SmartyPig to Increase AND Decrease Their Interest Rates

SmartyPigWhen we reviewed SmartyPig a few months ago, they offered a 2.01% APY on their online savings accounts, which was around 30 points higher than their closest competitor.  With every passing day, SmartyPig continued to offer a 2.01% APY, while other online banks slowly dropped their interest rates.  Currently, SmartyPig’s online savings account is over 60 points better than it’s closest competitor and the gap is about to become a lot wider.

Announced on Monday, SmartyPig will be increasing the APY on their savings account to 2.15% (now 1.75% as of October 1st 2010), which will effectively make it impossible to choose another online bank over SmartyPig.  On May 19th, 2010, SmartyPig will be making two major changes to their online savings account.  That’s right, I said two.

  1. The first change is the increase in APY to 2.15%.  If you look at other online savings accounts in the space today, you won’t find a single one offering more than 1.40% and to even find that high of an amount takes some digging.  While there are certain restrictions in how freely you can withdraw and deposit funds, there’s no where near enough of an inconvenience to disregard the much higher interest rate SmartyPig is going to offer.
  2. The second change is more subtle in SmartyPig’s press release, but it just might be more substantial.  Account balances of less than $50,000 will receive the new rate of 2.15% APY, however account balances of greater than $50,000 will receive a severely lowered interest rate of 0.50% APY.  In a very strange move, SmartyPig is effectively saying we want you to save with us, just not too much.

Almost every other bank I know offers a tiered savings account, where the more you invest, the greater your interest rate becomes.  The goal of any bank is to draw customers to deposit with them and usually the best way of doing this is to offer incentives for depositing more.  Just as you would offer a discount for someone buying in bulk, banks offer higher interest rates for depositing in bulk.  With a move like this, SmartyPig may want to consider a name change to SneakyPig.

Now please don’t misinterpret my last few sentences.  I think the majority of SmartyPig account holders will welcome this change and SmartyPig certainly agrees.

This tiered structure will greatly benefit more than 95% of our customers who are working hard towards their goals and using our redemption program to earn even more cash when they reach those goals.

But the problem I have here is that in order to help the smaller fish, SmartyPig has had to hurt the bigger fish.  A more recognizable bank like Ally would never be allowed to raise interest rates as high as SmartyPig unless they tiered their interest rates in a similar fashion.  Certain protocols are in place for banks and when you see one bank with a much higher interest rate with the rest, there has to be a catch and now you know what it is.

I’ve thought this over pretty extensively, and I don’t think this is a wise move on SmartyPig’s part.  When you’re looking at an interest rate of 2.01%, compared to even the best online bank rates, it stands on it’s own.  An increase to 2.15% certainly makes it stand on it’s own even more (if that’s possible), but the increase is more likely to draw larger investors with more to save because an additional 14 points on a few thousand dollars only means a few dollars more per year.  14 points on a few hundred thousand dollars however can start to make a significant difference.  The problem of course is that anyone who has more than $50,000 in their SmartyPig account will receive a terrible interest rate, so that initial attraction quickly becomes a huge detraction.  It’s almost as if their increased interest rate acts as an oxymoron.

I understand that SmartyPig is looking to attract more of the depositors that are saving up for everyday goals like buying TV’s and starting a college fund for the kids. But their current interest rate should already be doing that.  If it’s not, then bumping it up a few more points is going to hurt them a lot more than help.  A move like this tells me that SmartyPig is trying to grow faster than they currently are, but you cannot build a brand that quickly.  Like so many other things in life, slow and steady wins this race, and you would think a bank like SmartyPig knows this better than anyone, as their online savings account structure is built entirely around this idea.    Kudos to them for offering an even higher savings account rate, but for me, the math just doesn’t add up. (And that NEVER happens!)

Topics: Banking

3 Responses to “SmartyPig to Increase AND Decrease Their Interest Rates”

  1. I think when it comes to these kinds of things, its important to ask “How does this company make money?” Normal banks make money by borrowing funds from savers at one rate and lending them to spenders at a higher rate. But SmartyPig doesn’t do loans, so they don’t make their money the same way as other banks. Instead, they make all their money when people cash out their goals and take the “preferred retailer” gift certificates. The companies pay them for the marketing. With this model, they would want to discourage large investors who are just looking for a place to park their funds and get a great rate. OTOH, they would want to attract very small savers who are more likely to take their distribution in the form of a gift card rather than a bank transfer. In that case, it is absolutely a great move.

    • Des

      On the surface, the move would appear a sound one because you are 100% correct: SmartyPig only makes money when users cash in for gift certificates.

      However, the reason that SmartyPig remains as profitable as it is, is because no one can contend with their savings rate. What happens when online banks are back to offer 3.5% on a savings account? Will SmartyPig be able to offer 4.5% and entice the same customers? Probably not.

      Therefore, the only asset they will have at that time is the size of their deposits, which they have effectively eliminated in one move. Instead, they will be stuck with thousands of small depositors and no assets to make a necessary change to their business model.

      Smart move now … not so sure later.

  2. Tangible

    This would be a smart move if they paid the higher rate on the FIRST $50k and the lower rate on anything over, but instead you fall off a cliff when you go over by one cent. Bad for customers and ultimately bad for the business.

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