Chasing the Bag: Using Neobanks To Make 100x More Interest On Your Dough

Interest rates—probably not a topic that got a lot of playtime in your high school personal finance class. In fact, maybe you’re a little grossed out by fancy words like “macroeconomics” or “monetary policy.” 

You wouldn’t be alone—the very idea of numbers might numb your brain. However, there’s one good reason to care: you’re getting robbed.

The Federal Reserve, America’s central bank, is raising interest rates faster than it has in decades to combat sky-high inflation. While, in theory, you should be making more money on your bank deposits—the exact opposite is happening.

That’s one reason why millions of Americans are turning to digital-only banks, sometimes called neobanks. Let's explore what neobanks are, how they can afford to pay more interest to you, and identify some that you could consider using.

In the last decade, the legacy financial sector has been under attack by an unexpected adversary: technology. Companies like Robinhood and Coinbase have revolutionized the way that people trade stocks and crypto—some traders can’t even recall a time where they had to pay fees just to place trades.

In the same sense that these two names are ubiquitous with disruption, massive banks like Bank of America and Chase are facing competition from new companies like Ally, Chime, Varo, and SoFi. The rise of alternative banking companies can be credited to their emphasis on tech, design, and ease of use. They seldom charge account opening fees or maintenance fees and usually have low account minimums.

However, the one thing these neobanks are doing to bring in millions is paying higher interest rates.

At least a dozen neobanks now are offering yields north of 1%, which is more than 100x higher than their traditional banking counterparts. That means that you can make $1 per year for every $100 in your account—which might not sound like a lot. However, if you zoom out, you’ll see that this kind of yield is unprecedented in the recent history of U.S. banking.

These digital-only banks are able to pass along this interest because—unlike traditional banks, which use most of their interest income to pay for their branches and various services—neobanks have lower overhead. As a result, they can afford to just give you the money that belongs to you in the first place.

That pitch alone has brought the U.S. to the yard. According to an eMarketer study, more than 15% of the U.S. population is expected to be banking with digital-only banks by 2023. 

That’s enormously impressive considering that big banks were the only options just a few years ago.

Maybe you’ve heard enough and just want to know where to send your money. We respect that—and we’ve kept it simple:

Highest yields, no strings attached (in other words—you don’t have to do anything to get this yield):

For those of you looking for additional elaboration, it might help to get an idea of some of the names making waves: 

Some institutions, like Ally and SoFi, have graduated from “neobank” status to “bank” status in recent months after receiving bank charters. That was made possible by the wave of cash that has come rushing in.

As of August 2022, Ally and SoFi indicated they were offering 10x more than the national average for similar account types. Ally was offering 1.6% APY—no strings attached. All you need to do is deposit funds to Ally to earn a little extra dough on top of your dough. And the more dedicated (and gainfully employed) could collect 2% APY from SoFi if they make at least one direct deposit to the bank each month.

Both institutions also offered signup bonuses for registering a new account and sending a certain amount of direct deposits to the bank. However, these deals change from time to time, so read the terms and conditions carefully.

Outside of Ally and SoFi, there are plenty of other true-to-their-name neobanks, too. We’re just scratching the surface of what the fintech world has to offer, especially after the last few years have been so groundbreaking for the industry. Chime and Varo are two other popular online-only banks; both were offering at least 1% APY on balances as of this writing.

Odds are that interest will also continue to rise in the coming months as the Federal Reserve mulls more rate hikes. The consensus among the Fed’s members is that its baseline interest rate will push 3% by the end of the year—meaning you could be picking up way more cash by moving your money now.

The simple answer is 'yes,' but they aren’t necessarily 'easy' to unlock. For some neobanks, high-yield products come behind paywalls, gimmicky product features, and risky or non-insured investment.

At the safe end of this gradient is a company called Current. The company allows users to unlock 4% APY if they deposit their funds into something called a “savings pod.” However, each user can only get that 4.00% on up to $6,000 of deposits per month.

Another neobank called Aspiration offers 3% to 5% APY, but users have to pay a little upfront to unlock those yields by spending over $1,000 per month on the company’s debit card.

Save, a "market savings account,” offers FDIC insured deposits. However, the company invests your interest income into the stock market as interest accrues. They claim that, based on backdated performance, you can generate yields from 4% to 9% APY.

And for the risk-savvy, a crypto-facing neobank and exchange called Juno offers an option to farm out your cash in USDC to earn 6% APY. They also offer an FDIC-insured alternative which generates 1.2%, an already-meaningful premium over most traditional banks.

In conclusion, there are dozens of neobanks and neobank-flavored products. Many of them enjoy the highly-coveted FDIC insurance, meaning the government insures your original deposits. However, some of these riskier platforms might dance to a different tune. As always, it's wise to get studied before tossing your cash into a black box.