Beware of "Fintech apps"

Investment Analysis Clubs Macro Economic Trends and Risks
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The Federal Reserve has directly harmed conservative savers by flooding banks with free money, causing the yields on FDIC-insured savings accounts to drop to near zero.

So-called “fintech apps” have been invented to produce higher yields for cash. I never heard of this before so I read with interest (pun intended).

https://www.wsj.com/articles/hoarding-cash-high-yield-saving…

**Hoarding Cash? Don’t Swing at Every Yield Pitch**
**Fintech apps are offering outsize returns on your cash. A look under the hood shows their flashy marketing can hide potential pitfalls, and you won’t always get the same safeguards a regular bank offers.**
**By Jason Zweig, The Wall Street Journal, July 15, 2022**

**Financial-technology, or fintech, startups are offering much higher yields on their apps and websites — often 4% and up. These aren’t conventional savings accounts, though, and many have caveats and complexities. Before you grab what sounds like a tempting yield, make sure you take a closer look....**

**Various fintech websites and apps, including Aspiration, HMBradley, Current, T-Mobile Money and Varo, offer rates of 3% to 5%. At most of them, though, you must maintain specific account sizes, hit spending targets or do business with affiliated companies....**

**<Snip descriptions of fintech companies that speculate with the money and skim the proceeds. It's possible to lose. Unlike banks, these are not FDIC insured.>**

**The graveyards of investing are full of people who mistook marketing messages for guarantees. In the end, it always pays to care more about the return of your money than the return on your money.** [end quote]

It appears that “fintech” companies are unregulated speculators that use the lure of “safe” returns to attract conservative investors who don’t read the fine print. They aren’t savings accounts at all.

The only sure savings account is FDIC (or FCUA) insured. I always check with the web site of the FDIC to make double-sure of a bank’s claims before starting with a new bank. Treasury securities are also safe. The GSEs (Fannie Mae and Freddie Mac mortgage backers) are not exactly Treasury but most of their securities are AAA rated.

What to do with cash?

  1. Some banks have gradually begun to increase their yield on plain-vanilla, FDIC-insured savings accounts. See bankrate.com for the latest. It’s important to have a deep cushion of plain old cash to cover living expenses. (If you are working, keep at least 6 months of living expenses in cash because it could take that long to find a new job if you become unemployed during a recession.)

  2. I-Series Savings Bonds yield the inflation rate (adjusted every 6 months). Money can be accessed after a year. Lots of fine points to read about. Principal is always returned in full, regardless of prevailing inflation/ deflation and market interest rates. https://www.treasurydirect.gov/indiv/products/prod_ibonds_gl…

  3. Treasury Inflation Protected Securities (TIPS). Unlike I-Bonds, principal is at risk if sold before maturity in the secondary market. TIPS are a reasonable investment for those who think that inflation will stay higher, longer than the market expects.

  4. Treasurydirect.gov for Treasury bills of many maturities, as short as 3 months. Currently the 3-month Treasury yields 2.33%. https://ycharts.com/indicators/3_month_t_bill

  5. The secondary market for Treasury and GSE bonds. These are currently yielding higher than bank CDs.

The Treasury yield curve is inverted in places. As the Fed raises the fed funds rate it may invert.

https://stockcharts.com/freecharts/yieldcurve.php

I wouldn’t touch “fintech.”

Wendy

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"The Federal Reserve has directly harmed conservative savers… "

Also liberal savers :wink:

One of those terms that has become politicized so one has an immediate visceral reaction.

Obviously, I know you meant it in a non-political way.

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<Obviously, I know you meant it in a non-political way. >

From now on, I will use the term “risk-averse.”

Just for you. :wink:

Wendy

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4. Treasurydirect.gov for Treasury bills of many maturities, as short as 3 months. Currently the 3-month Treasury yields 2.33%. https://ycharts.com/indicators/3_month_t_bill

Wait… in as little as 3 months I can gain 2.3% of my capital? Did I read that correctly?

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  1. Use Vanguard money market funds. They outyield the competition, because they have the lowest expense ratios. If you want to be extra safe, use the Vanguard Treasury money market fund. If you have a Vanguard brokerage account, all uninvested cash is automatically put into the Vanguard Federal money market fund.
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Wait… in as little as 3 months I can gain 2.3% of my capital? Did I read that correctly?

That’s 2.3% annualized. The annualized yield means that if you buy 3-month T-bills and keep rolling rolling them over for the same yield when they mature, your investment will be 2.3% larger. (Of course, if interest rates rise, your investment will grow more than 2.3% over the next year. If interest rates fall, your investment will grow by less than 2.3% over the next year.)

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Hi Wendy,

Thanks for your post. As I have posted here in the past, I am one who jumped at an opportunity to improve yields on cash. I spent a lot of time and effort to set up accounts at HM Bradley Bank, which is a “neo bank” that is offering higher rates on cash savings. HM Bradley was one of the banks mentioned in the article that you referred to.

https://www.hmbradley.com

The rules are complex to get the highest rate, so it took some work to get there, but since we have opened our accounts (two savings accounts and two credit card accounts) in less than a year, we have made over $6,000.

We pay the entire credit card balance monthly (so no interest fees) and there is one free year of no-fee usage on the credit card -after that, it’s $60/year.

Also, HM Bradley is the front-end bank. The savings deposits are actually deposited with Hatch Bank, which is listed as an FDIC insured bank, so our deposits are fully insured. The other limitation on these accounts is that they only pay interest on up to $100,000 on each account, so the balance needs to be managed closely.

https://banks.data.fdic.gov/bankfind-suite/bankfind/details/…

It has been a fair amount of work to set this all up. But I will move our funds from there in a heartbeat if Ally Bank would finally up their rates to 3+%. I believe that Ally will be hitting that somewhat soon as they have been ratcheting up their rates as the Fed increases the interest rates in the past 4-6 months.

'38Packard

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I usually expect better research from the WSJ. For example, T-Mobile Money isn’t fintech, and isn’t put forth as fintech in their marketing materials. It is simply an additional benefit provided to T-Mobile subscribers (like the discounts on gasoline, travel discounts, etc).

T-Mobile Money is indeed FDIC insured, and is run by a regular online bank just with a T-Mobile branded front end for electronic access. It only gives 4% interest on the first $3000 (if you go through some hoops), and it has the usual online bank rate for anything above that amount.

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From now on, I will use the term “risk-averse.”

This is also an inaccurate term. It is not risk averse, it is simply accepting different types* of risk.

  • The “conservative saver” accepts the risk, almost the certainty, of negative real returns. At least for the last few decades.
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