The problem with high-yield 'savings' accounts

Plus: Getting my financial accounts in order

Hi everyone,

Over at The Purse, we are hard at work on a series of first-person inheritance stories and estate planning/settlement guides. Check it out!

In today’s issue:
1. The problem with high-yield ‘savings’ accounts
2. The one estate planning task you should do this week
3. On my radar

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The problem with high-yield ‘savings’ accounts

If you don’t already, you absolutely should have a high-yield savings account, which can offer 20 times as much interest on your savings than the typical savings account. You can find these at traditional banks like Capital One, at online only banks like Ally, and, increasingly, at fintechs.

Or at least that’s what the fintechs advertise. But these days you also need to make sure that the account you’re opening is actually a savings account. Otherwise, you risk losing the entirety of your savings if something goes wrong.

Fintech companies have become increasingly popular among younger generations for their ease of use and digital-first ethos. Many of them are also able to offer higher interest rates on customers’ deposits and savings than traditional banks. For example, the national average savings account interest rate is 0.38%, according to the Federal Deposit Insurance Corporation, or FDIC, while you can find high-yield accounts from digital providers that currently offer as much as 4%.

What many people do not know is that fintechs are usually not technically banks. You might not think that matters when they offer what appears to be the same financial products, but it does in some pretty profound ways.

One is that they cannot have FDIC insurance, which was created after the Great Depression to protect your deposits and savings from bank failure. Instead, fintechs often partner with actual banks that are FDIC insured, and the cash you think is held at the app you signed up for is is actually held at these partner institutions.

Fintechs tout the insurance on their websites, but if you look closely, you will see that the fintech’s “savings” account is actually labeled a “cash account” or some such similar moniker.

This is why some fintechs say they they are FDIC insured up to $1 million or more, which is well over the $250,000 FDIC limit. (Wealthfront touts up to $8 million in FDIC insurance.) If you have that much cash, it will be spread out at multiple partner banks, and you may not even know. The partner banks could change at any time, meaning your cash could be moved from one to another at any moment.

Okay, you’re thinking, what’s the big deal? There have been a few high-profile incidents recently that show how this can put your money in danger.

Take the recent collapse of Synapse, a financial technology service provider backed by investors like Andreessen Horowitz. Synapse acted as a middleman between chartered banks and nonbank financial firms like Yotta, a prize-linked savings app, and Juno, a crypto-friendly banking platform. Basically, it would help move deposits from fintechs to the banks that actually held the funds, managing the ledger that tracked the funds and collecting a fee for its trouble. It also helped non-banks do other bank-like things, such as offer debit cards and early direct deposits. Because Synapse was not technically a licensed bank, it was not subject to regulatory standards that banks must follow.

Then Synapse collapsed in April 2024 due to a number of its clients and banking partners pulling their accounts. After its bankruptcy, more than 100,000 people lost access to over $265 million held across various fintech apps and platforms. Many still cannot access their funds to this day, according to the Yale Journal of International Affairs.

The reasons why are convoluted. Synapse couldn’t technically be overseen by the Federal Reserve (which oversees banks), and there was seemingly no other supervisory board/organization overseeing what it was doing, either. The customer funds it held itself weren’t actually covered by FDIC insurance, despite being marketed that way. And it moved customer funds around a lot, including to its own brokerage arm, meaning there was a lot of complexity to unravel.

Plenty of Yotta customers had no idea that the firm wasn’t actually holding their deposits, as this recently-published More Perfect Union report highlights. (I find some of More Perfect Union’s reporting to be sensationalized and there are some takeaways in this report that I think are actually incorrect, but it is spotlighting really important issues and actually talking to the affected savers, so I wanted to link to it anyway.)

“When these systems function as intended, consumers are rarely aware of the intermediaries involved,” reads Yale’s report. “However, at the point of failure, the underlying complexity erupts disorderly, leaving customers trapped in bureaucratic limbo. Caught between technology platforms and partner banks, neither party assumes full responsibility.”

This type of arrangement applies to bigger name fintechs, too, and is the reason why I, personally, do not bank with them despite their competitive interest rates. I am simply too risk averse to trust my savings to them—and have read too many horror stories. Plus, there are plenty of licensed banks and credit unions that offer high-yield accounts. (My account at one of the biggest banks out there currently offers 3%.)

