SmartyPig Lowers Interest Rates – Is Their Business Model Sustainable?

by Ryan Guina

When SmartyPig launched a couple years ago, they created a big splash because their interest rates were quite a bit higher than most other savings accounts at a time when interest rates were continually dropping. Over the last year, SmartyPig has maintained consistent interest rates, with the exception of 2 months ago when they bucked the trend again and increased interest rates. But all good things must end – SmartyPig announced this week they will lower their interest rates to 1.75% APY starting on September 7th.

SmartyPig Lowers Interest Rates

SmartyPig finally had to acknowledge that the high interest rates they were offering were unsustainable and they dropped their rates, bringing them a little more inline with some other banks on the market, but still much higher than the industry average. Here is a rate chart found on their official site, which shows their interest rates over the last year, and those of some competitors:

Source: SmartyPig

As you can see, there is still a large gap between SmartyPig and Ally Bank, the next highest bank on this list, and ING Direct, another popular online bank (ING is a popular choice, but they haven’t had the highest interest rates in a couple years; their popularity primarily stems from the ease of use of their online banking).

Why is SmartyPig Dropping Interest Rates?

The official answer, paraphrased, is “we’re tightening our belts due to the economic situation.” This is an understandable response. After all, when you consider how banks make money, you realize there is a fine line between how much interest they can offer above the rates set by the Federal Reserve.

It can be very difficult for banks to money by offering higher interest rates than the industry average, particularly when your business model is different than most banks. And that is why I think SmartyPig’s 2.15% interest rate was unsustainable with their current business model.

About SmartyPig’s business model. Most banks make money by making loans based on the amount of deposits they receive. SmartyPig does things a little differently. SmartyPig requires account holders to create a savings goal, then set up an automatic contribution toward that goal. Once the goal is reached (or any time a customer wishes to make a withdrawal), SmartyPig gives customers the option of receiving cash or redeeming their money for a gift card – often at a big savings (some gift card discounts are as high as 14%). This is great for customers who were planning on using their savings for a specific purpose because they can get great savings. It works for SmartyPig too, because they receive a commission for each gift card that is redeemed. It’s a win-win situation when the customer redeems a gift card.

But not all customers redeem gift cards. Some customers simply want cash, and SmartyPig doesn’t make as much money when customers simply make a withdrawal. So SmartyPig needs to find a balance.

Is SmartyPig’s Business Model Sustainable?

I don’t think lowering interest rates is a sign of impending doom. If anything, it shows SmartyPig is being realistic about the market and their business model. I would be shocked if SmartyPig wasn’t running some hard analysis on their profitability and had a good idea of where the interest rates need to be for them to make a profit and still offer customers a valuable product.

I don’t know the ins and outs of their entire business model and profitability, but I do know that SmartyPig offers best in class interest rates in an FDIC insured savings account. That is enough for me to feel secure leaving my savings in my SmartyPig account and enjoying the high interest rates.

For more information about SmartyPig and their features, please see this SmartyPig review.

What are your thoughts on SmartyPig?

Published or updated September 3, 2010.
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{ 6 comments… read them below or add one }

1 Ken

Another thing I could see SmartyPig doing instead of lowering rates is to lower the rate tier again. Perhaps from $50K to something like $25K. I would guess those with SmartyPig balances near $50K are spending much less than $50K on gift cards.


2 Ryan

Ken, I wouldn’t be surprised to see that happen in the near future. I’m sure they’ve analyzed their customer demographics and have a good idea which customers (by deposit amount) are most profitable in the long run. However, I think they need to be careful before making too many changes, or they may have a hard time attracting new customers. It doesn’t seem to me that most banking customers are looking for a new rewards program – they are looking for strong interest rates and a good bank to work with long term. Anyone can buy discounted gift cards at a reseller.


3 Evan

It was inevitable…just another reason why rate chasing is a bad idea.

SmartyPig also had that weird thing that gave her less % for money over 50k?


4 Ryan

Evan, yes, SmartyPig has a a tiered interest rate system. The highest interest rate is only available for deposits of less that $50,000. If deposits exceed that amount, the entire balance earns a lower interest rate, in this case, 0.50%. That said, if you are married you and your spouse can each open an account and earn the full interest rate on up to $50,000 each, effectively earning a solid return on up to $100,000, which is probably more than most people are able to stash away in cash… 🙂


5 pamela

Well isn’t that convenient..just after the were taken over by a new bank the rates dropped. thank goodness I didn’t put more money than I already did


6 Doug

SmartyPig just dropped its interest rates again – down to 1.35% now.


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