Save, a fintech that bills itself as a higher-yield alternative to traditional savings accounts and CDs, has brought a new option to U.S. depositors: an account that can provide returns on par with stock investments without the risk of owning stocks, all while maintaining the protection of deposit insurance.
Save is attempting to serve an unmet need among retail depositors, founder and chief executive Michael Nelskyla tells The Financial Brand. Nelskyla is a Wall Street veteran who has worked at UBS, Goldman Sachs and Citizens Financial Group. His experience heading up index and structured derivative sales helped inspire the concept behind Save.
“When I was at Goldman, I noticed that affluent depositors were offered something different than retail depositors,” typically a better rate or a unique structure, he says. “We looked at how we can change the deposit product to offer retail more choices.”
Traditionally, retail depositors can opt for either a CD with a fixed term and rate or a savings account with a variable rate. “We said, why not let people choose the asset? Why not let people choose equities or commodities?” Nelskyla says. “The aim became to give you a deposit account with the returns of the market.”
The Houston-based fintech serves consumers directly through its website and app. In December, it received an unspecified amount of funding from BNP Paribas, one of Europe’s largest banks, and Webster Bank in Stamford, Conn. The capital will be used to fund its business-to-business initiative, dubbed “Powered by Save,” as the fintech seeks to partner with U.S. financial institutions to allow them to white-label its products for their own customers.
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A Unique Deposit Option: the ‘Market Savings Account’
Save offers customers what it refers to as a “market savings account,” along with a credit card. All deposits are placed with Webster Bank and are covered by the Federal Deposit Insurance Corp. up to the usual limit of $250,000.
Despite its name, this savings account is similar to a CD in that the deposit is committed for a one-year, two-year or five-year term, and any early withdrawal is subject to forfeiting the gains it may have accumulated.
Instead of earning interest as a traditional bank account does, the accounts from this fintech instead pay a rate that varies based on the returns Save earns from a portfolio of investments. The longer the term on the deposit, the higher the potential return, but there is no guarantee of the upside.
The downside is protected though. Depositors are guaranteed that they will not lose any of the initial amount they deposited, even if the investments lose money.
Break-Even Is the Worst-Case Scenario:
Even if the investments lose money, depositors retain their initial principal.
Another difference from traditional bank accounts is that the returns are taxed at a lower rate, as they are considered long-term capital gains rather than income. Save is registered as an investment adviser with the Securities and Exchange Commission.
Save’s Visa credit card is issued through Evolve Bank & Trust, a banking-as-a-service provider in West Memphis, Ariz. The card has an annual fee of $750, but has the potential to deliver an estimated annual return of 6% on all spending, according to Save’s press release.
Instead of the typical cash back or points that other cards offer, the card from Save matches customer spending with investments, and the customer gets to keep the returns on those investments, minus a management fee of 0.79%. The fee applies only if the investments earn a return of at least that amount.
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Bank-Fintech Partnerships a Good Strategy for Save
The Save account is a niche product, but could appeal to certain consumers, says David Donovan, an executive vice president for financial services at the consulting firm Publicis Sapient.
“I think this concept is interesting for consumers who don’t want to take much risk,” he says. “The FDIC protection of savings up to $250,000 is a great feature because it gives the saver peace of mind, and consumers currently get very little return from their savings accounts.”
The average savings account was paying a 0.24 annual percentage yield in late April, according to Bankrate. By comparison, rates on some high-yield savings accounts, including one just launched by Apple, were in the 4% range, putting them on par with one-year CD rates. Save’s projections suggest depositors could double that return with its market savings account.
“We believe that the higher rates rise, the more consumers will seek returns above a certain amount in safe places.”
— Michael Nelskyla
Save launched in 2019, after raising capital from private equity, family offices and individuals. In the years since then, it has attracted more than 30,000 customers, which Nelskyla says are roughly equally split among the one-year, two-year and five-year product. The average deposit on the shorter end is $20,000, and for the longer term, $55,000. Nelskyla says 18% of Save’s customer base has been referred by other customers. The fintech is running an enticing referral campaign on its website.
Peter Wannemacher, a principal analyst with Forrester, says the dual route of acquiring its own customers as well as partnering with banks and credit unions could be a good strategy for Save.
Part of that is because what Save is doing is unique, so prospective customers may not fully understand how they are making money or how the product works. “You have this relatively unique product, promising to make you more money; it might be a leap of faith for some people to trust a fintech,” Wannemacher says. “Consumers trust banks with their money, and it could be a really useful product for banks. Their marketing departments would have to do a really good job, though, of explaining to their customers exactly how it works.”
Donovan also believes that the partnership model could be the best route forward for Save. “The key will be whether Save can scale and acquire customers,” he says. “Scale is always the biggest hurdle for fintech companies.”
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Save Relies on ETFs to Generate Its Returns
Here’s a closer look at the mechanics of Save’s unique deposit account.