That’s not financial advice. You should bank wherever you want as long as you understand the risks and how each company is different, and if you haven’t opened a high-yield savings account, you should do that ASAP. But know that there are plenty of options available at actual FDIC-insured banks or, better yet, NCUSIF-insured credit unions.

As for the Synapse nonsense, it looks like customers are still, understandably, trying to get their funds back, and the California Department of Financial Protection and Innovation recently announced that Yotta has to pay a $1 million penalty for engaging in deceptive practices. But if you want to avoid the hassle and stress, read the fine print of your high-yield “savings” account carefully.

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A simple estate planning task

As I mentioned above, The Purse is publishing a bunch of stories on inheritances and estate planning and settlement. I’ve talked to estate planning and divorce lawyers and financial advisors over the past few weeks for the stories, and I’ve been trying to do a few of the tasks we’ve discussed on our calls.

I don’t have a will yet. But I did one thing this week that was super simple and has made me feel a lot better: I updated the beneficiaries on my various financial accounts.

There are a number of reasons to do this. The biggest is that adding beneficiaries to accounts means they won’t be sent to probate, or the legal process that occurs after you die where a judge approves the division of your assets. That can save your loved ones months or even more than a year of bureaucratic headaches and stress.

One thing to note is that your beneficiary designations supersede anyone named in your will, if you have one. That’s why it’s so important to keep them updated, if you haven’t checked in a while. It also means one of the most consequential financial tasks you can do is also one of the easiest to accomplish!

My retirement accounts are with Fidelity, and I only had to navigate to my user profile to find the beneficiaries section. I don’t know how other financial institutions work, but it’s probably similarly easy to find.

Doing this took me about five minutes, and I feel better knowing my assets won’t be stuck in legal limbo.

Per stirpes vs. per capita

When I updated my Fidelity account, it also asked if I wanted my beneficiaries to be designated “per stirpes.” This legal term means assets should be divided along the branches of the family tree. (It comes from Latin, literally meaning “by branch.”) In practice, that means if one of your named beneficiaries predeceases you, their portion of your estate goes to their next living descendants.

So let’s say your spouse is named as your beneficiary, but they die before you and you don’t update your paperwork. Your assets would then be divided between your children. But if one of your children is also dead, her portion would be divided between her children/direct descendants, and so on.

That can end up being a little more complicated than “per capita,” which means “by head” and is a term we’re all much more familiar with. In an estate planning context, per capita means your assets will only go to named beneficiaries. So if you name your three children but one predeceases you, everything will be split between the other two, rather than also divided by the third’s descendants.

The tech of it all

Another thing I’m thinking about is the computer/phone passwords of it all. So much of our financial lives are solely run digitally now, and if our loved ones can’t access our devices it makes it so much harder to get anything done.

The Purse featured a woman whose father died unexpectedly, and she told us how lucky she was that he had message previews on his iPhone. Otherwise, she wouldn’t have been able to login to his accounts and get a handle everything.

Someone commented on the story that all of this stuff that is supposed to make our lives easier/more convenient often does the opposite, and I couldn’t agree more.

“That two-factor authentication thing, as necessary as it may seem, can really trip you up. We’ve been dealing with that with my mom, who has dementia—luckily, my sister and I live near her and can access her phone, which has no password, in person when we need to,” the commenter wrote. “I know my husband’s phone password, and he knows mine. Yet I feel like we’re still behind on sharing all the passwords we might need some day.”

Between all of the various accounts we need to have everywhere, the passwords, the two-factor authentication…I understand the reasons for all of it, but man is it complicated!

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On my radar

• JP Morgan Employee Woes: Between the employee who (allegedly?) stole a Knicks trash can and the bizarre sexual harassment saga, JPM is having a lot of…interesting employee problems lately.

• Recipes: It’s CSA season, and we’ve been making a lot of simple salads with the lettuces and arugula that are common at the beginning of summer. I also made a pretty good pesto with the arugula!

• Social Security: Two weeks ago, I wrote about how Social Security isn’t “running out,” and having a doomer mindset about it isn’t helpful (don’t let the bastards win, etc.). This week, Elizabeth Warren published an op-ed calling for lifting the Social Security payroll tax cap, a very popular proposal I wrote about here last July. Read Money Moves and you’ll always be one step ahead!

• TV Update: I liked “Widow’s Bay” like everyone else. I don’t know how I feel yet about “DTF St. Louis.” And “The Real Housewives of Rhode Island” was perfect.

That’s it for now. See ya soon,
A

P.S. Thanks Christopher Skinner for the illustrations!