Betterment, one of the original robo-advisory services, announced two new products, Betterment Cash Reserve and Betterment Everyday Checking, that can help their customers consolidate their finances under one virtual roof. This move towards consolidation reverses a trend that has been part of the investing and banking landscape for decades.
Mike Reust, Betterment's chief technical officer, has been with the firm for six years. He observed when he started the feeling that clients felt there was a lot of risk when consolidating assets at a single financial institution. "What we’re seeing more recently, especially through the research we did about banking, is that the appetite to consolidate and simplify is outweighing the fear of having all the eggs in one basket," Reust says. He believes people are getting over the fear generated when banks and brokerages went under in 2008, and want the simplicity of fewer financial relationships, as long as they feel safe. Betterment's savings accounts are FDIC-insured up to $1,000,000, and the checking accounts will carry up to $250,000 of FDIC insurance.
Virtual Savings Available Immediately
Reust says that both the checking and savings products emerged from talking with their customer base, which currently numbers about 450,000. "We talked to customers and tried to understand their problems and prioritize their needs," Reust explains. "We want to solve problems our existing customers have, but we expect to attract new customers as well."
Cash Reserve is available now, and existing Betterment customers can go through a quick signup process. Everyday Checking will roll out in September, and customers who are on the waitlist will be the first to have access. "Everyday Checking is a big, complicated process, so we're throttling it a bit," says Reust. "It will be generally available, we hope, by the end of 2019 or early 2020."
Betterment Cash Reserve, which has no minimum balance or fees, will pay 2.69% APY at launch. Besides the FDIC insurance, customers can make unlimited withdrawals from this account; most savings accounts have a limit of the number of withdrawals a client can make per month.
Underneath the hood, Betterment is acting as a conduit to move customer's money into one of their partner banks, which at launch include Barclays Bank Delaware, Citibank, N.A., Georgia Banking Company, Seaside National Bank & Trust, and Valley National Bank. Since Betterment is taking on the role of acquiring the accounts, their partner banks are paying higher interest on these deposits than they pay their in-house savings account holders. "We're taking care of the heavy lifting so they can offer us more interest than they can provide on their own," explains Reust.
Reust says that Betterment didn't set out to pay a high-interest rate when this service was designed. "We tried to solve a problem for our customers and ended up generating a great rate. The target was a good product, and we wanted to be competitive, but we didn’t realize until far after we were working on this and negotiating with banks that we had a great rate," Reust says.
Betterment currently offers a Smart Saver product to its customers, which is usually used for setting up an emergency fund. That product will be phased out over the next month, and customers will be notified when their Smart Saver account has been converted to Cash Reserve. Customers will still be able to create a general investing goal with a 100% bond allocation if they’d like to continue to mirror the Smart Saver portfolio strategy. The Smart Saver product was not FDIC insured.
Checking to Launch in September
The checking account will include a debit card that will work anywhere debit cards are taken. Betterment has a single banking partner on this, National Bank of Kansas City, and the relationship is much more complex than the partnerships with banks providing the savings account. There will be no account fees, no overdraft fees, no minimum balance, and any ATM fees will be reimbursed worldwide.
The checking account and debit card can be used at tap-and-pay terminals, but won't start out being linked to Apple Pay or Google Pay. "We have an update list that will be based on what customers want," says Reust. "We’ll see what users want and go from there. We expect to build deeper relationships with our customers."
Is There a Catch? How Is It Free?
How will Betterment make money off these new products? On the checking side, the firm makes money by taking a share of the net interest margin that is paid on the checking account. Betterment can capture a portion and will pass on the rest to customers. They plan to pay interest on cash held in the checking account, but the are not yet announcing a rate. Generating revenue on savings accounts is similar'; Betterment takes a share of the net interest margin. On checking, when you use the debit card to spend money, Betterment gets a cut of the interchange fee. "We use the revenue to cover other costs of the program, like reimbursing ATM fees," says Reust.