When customers open a market-linked savings account with the minimum deposit, Save asks for their desired investment duration and risk level. (The minimum is $1,000 for the one-year term and $5,000 for the five-year term.)
The deposit remains in a savings account at Webster Bank. But it is linked to an investment account at Apex Clearing Corp., which facilitates an equal amount of money being put into exchange-traded funds, or ETFs, consistent with the customers’ approach. Save has a stable of around 30 proprietary ETFs, tied to different investment themes like sustainability and alternative assets, that the customer can choose from.
In selecting a fixed term for their account, customers have three options, with five years being the longest. At the end of the term, they get the deposit back with any investment gains, minus Save’s management fee of 0.35%. Customers pay that fee only if their portfolio showed a gain of 0.36% or more at maturity.
“We decided we’re going to align ourselves fully with outcomes,” Nelskyla says. “Where the customer makes money, we earn our fee. And, in the case where the customer doesn’t make any money, we don’t get a fee at all.”
Based on the past performance of similar investments, Save suggests that, hypothetically, customers could earn an 8.96% APY on a one-year deposit and 9.06% APY after five years.
“The equity markets generate a positive return somewhere in the range of 80% of the time, and they’ve been down around 20%. That means you’re not likely to get zero return, but you may.”
— Michael Nelskyla
The pitch to consumers is: the potential for returns is similar to what equities would pay, the fee is charged only when the investments are profitable, the deposit is FDIC insured and the principal is never at risk.
Typically investing in equities puts account holders’ capital at risk, but that’s off the table here. No customer funds are invested directly in the ETFs. In fact, the deposits are not encumbered or pledged by Save in any way in order to purchase ETFs.
The fintech instead uses its equity capital to execute the investment strategy on behalf of customers. “We can grow to several billion on our balance sheet with our capital,” Nelskyla says. “After that, our business plan is based on scale.”
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Is There a Catch to the Save Account?
There are facets to the market savings account from Save that are sure to be important to depositors and pose challenges to explain in a retail banking environment.
Some CD offerings across the country are reaching above 4% now. At that rate, a one-year CD of $10,000 will earn $400, if it goes to term. Let’s say the same amount is put into a Save account and equity markets provide the same return of 4%; in this scenario, Save’s fee would reduce the return that the customer receives to $363.60. The point is that middling returns from equities can cause Save to return less than a traditional CD.
However, the traditional CD in this example would never earn more than 4%, or $400. In Save, the same $10,000 could generate $896 in returns in one year, if the market provides the APY from the fintech’s hypothetical back-testing.
“If you look historically, equities outperform any interest rate-based products,” Nelskyla says. “You’re making a trade-off. You can choose between a deposit that pretty much guarantees a rate or the potential for more. The equity markets generate a positive return somewhere in the range of 80% of the time, and they’ve been down around 20%. That means you’re not likely to get zero return, but you may. There is downside and upside, but you can’t lose your deposit.”
Save reinvests funds invested on its platform at maturity, unless otherwise directed by the depositor.
Product Comparison from the Depositor’s Perspective
|0.24% Avg. APY
|Yes, usually with penalty
|1-year: 1.68% Avg. APY
5-year: 1.23% Avg. APY1
‘Market Savings Account’
|Yes, subject to advisory fees and early withdrawal costs
1 Bankrate April 2023
2 Per Save‘s “hypothetical back-testing”
Save’s Pitch to Bank Partners: Cheap Core Deposits
Nelskyla says Save is “working on some partnerships now” with financial institutions. He also sees greater demand for the fintech’s products in the future, even if interest rates go higher.
Two financial trends are creating some strategic insulation for the fintech as it pursues partners. First, elevated inflation — it was at about 5% in April — still nullifies earnings on traditional deposit products; savers need a higher rate to come out ahead at this point. Second is risk. As rates rise, it often causes tumult in the stock market, which then causes some investors to move money to safety. Save has a compelling benefits package for the current situation: potentially beating inflation, avoiding risk of capital loss, and obtaining the safety of the banking system.
“We believe that the higher rates rise, the more consumers will seek returns above a certain amount in safe places,” Nelskyla says. “There is a depositor need that’s currently unmet.”
He also believes the platform would be a fortuitous partner for banks and credit unions. Management teams are working to keep their cost of funds down, and the deposits in the Save accounts come with no interest expense. So, for example, when a customer opens a market savings account directly with Save, those deposits now go into Webster Bank, where they are placed in a noninterest-bearing account.
A bank or credit union that becomes a white-label partner would get that same benefit, since it would retain the deposits that are in its “Powered by Save” accounts.
Save accounts also are considered core deposits, Nelskyla says. “It’s a core deposit that’s about 30% more efficient,” he adds. “We handle all the backroom tasks to get the account open. We are a tool the bank can use to retain depositors who are rate shopping as well.”