It's something online-only banks compete on: slapping attractive interest rates on their savings accounts to woo you. But in recent months, your high-yield account options have been multiplying from a newer space as interest rates have perked up from years of near nothingness during the aftermath of the economic crisis.
Aspiration, Varo Money, Empower, Social Finance, Wealthfront and other fintech firms are now offering 2 percent annual percentage yield (APY) or higher on their accounts for your cash. Yes, there are higher yields available. But these fintech firms — which partner with a bank to hold your deposits or sweep your deposits into Federal Deposit Insurance Corp. member institutions — are paying 20 times the national average of 0.1 percent for savings accounts, per Bankrate's data.
"You're definitely seeing them put out some of the higher rates out there to try to attract new business," says Nathan Stovall, a senior research analyst at S&P Global Market Intelligence.
The strategy marks a twist: fintech companies, well-known for their digital experiences and promises to help democratize finance, are increasingly competing on rate as the battle for your cash continues to heat up from incumbents, tech companies and startups alike.
For traditional banks, it represents rising competitive threats. For you, it means more options to consider and additional interest income.
Large banks, which typically pay paltry amounts for your deposits, have been heavily investing in improving their digital banking in recent years — providing you another reason to stay put.
For some fintech firms, offering a competitive rate is tied to expanding into banklike products. Wealthfront, for instance, introduced a 2.24 percent yield when the robo-advisor launched Wealthfront Cash Account in mid-February.
For others, the bump up is the result of a behind-the-scenes change that gives the firm more control over the account. Some, meanwhile, are just waiting for their debut. Financial Life, for instance, is gearing up to launch a 2.20 percent APY on a saving account it plans to roll out soon with an undisclosed bank partner.
Consumers can expect more high-yield account options coming from younger fintech firms in the months to come. If you're a young person using these products, it could mean learning something new.
"There's an opportunity here to almost in a way educate younger consumers, 'Hey, guess what, you don't have to accept a sub-1 percent interest rate, you can actually get more,' " says Raja Bose, a global retail banking consultant at Genpact. "It's an underserved market."
Regardless, it ought to put more pressure on incumbents to shake up the way they seek out deposits to improve banking in a more general way.
"Banks need to compete with these fintech animals that have really strong offers and great customer experiences," says William Trout, head of wealth and asset management at Celent, a research, advisory and consulting firm.
Reacting to intensifying competition is already evidenced in one of the biggest planned mergers in a decade — SunTrust Bank and BB & T. The deal will let the combined banks have a larger tech budget as it seeks to become more competitive in an industry that is transforming.
Mary Wisniewski writes for Bankrate.com.
