SmartyPig Interest Rate: How SmartyPig Can Offer Above Average Interest Rates

Most online savings accounts are currently offering rates of return between 1.0% and 1.5% APY on their money, but one online savings vehicle, SmartyPig, is currently offering 2.01% APY to its account holders. How can SmartyPig offer above average interest rates when its competitors are offering much lower interest rates?

Some have questioned whether or not SmartyPig is even a legitimate company, but rest assured SmartyPig is a legitimate company that has partnered with West Bank to provide their FDIC-insured online savings offering. SmartyPig operates a bit differently than most online savings accounts since you use to save for specific goals rather than serving as a general savings account, but it’s still a perfectly legitimate company.

SmartyPig’s above average interest rates can be explained in a few different ways. First, companies that are relatively new like to offer above-average rates to attract new borrowers, even if they end up taking a bit of a hit on the initial depositors. Many banks offering online savings accounts have started off with higher interest rates to attract new depositors and then lower their rates back down to about market rates after they have established themselves as an online savings account provider and have received the amount of deposits they are hoping for.

SmartyPig has made some strategic moves to structure their accounts in a way that allow them to offer higher interest rates. First, consumers are essentially required to put in a certain amount of savings each month. Much like how rewards checking accounts are willing to give you a bonus if you setup direct deposit, SmartyPig is offering you a bonus because you are automatically putting money into the account each month.

Most online savings accounts credit interest monthly, but SmartyPig credits interest rates on a quarterly basis. This shouldn’t have any major effect since SmartyPig compounds interest on a daily basis as other savings accounts do. The company may save a small amount of money in interest by making fewer total payments delaying payment of interest, but those savings are likely not substantial.

The bank also partners with a number of retailers including Macy’s, BetBuy and Amazon.com. Retailers benefit from partnering with SmartyPig because consumers that receive their funds back in the form of gift cards to the retailers will end up funneling additional sales back to the retailer that the retailer might not have had if the consumer had not cashed out their savings in the form of a retailer specific gift card. SmartyPig has not commented about whether or not it makes money from these partnerships, but it’s possible that SmartyPig receives a percentage of each savings goal that is paid out as a gift card.

The company is not publicly traded, so consumers likely won’t ever have a full understanding of how SmartyPig’s finances allow them to offer above average interest rate, but the interest rates that they offer are certainly a competitive advantage that SmartyPig has compared to other savings options.