Digital advice platforms are no longer battling for an edge on fees, investment products or
financial planning. The frontline today is interest rates.
Betterment is the latest robo-adviser to introduce banking features with
Betterment Everyday, a checking and high-yield savings platform. The savings accounts, which are insured by the Federal Deposit Insurance Corp. up to $1 million, offer a 2.69% interest rate, which CEO Jon Stein claims is the highest rate for an FDIC-insured account on the market.
"I feel like, as is usual, we're leading the way in the space," Mr. Stein said.
He denied the company is playing catchup to banking products already available at
Wealthfront, Personal Capital, Social Finance Inc., M1 Finance and Acorns.
"We've been working on this for a long time. It doesn't really have anything to do with what other competitors are doing," he said.
"It's not like we're the first custodian to add checking and savings. That's a pretty well-known playbook," Mr. Stein added.
(More: Personal Capital latest digital adviser to offer high-yield cash accounts)
There is a caveat to the Betterment attractive interest rate — it is only available as a promotional offer to customers who also join the waitlist for Betterment's checking account. Otherwise, the interest rate is 2.43%, falling short of Wealthfront's offer of 2.57% interest on cash.
The checking account is FDIC-insured up to $250,000 and has no account fee, overdraft or monthly maintenance fees, or minimum balance. Betterment is also planning to launch its own Visa debit card that will reimburse all ATM fees worldwide.
The debit card opens a potential new revenue stream for Betterment, as the company will get a share of transaction fees every time the debit card gets swiped.
The only other way the company makes money is on the advisory fee it charges on investment accounts, Mr. Stein said. Customers are not required to open a brokerage account to take advantage of Betterment Everyday, and the firm passes along the full value of interest rates. It's essentially a break-even offering for Betterment to bring new consumers to the brand, Mr. Stein said.
(
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Wealthfront spokeswoman Kate Wauck said it's great to see more options on the market that allow consumers to earn higher interest on cash than offered by traditional banks, but she criticized Betterment's strategy.
"It's disappointing to see Betterment play a similar bait-and-switch game that you'd expect from the industry — offering a short-term promotional rate to lure new customers in," Ms. Wauck said in an email. "The new entrants in this space have to push the industry to do better than the same old tactics. It's why we exist and we can't lose sight of that."
Betterment already offered clients some help with cash. It launched Smart Saver in August 2018, to put cash in a money market account. However, critics at the time pointed out that the promised after-fee yield, 1.8%, was lower than rates offered by some online banks.
In response to why so many digital advice companies are turning towards cash management, Mr. Stein said part of the reason is that new technology makes it easier for companies like Betterment to set up banking services, and regulators also are more friendly to new bank charters.
(More: Carson Group advisers will soon be able to offer clients banking accounts)
Betterment also is responding to investor concerns about the aging bull market, Mr. Stein added.
"Even if the market is hitting new highs, a lot of new investors are saying they would like a larger allocation in cash," he said.
The robo-adviser is offering its checking account in partnership with the National Bank of Kansas City. The savings account is in partnership with Citi,
Barclays,
Valley National Bank, Seaside National Bank & Trust and George Banking Co..
The deals struck with these banks allow Betterment to offer the high interest rate and will help the firm remain competitive if the
Federal Reserve lowers its fed funds target, Mr. Stein said.
BackEnd Benchmarking head analyst David Goldstone said it makes sense for digital advisers to expand into banking to vary the type of consumers they attract and increase their wallet share for each client.
"Similar to how Betterment and other digital finance platforms put fee and value pressure on traditional advisers, it is nice to see the same pressure be applied to traditional banking products," Mr. Goldstone said. "When product competition increases, end consumers see benefits in lower fees and better products."
What remains to be seen is whether the banking customers will become investors.
