us to further extend our services into the banking sector this year,” Andy Rachleff, CEO of Wealthfront, said in a statement.

For savers seeking higher rates, money-market mutual funds are also an option: Such offerings may pay 2% or even more. The funds invest in short-term securities that typically remain steady in value, but they aren’t backed by the US government if anything goes wrong (which happened, spectacularly, during the 2008 financial crisis). Wall Street Journal columnist Jason Zweig (paywall) warns that money funds yielding more than 2.5% are likely taking “excessive risk.”

This story has been updated in the fifth paragraph to change the word “partner” to “white-labelled.”

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