In the wake of several bank collapses, many have wondered where and how to store their hard-earned money safely. Charles Schwab, State Street, and M&T saw $60 billion in combined bank deposit outflows in Q1 as customers moved their money in search of safe parking and higher returns. First Republic Bank’s net outflows have exceeded $100 billion in recent weeks, and the bank was recently sold to JP Morgan as a result.
Brokerages may be viable for storing savings as they offer higher yields and better account protection than traditional banks. Smaller and more regional banks are searching for more deposits, which benefits brokerage startups like Betterment and Wealthfront by allowing them to negotiate better savings rates from their partner banks. The FDIC does not insure brokerages, but customers can receive coverage through cash sweep programs offered in most brokerage accounts. Cash sweeps transfer funds not invested in stocks or other assets to partner banks, each providing up to $250K in FDIC insurance. Splitting funds in this way across banks means more total FDIC coverage for the customer.
Wealthfront increases its cash account yield when the Federal Reserve raises the central bank rate. How much of that increase goes to customers depends on the rate bank partners are willing to pay Wealthfront. In March, Wealthfront raised its rate to 4.3% from 4.05%, consecutively passing all the increases to customers. It announced its increasing it to 4.55% on May 3rd. To learn more about Wealthfront, check out our memo.
In March, Betterment doubled its coverage to $2 million and $4 million for joint accounts for its cash accounts, which can earn a 4.20% APY. Robinhood said it would protect customers up to $1.5 million (a number which will increase to $2 million on or after June 1, 2023) in insured deposits and provide 4% on certain accounts for Robinhood Gold members, a monthly subscription service for uninvested cash. More recently, in April, Apple announced that Apple Card users could choose to grow their Daily Cash rewards with a savings account from Goldman Sachs, which offers a high-yield APY of 4.15%. This offering has no fees, minimum deposits, or minimum balance requirements; users can set up and manage their savings account directly from Apple Card in Wallet. Apple has brought in ~$990 million in deposits over its first 4 days, with nearly $400 million of that coming on launch day alone.
On Thursday, regional bank stocks dropped despite the Federal Reserve’s assurances of the banking system’s stability. Investors are concerned the regional banking issues may expand and affect the broader economy. Amidst the uncertainty, brokerages seem like an increasingly convenient and safe option to park money and earn yields higher than the big banks offer.
