Credit Karma Enters the High-Yield Savings Market

Posted: 5 November 2019 6:57 pm
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Little piggy banks on ascending stacks of coins

The account, however, may not be as unique or as high performing as the company suggests.

Consumer credit advocacy platform Credit Karma has entered the banking market with a high-yield savings account offering access through an app or online. The account — called Credit Karma Savings — promises savings rates that are “20 times the national average” with no minimum deposits or fees.

“We spent the first 12 years focusing on helping Americans manage their debt,” said Credit Karma founder and CEO Ken Lin in a press release. “With more than 100 million members around the globe, it made sense for us to jump across the balance sheet with Credit Karma Savings.”

Offered through MVB Bank, deposited funds are FDIC insured for up to $5 million. With a current APY of 1.90%, Credit Karma has met its claim of a rate at least 20 times the current reported national average of 0.09%. The platform, which is known for offering free credit scores, may not be offering the best rate on the market, however.

Finder’s editor’s pick for savings accounts, Barclays, also offers a 1.90% APY with no minimum deposits and no fees. NerdWallet’s best yielding top-pick, CIBC Bank USA, offers a 2.05% APY with a $0.01 minimum balance. Sterling National Bank’s BrioDirect offers a no-fee high-yield savings account with a 2.30% APY and a $25 minimum deposit. TAB Bank offers a no minimum deposit, no-fees savings account at 2.10% APY. HSBC is offering 2.05% with a $1 minimum deposit.

While the Credit Karma Savings rate may not be the highest on the market, the platform argues that it is the best solution for its members. “It took us about 18 months to think about this product and bring it to life,” Jagjit Chawla, Credit Karma’s general manager for tax and savings, told the TearSheet Podcast.

“We wanted our members to get a 100 percent free product that was easy to open and optimized — we work with a network of 800 community and larger banks to optimize the yield on a monthly basis. We take a full 100 percent of that yield and pass it on to our consumers. To structure that, we had to do a first-party solution to help people actively save money on our platform.”

This, however, may be more than most customers are looking for. One commenter on Reddit, for example, has noted that Credit Karma Savings allows the linking of only one external bank account, which cannot be changed. Per Credit Karma’s policy, this limit is to ensure that funds can only be returned to where they originated from. In practice, this requires the customer to maintain the originating account for as long as they are with Credit Karma Savings, without provisions for bank account transfers or bank failures.

Understanding the High-Yield Savings Market

The concept of high-yield savings is relatively new. Typically, interest rates are a way for banks to entice customers to sign up for an account and keep their savings in deposit longer. The longer the deposit stays with the bank, the more capital the bank has to back loans and investment opportunities to customers.

While they don’t offer the interest rates of products with no-withdrawal terms, such as certificates of deposit, savings accounts allow banking customers ready — if limited — access to their money through easy deposits and withdrawals. These withdrawals may be limited, however, reflecting the importance of the account to the bank’s capital reserves.

With the advent of Internet-only banks, this concept was inverted. These banks offered no or limited direct lending, breaking the traditional bank’s profit model. While some online banks have brick-and-mortar parents, where savings capital can be invested in traditional loan lines, other banks use direct market investment and other methods to grow their accounts. With lower overhead than brick-and-mortar banks, online banks can pass the savings on to their customers.

Credit Karma is not the first platform to offer a high-yield savings product. Wealthfront, an automated investing platform, launched a high-yield savings account in February, as did the student loan refinancing platform SoFi. Betterment launched its in July. But Credit Karma Savings seeks to distinguish itself by being the only tech platform to not divert a percentage of its savings account’s APY. “One hundred percent of the interest earned is delivered back to the member,” the company told CNBC’s Make It.

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