Apr
14
2023
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Guide to Share Lending

By | Growing Wealth, invest, Investing | Comments Off on Guide to Share Lending

Share lending is when investment firms loan shares to borrowers as a way to collect additional revenue on stocks they already hold. This produces another revenue stream on equities that would otherwise sit untraded in their portfolios.

The borrowers of the shares are often short sellers, who give collateral in the form of cash or other securities to the lenders.

What Is Share Lending?

Share lending is very much as it sounds: Institutions lend out shares of stock to other investors in order to generate more revenue.

The lenders tend to be pension funds, mutual funds, sovereign wealth funds, and exchange-traded fund (ETF) providers, since these types of firms tend to be long-term holders of equities.

Brokerages can also practice securities lending with shares in retail investors’ brokerage accounts. Share lending can help such firms keep management fees down for their clients.

Share lending is also known as securities lending, as the practice can extend beyond equities to bonds and commodities. Securities lending has become more popular in recent years as increased competition in the brokerage space drove down management fees to near-zero, and investment firms sought other sources of revenue. Worldwide revenue from securities lending totaled $9.89 billion during 2022.

Share lending is also useful to investors who are shorting stock, because those investors need to borrow shares in order to open their positions.

Critics argue that the practice comes at the expense of fund investors, since investment firms forgo their voting rights when they loan out shares. They might also try to own stocks that are easier to rent out.

Other concerns about share lending include a lack of transparency, and an increase in counterparty risk. That said, because short-sellers often use margin trading as a way to increase their potential returns, they’re likely used to assuming risk.

How Securities Lending Works

Here’s a deeper breakdown of how share lending works:

1.    Institutional investors use in-house or third-party agents to match their shares with borrowers. Such agents receive a cut of the fee generated by the loan.

2.    The fee is agreed upon in advance and typically tied to how much demand there is for the lent-out security on the market.

3.    The institutional investor or lender often reinvests the collateral in order to collect additional interest or income while their shares are out on loan.

4.    Borrowers tend to be other banks, hedge funds, or broker-dealers, and sometimes include other lending agents. When the borrower is done using the shares, they return them back to the lender.

5.    If the collateral posted was in the form of cash, a percentage of the revenue earned from reinvesting is sometimes given back to the borrower.

Retail investors should learn whether their brokerage offers securities lending or share-lending programs. If you have a margin account at a brokerage or with a specific investing platform, there’s a good chance that you may be eligible or given access to a share-lending program. But you’ll need to ask your specific brokerage for details.

For some dividend stocks, investors could get some form of payment from the borrower, rather than the dividend itself. This payment may be taxed at a higher rate than a dividend payout.

Share Lending and Short Selling

In order to short a stock, investors usually first borrow shares. They then sell these shares to another investor or trader, with the hope that when or if the stock’s price falls, the short seller can buy them back and pocket the difference, before returning the loaned shares.

In share lending, a share can only be loaned out once — but when the borrower is a short seller, they can sell it, and the new buyer can lend it again. This is why the short stock float — the percentage of the share float that is shorted — can rise above 100% in a stock.

The fee generated by lending out shares depends on their availability. A small number of stocks tend to account for a large proportion of revenue in securities lending.

Criticism of Securities Lending

The lack of transparency in securities lending is a concern for many investors — both retail, and institutional.

The Dark Side of Share Lending

In December 2019, Japan’s Government Pension Investment Fund, among the world’s largest, announced that it would halt stock lending, saying the practice is not in line with its goals as a long-term investor. They further cited a lack of transparency regarding the identity of the individuals or entities borrowing the loaned securities, as well as their motivations for borrowing.

This became a bigger concern for investors after the “cum-ex” scandal in Germany, where borrowed shares were allegedly used in a tax evasion scheme.

Voting Rights Transferred

Another one of the biggest criticisms of share lending is that shareholder voting rights attached to the actual stock are transferred to the borrower.

This practice challenges the traditional model, in which institutional investors vote and push for change in companies in order to maximize shareholder value for their investors. Money managers can recall shares in order to cast a vote in an upcoming shareholder meeting. But there are concerns that they don’t, and it’s unclear how often they do.

