Holding Onto Cash? Fintechs Offer High Yields—and Higher Risk.
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Here's your Money Briefing for Tuesday, July 19th. I'm J.R. Whelan for The Wall Street Journal. Americans built up trillions of dollars in savings during the pandemic, and with banks offering savings rates of close to zero, a lot of people are being tempted by the higher rates offered by financial technology startups. But those could come with a higher level of risk as well.
you should approach yields of 3% to 4% to 5% and higher with a lot of skepticism because the fintech generating that is doing something that banks can't and won't do, and you need to understand that before you commit your money.
Jason Zweig writes the WSJ's Intelligent Investor column. Coming up, he'll tell us how these startups can offer such attractive rates, and why investors need to look beyond their percentages and flashy marketing language to be sure their cash is not at risk. That's after the break.
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High inflation and an unsettled economy might send many Americans searching for a better interest rate on their cash.
What problem are listeners introduced to about fintech high-yield accounts?
The savings rates at traditional banks have been near zero for years, but a new crop of financial technology or fintech startups promise much more attractive rates. So are they all they're cracked up to be? WSJ Intelligent Investor columnist Jason Zweig is with us to discuss. Hey, Jason, thank you so much for being with us.
Great to be with you, Jer.
So, you know, Jason, some of these startups, I'm thinking of places like FAIR, Aspiration, HM Bradley, Current Borrow, they're offering rates in the 3% to 5% range. And that's far above what traditional banks are offering. So how do these startups work? And why are many of their rates so high?
Well, so these companies, these fintech startups usually represent what they're doing as a sort of modified savings account. And the way they get these higher yields is by investing in the financial markets. So this is not a yield that you're earning on the savings account itself. It's a yield that the fintech company is generating by buying stocks, mutual funds, ETFs, and basically taking greater risks in order to earn those potentially higher returns.
Yeah, let's talk about some of the risk involved. Now, there's risk in almost any kind of investment. But how does the risk involved in making deposits with many of these startups compare with a traditional bank?
Well, if you put your money in a traditional bank in the U.S., you get your deposit insured up to $250,000 per account by the Federal Deposit Insurance Corporation, the FDIC, which means that basically the U.S. government is ensuring that You won't lose money on your deposit, even if the bank goes bust. And as a general rule with these fintechs, you either don't get that guarantee or you get a modified form of it. A lot of these fintech startups are not regulated as banks per se. And that gives them somewhat more freedom since they're not subject to all the same regulations as traditional banks. They can take more risks and they can take different kinds of risks than traditional banks customarily will with deposits.
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