Apple, Robinhood play high-yield games to win depositors from banks

The technology industry is known for innovation and creating the next big thing. But in a time of economic uncertainty and rising interest rates, a growing segment of the tech sector is chasing one of the most non-innovative products on the planet: yield.

With US Treasury yields climbing late last year to the highest in more than a decade, consumers and investors can finally generate returns just by parking their money in savings accounts.

The banks react by offering offers with higher returns. American Express, for example, offers consumers a 3.75% annual percentage rate (APY), and First Citizens CIT Bank has a 4.75% APY for customers with at least $5,000 in deposits. Ally Bank, which is online only, is promoting a 4.8% Certificate of Deposit.

However, some of the highest rates available to savers do not come from traditional financial firms or credit unions, but rather from companies in and around Silicon Valley.

Apple is the most notable new entrant. Last month, the iPhone maker launched its Apple Card savings account with a generous 4.15% APY in partnership with Wall Street giant Goldman Sachs.

Then there is the entire fintech market, consisting of companies that offer consumer financial services with a focus on digital products and a friendly mobile experience rather than brick-and-mortar branches with expensive bank tellers and loan officers.

The stock trading app Robinhood has a feature called Robinhood Gold, which offers 4.65% APY. Interest is earned on uninvested cash that is swept from the client’s brokerage account to partner banks. It’s part of a $5 a month subscription that also includes lower borrowing costs for margin investing and stock investing research.

The company lifted its yield from 4.4% on Wednesday after the Federal Reserve approved its 10th rate hike in a little more than a year, raising its benchmark rate by 0.25 percentage points to a target range of 5%-5.25%.

“At Robinhood, we’re always looking for ways to help our customers make their money work for them,” the company said in a press release announcing the trip.

LendingClub, an online lender, promotes an account with a 4.25% return. The company told CNBC that deposit growth increased 13% for the first quarter of 2023 compared to the previous quarter, “as depositors looked to diversify their money away from traditional banks and earn increased savings.” Year on year, savings deposits have increased by 81%.

And Upgrade, led by LendingClub founder Renaud Laplanche, offers 4.56% for customers with a minimum balance of $1,000.

“It’s really a trade-off for consumers, between security or the appearance of security, and returns,” Laplanche told CNBC. Upgrade, which is based in San Francisco, and most other fintech players hold customer deposits with institutions backed by the Federal Deposit Insurance Corp., keeping consumer funds safe up to the $250,000 threshold.

SoFi is the rare example of a fintech with a bank charter, which it acquired last year. It offers a high yield savings product with an APY of 4.2%.

The story is not just about rising interest rates.

Across the emerging fintech spectrum, companies like Upgrade are, intentionally or not, capitalizing on a moment of upheaval in traditional finance. On Monday, First Republic became the third US bank to fail since March, following the collapses of Silicon Valley Bank and Signature Bank. All three saw depositors rush for the exits as worries about a liquidity crunch led to a doom cycle.

Shares of PacWest and other regional banks have plunged this week, even after First Republic’s orchestrated sale to JPMorgan Chase was meant to signal stability in the system.

After the collapse of SVB, Laplanche said Upgrade’s banking partners came to the company and asked it to step up its supply of funds, in an apparent attempt to halt withdrawals at smaller banks. Upgrade funnels the money it attracts to a network of 200 small and medium-sized banks and credit unions that pay the company for the deposits.

For well over a decade, before the recent jump in interest rates, savings accounts were dead money. Lending rates were so low that the banks could not offer returns on deposits with profitability. The shares were also in such a state of flux that investors did just fine in shares and index funds. A subset of those with a stomach for risk went big in crypto.

As the price of bitcoin rose, a number of crypto exchanges and lenders began to mimic the banks’ savings model, offering very high returns (up to 20% annually) for investors to store crypto. These exchanges are now bankrupt after the collapse of the crypto industry last year, and many thousands of customers lost their money.

There is some potential volatility for fintechs, even those outside of the crypto space. Many of them, including Upgrade and Affirm, partner with Cross River Bank, which acts as the regulated bank for unchartered companies, allowing them to offer lending and credit products.

Last week, Cross River was hit with a consent order from the FDIC for what the agency called “unsafe or unsound banking practices.”

Cross River said in a statement that the order was focused on fair lending issues occurring in 2021 and that it “does not place any restrictions on our extensive existing fintech partnerships or the credit products we currently offer in partnership with them.”

While fintech is largely under far less regulatory pressure than crypto companies, The FDIC’s action suggests that regulators are beginning to pay more attention to the kinds of products that high-yield accounts are designed to complement.

Still, the emerging group of high-yield savings products is much more mainstream than what the crypto platforms promoted. That’s largely because the deposits come with government-backed insurance protection, which has a long history of safety.

Nor are they designed to be large profit centers. Rather, by offering high returns to consumers who have long placed their money in dormant accounts, tech and fintech companies are opening the door to potentially new customers.

Apple has a whole range of financial products, including a credit card and payments app, which seamlessly integrates with the savings account, which is only available to 6 million plus Apple cardholders. These customers reportedly made nearly $1 billion in deposits in the first four days the service was on the market.

Apple did not respond to a request for comment. CEO Tim Cook said on the company’s earnings call Thursday that “we’re very pleased with the initial response to it. It’s been incredible.”

Meanwhile, Robinhood wants more people to use the trading platform, and companies like LendingClub and SoFi are building relationships with potential borrowers.

Laplanche said high-yield savings accounts, while compelling to the consumer, are not core to most fintech businesses, but serve as a tool for more lucrative products, such as consumer loans or conventional credit cards.

“We started on credit,” Laplanche said. “We think that’s a better strategy.”

SoFi launched its high-yield savings account in February last year. In its annual SEC filing, the company said that offering checking and high-yield savings accounts provided “more daily interaction with our members.”

Affirm, best known as a buy now pay later firm, has offered a savings account since 2020 as part of a “full package” of financial products. Its yield is currently 3.75%.

“Consumers can use our app to manage payments, open a high-yield savings account and access a personal marketplace,” the company said in a 2022 SEC filing. An Affirm spokesperson told CNBC that the savings account is “one of the many solutions in our product line that gives consumers a smarter way to manage their finances.”

Seen against the backdrop of a regional banking crisis, savings products from anywhere but a national bank may seem unappealing. But chasing dividends comes with at least a little risk.

“Citi or Chase, it feels like it’s safe,” to the consumer, Laplanche said. “Apple and Goldman aren’t inherently risky, but that’s not the same as Chase.”

— CNBC’s Darla Mercado contributed to this report.

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