A Hidden Problem

Another concern is that share lending programs incentivize money managers to own stocks that are popular to borrow, but may underperform. A 2017 paper entitled “Distortions Caused By Lending Fee Retention,” updated in July 2022, found that mutual funds that practice securities lending tend to overweight high-fee stocks which then underperform versus funds that do not rent out shares.

Pros and Cons of Share Lending

There are numerous pros and cons to share lending.

Pros

The most obvious upside for investors is that they may be able to open up an additional revenue stream to increase their returns by lending their shares. Along the same lines, share lending can also help investors turn otherwise dormant investments into return-boosters, under the right circumstances.

Also, lending shares allows for investors to lend their shares to short-sellers — thereby greasing the wheels of the market and allowing short-sellers to do their work. It adds liquidity to the market, in other words.

Cons

One downside to share lending is that retail investors should take note that securities that have been loaned are not protected by the Securities Investor Protection Corporation (SIPC). The SIPC, however, does protect the cash collateral received for the loaned securities for up to $250,000.

There can also be negative tax consequences when lending out shares of stock. You don’t receive dividends for the stocks you’ve loaned out, but you do get Payment in Lieu that’s equal to the value of the dividends paid on loan shares. Unfortunately, though, these payments are taxed at your marginal tax rate, not the more favorable dividend rate.

Another concern is the increase in counterparty risk (similar to credit risk). Let’s say a short seller’s wager goes sour. If the shorted stock rallies enough, the short seller could default and there’s a risk that the collateral posted to the lender isn’t enough to cover the cost of the shares on loan.

Finally, there may be additional and special criteria that investors need to meet in order to qualify for share-lending programs. This will depend on individual brokerages or platforms, however. And a final note: If you use a platform that allows you to buy or trade fractional shares, those fractional shares may not be eligible for share lending, either.

Pros and Cons of Share Lending
Pros

 Cons
Potential to earn more revenue Lack of SIPC protection
Allows investors to boost returns from dormant investments Increased counterparty risk (the borrower may default)
Adds liquidity to short-seller market You’re taxed at the marginal rate on payments in lieu of dividends
Investors may need to qualify

The Takeaway

Share lending or securities lending is a potential source of revenue for institutional investors and brokerage firms, who rent out shares that otherwise would have sat idly in portfolios. The practice has ramped up in recent years as management and brokerage fees have shrunk dramatically due to competition and the popularity of index investing.

There are pros and cons, however, as there’s always a risk that a borrower could default. That’s offset, naturally, by the chance to earn additional revenue and boost your ultimate returns. But there are no guarantees.

If you’re interested in investing in stocks, you can start building your portfolio with SoFi Invest. When you open an Active Invest account, you can start trading stocks online with SoFi Invest’s secure, streamlined platform today. And you may qualify for share lending, which could bring in some income.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What are the risks of share lending?

Some of the biggest risks of share lending are counterparty risk (or, the risk that a borrower will default and not be able to return your shares); the fact that you may lose SIPC protection on your shares; and that you may need to qualify in order to actually lend shares.

What exactly happens when you lend shares?

When you lend shares, ownership is temporarily transferred to a borrower, who transfers other shares or investments to the lender as collateral. The borrower also pays the lender a fee for the privilege of borrowing their shares.

Does share lending save money?

It doesn’t necessarily save money, but it can be a way to earn more money or drive more revenue from your owned investments. By lending out shares, you can garner fees from borrowers, amounting to a boost to your overall return.

For members enrolled in the Apex Fully Paid Securities Lending Program, securities are lent based on the Master Securities Lending Agreement. Members are eligible to receive a monthly payment if Apex lends out any securities. The payment is a percentage of the total net proceeds earned, which is subject to change. There are risks with share lending, for a detailed review of those risks please review the Important Disclosure. Members may opt out of the Securities Lending Program at any time by sending us a message via chat.
SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Apr
14
2023
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Alternatives to Banks and Traditional Savings Accounts

By | Budgeting & Goals, Financial Independence | Comments Off on Alternatives to Banks and Traditional Savings Accounts

Increasingly, there are more and more alternatives to traditional banks and savings accounts. From fintech to mobile banking and money market funds to cash management accounts, you’ll have plenty of options to consider in the changing world of personal finance. Here’s a look at:

•  Alternative banking options, including money market accounts, cash management accounts, and more

•  The pros and cons of mobile banking

•  Credit unions vs. P2P lending vs. traditional banks.

