Upgrade offers 3.5% APY as the deposit match increases

Credit card startup Upgrade is releasing a new savings account with what it says is the nation’s highest interest rate as competition for deposits increases, CNBC has learned.

The fintech firm’s Premier Savings account launches on Thursday with an annual percentage rate of return of 3.5%, according to CEO Renaud Laplanche. That’s higher than any account currently tracked by Bankrate.com, senior analyst Ted Rossman said in an email.

“At 3.5%, we are by far the best savings account in the country,” Laplanche said during an interview.

Competition for deposits is heating up after a time when banks were flooded with cash and had little reason to raise interest rates. That began to change when the Federal Reserve began its most aggressive rate hike campaign in decades, squeezing borrowers and ultimately rewarding long-suffering savers.

A year ago, high-interest savings accounts had APYs around 0.5%; now many are over 2%.

The dynamics are closely watched by banking analysts because higher funding costs affect how much the industry will benefit from future Fed moves. Even big banks, included JPMorgan Chase and Wells Fargohave increased the prices of CDs recently, unlike earlier this year when it was mostly smaller institutions that increased payouts, Morgan Stanley analyst Betsy Graseck said in a Sept. 30 note.

“This suggests that the pressure on deposit pricing is becoming more spread across the banking industry as rates move sharply higher,” Graseck said. “We think deposit price competition will continue to increase from here.”

One reason for that is because fintech players are more established now than in previous rate hike cycles, and they tend to pay the highest prices, according to the veteran analyst.

Upgrade, a San Francisco-based startup founded by Laplanche in 2016, can afford to pay higher rates than rivals because of its network of 200 small banks and credit unions, according to its CEO. These institutions do not have national platforms for collecting deposits and as a result are willing to pay more for funding, he said.

“These deposits are much more valuable to us and to our small partner banks than they are to others,” Laplanche said. “We can make sure they have all the funding they need because we can raise deposits on their behalf.”

Ironically, the second highest rate noted by Bankrate.com this week was offered by LendingClub at 3.12%. Laplanche co-founded the fintech pioneer in 2006 before leaving a decade later.

Like other fintech firms like Chime that offer banking services through smartphone apps, Upgrade is not a bank; it partners with institutions including Cross River Bank to offer FDIC-backed accounts.

The upgrade’s new account requires a minimum balance of $1,000 to earn 3.5% APY. It has few restrictions apart from that; the accounts are not limited and do not require users to sign up for Upgrade’s other products to take advantage of the price, Laplanche said.

Other fintech players offer higher prices on limited amounts of money. Fintech firm Current, for example, offers a 4% APY, but only for savings up to $6,000.

Laplanche said the product’s interest rate is likely to rise further in the coming months as the Fed tries to wrangle inflation by raising the benchmark rate, he said.

“We will be watching what the Fed does,” the CEO said. “If they keep raising rates, there could be a point next year where we’re paying 4.5%.”

Upgrade, which was valued at $6.28 billion in a private funding round late last year, is best known for credit cards that turn monthly balances into installment loans.

This feature automates financial discipline for users and generally lowers the interest they pay compared to traditional cards. The product seems to be gaining traction; Upgrade was the fastest growing card issuer with outstanding balances among the top 50 players, according to the Nilson Report newsletter.

Upgrade will continue to build products aimed at helping Americans navigate life events, including by eventually offering auto loans and mortgages, Laplanche said. And unlike many other direct-to-consumer fintech firms, Upgrade is profitable and doesn’t need to raise more funding, he said.

“The world was full of liquidity and deposits just a year ago,” Laplanche said. “Now you see the opposite happening and deposits become really valuable again.”