Have you noticed a recent rise in the number of “cash management accounts?”
If the term is new to you, you're not alone. I only learned about these a few weeks ago and they're fascinating. They are not technically bank accounts. The companies that have them are not banks. They're usually some other type of financial company like a robo-advisor or brokerage or even a student loan refinancing company.
If they aren't bank accounts, what exactly are these things?
What is a Cash Management Account?
The terms for each account may be different but the basic idea is the same. You have a company that's the “face” of the account and a bank, or series of banks, that provide the actual bank account.
What you're getting is a Deposit Sweep account. It's operated by the Insured Network Deposit (IND) Sweep Service and your cash is periodically swept into your bank accounts. IND is run by the Promontory Interfinancial Network, which is the same company that runs CDARS.
For example, with Betterment Everyday, the “face” is Betterment. There are four banks (Citi, Barclays, Valley National Bank, Seaside National Bank & Trust, and Georgia Banking Company) providing the banking services. The banks they partner with are the ones offering the FDIC insurance, which is why you get $1,000,000 of FDIC insurance. That's $250,000 per bank.
SoFi Money is a cash management account that has FDIC insurance up to $1,500,000 – this just means they have six partner banks. SoFi Money isn't any “better” or “worse” because of the higher FDIC insurance, they just have more partner banks.
The key thing to look for is the perks of the account. Most of them will have a high-interest rate, no account minimums, and no account fees.
Here are rates as of publishing:
- Betterment – 1.83% APY
- Robinhood – 1.80% APY
- Wealthfront – 1.82% APY
- Ally Bank – 1.60% APY (for reference, this is an online savings account)
- Vanguard Federal Money Market Fund (VMFXX) – 1.66% APY (w/ 0.11% expense ratio)
- SoFi Money – 1.60% APY
- Personal Capital – 1.55% APY
- Federal Funds Rate – 1.50%-1.75%
As you can see, they are comparable or slightly higher than what you'd see at an online savings account. I have Ally Bank as a reference for online banks and the Vanguard Money Market Fund, which is their sweep fun, as reference for a brokerage.
The Vanguard Money Market Fund is not FDIC insured, it's covered by SIPC.
“Quirky” FDIC Insurance Converage
There is one quirk you need to know about cash management accounts. When the money is with the partner company, your money is NOT FDIC insured because the partner is not a bank. The money is swept into the bank account regularly (usually daily, but it varies) but when it's in the partner company, it's not FDIC insured yet.
If the partner is a brokerage, your funds are protected by SIPC insurance. SIPC insurance is similar to FDIC insurance except for brokerages.
If the partner isn't a brokerage, there's no federal program that the partner can pay into to protect you.
The key benefits of a cash management account are what you'd expect from online savings and checking accounts PLUS whatever the partner offers. That's the added value.
- A competitive interest rate
- No minimum balances, no account maintenance fees
- Very few other fees, if any
- A versatile mobile app
- A debit card, potentially with cash rewards
While these offer higher interest rates, it's not a great place to be saving money for the long term. It's not a knock specifically against cash management accounts but against the idea that you should even ever need $250,000 of FDIC insurance, let alone a million dollars. That money should be invested in the stock market or put into a different type of safe investment vehicle.
You will never see physical branches, so you will be missing some of the features a physical location offers. That said, most will give you ATM reimbursements to make up for that.
You also never run into the 6 transfer limit for savings accounts. Regulations require a bank to limit the number of transactions on a savings account. If you go over six, you will often be warned and sometimes be penalized. If you do it too often, the bank may close your account. It's only for savings accounts, you can transact as often as you want on a checking account. Cash management accounts are not limited either.
There are usually no other banking products. No money markets, no certificates of deposit, no loans, etc.
If you already have an account at a partner bank, it's subject to the same FDIC limit. For example, if you're using Robinhood and you already have a Citi account with $250,000 in it – you've hit the limit. (and congrats! you should move that money!) In some cases, you can designate the partner bank you're using so you don't exceed limits.
Closer Look at A Few Programs
Here is a look at three cash management accounts to give you a sense of what you are getting:
Robinhood Cash Management
Robinhood's Cash Management account is waitlist only but they offer a 2.00% APY (10/8/2019) and it takes all uninvested cash in your Robinhood account. This is similar to principle to a sweep account at any other brokerage. What's interesting is that brokerages that offer free trades often don't pay interest on cash balances because they keep that interest as income. This interest income helps offset revenue they aren't booking from trades.
At Robinhood, they have 5 partner banks so you get $1.25 million in FDIC insurance. The banks are Wells Fargo, HSBC, Goldman Sachs, Citibank, U.S. Bank and Bank of Baroda. There are no account minimums, no maintenance fees, and no foreign transaction fees. They also offer a Mastercard debit card and a 75,000 ATM network.
Robinhood gives you a free share of stock when you open a brokerage account.
SoFi Money is currently available and they even give you $25 when you deposit $100. SoFi started as a student loan company and SoFi Money is a cash management account with $1,000,000 in FDIC insurance. There are no account fees, no account minimum, and no foreign transaction fees on their Visa debit card. They will reimburse any ATM fees as long as the ATM is part of the Visa, Plus or NYCE network. They also offer personal checks, bill pay, and transfers out of the account.
Betterment Everyday is their cash management account with a savings and checking component. Everyday Savings has up to $1,000,000 of FDIC insurance (4 partners) whereas the Everyday Checking has just $250,000 (1 partner, nbkc Bank). There are no fees, no minimums, and ATM fees are reimbursed worldwide.
Our review of Betterment Everyday discusses this more.
Are These Safe?
The only potentially “unsafe” aspect is the lack of FDIC insurance before they sweep funds to a partner bank. For the companies with SIPC insurance, you're safe. The ones that don't have coverage are a little riskier.
We haven't gone through a financial period where these companies have been tested but I have trouble picturing a scenario in which you would lose money. That said, pick a partner with SIPC insurance or transfer smaller amounts to mitigate the risk.
Cash management accounts are a nice evolution in banking and I hope to see more of them for companies doing interesting things!