Alternative Banking Options

Aside from the old-school savings and checking options offered at traditional banks, there are other options that allow you to save and withdraw cash.

Money Market Accounts

Money market accounts (MMAs), also known as money market deposit accounts (MMDAs), are a type of interest-bearing savings vehicle that was developed several decades ago. In general, these accounts offer relatively lower risk for investors than other types of investments because they are insured by the Federal Deposit Insurance Corporation. These accounts would typically offer higher interest rates than traditional savings accounts because the funds can be invested into government securities, certificates of deposit (CDs), and other vehicles. However, in today’s market, the gap is often not so great.

These accounts often combine features of a savings account and a checking account. For instance, if you are an account holder, you may or may not be limited to the number of monthly withdrawals you can make, which is standard with some savings accounts. However, you may also have a debit card, as you would with a checking account, to make transactions more seamless.

It’s worth noting that, even though they may sound alike, money market accounts and money market funds (a type of investment) are very different financial products.

Cash Management Accounts

A cash management account (or CMA) combines traits of a savings account with a checking account, allowing account holders to both save and spend. These accounts are typically offered by non-bank fintechs, such as online investment firms or robo-advisors. Rates can be competitive while allowing the account holder to make withdrawals as needed. This is in contrast to the types of accounts that limit transactions allowed per statement cycle.

Sometimes, checks are provided with cash management accounts. They may also come with debit cards and access to ATMs.

The funds are typically dispersed into accounts at banks where FDIC insurance keeps the money safe.

Alternative Options vs Traditional Savings Accounts

Here’s a quick look at how money market accounts and cash management accounts differ from traditional savings accounts.

Note: As you review these options, if you are interested in higher insurance limits, it’s worthwhile to note that some banks participate in programs that extend the FDIC insurance to cover millions.1

Money Market Account Cash Management Account Traditional Savings Account
May offer higher interest rates than traditional savings accounts. Often offered by non-bank financial service providers. They combine the attributes of traditional checking and savings accounts, offering competitive interest rates. Typically offered by traditional banks, traditional savings accounts may offer lower interest rates than money market accounts and cash management accounts.
May allow limited withdrawals each month using check or debit card. Users can make withdrawals as needed. Checks may be provided. Federal rules once limited withdrawals and transfers out of the account to six per month. That regulation has been suspended in response to the COVID-19 pandemic, though banks may still adhere to it.
Can be invested by the bank in government securities, certificates of deposit, and commercial paper, all of which are considered relatively low risk investments. Does not allow investing. Does not allow investing.
Money market accounts are FDIC insured up to $250,000. FDIC insured up to $250,000. FDIC insured up to $250,000.

Fintech

Fintech is short for “financial technology,” a term used to describe financial services with essential, integrated technology. Some forms have become so commonplace that users don’t necessarily even consider them as fintech. An example would be using a mobile payment app. When considering fintech vs traditional banking there may be other products that are more clearly alternative banking solutions. An example of this could be buying and selling cryptocurrency.

Besides mobile apps and cryptocurrency, other fintech examples may include:

•  Digital-only banks, meaning ones without brick-and-mortar branches

•  Artificial intelligence (AI), such as those used in chatbots to answer customer questions and with robo-advisors to help with investing

•  Biometric technologies that make it easier to log into apps while also providing additional security.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


Pros and Cons of Mobile Banking

Most traditional banks and credit unions offer mobile banking today as part of their services. Basically, mobile banking allows customers to check their balances and transactions online, deposit checks on their phones, and transfer funds digitally.

Because online-only banks typically don’t have physical branches, overhead costs can be lower for them. They may then pass those savings onto their customers, as well as often provide perks beyond those provided in a traditional bank. Here’s a look at some of the pros and cons of online banking:

Pros Cons
Higher interest rates: Reduced overhead can help online-only banks to provide more attractive interest rates. Lack of live assistance: Online-only banks commonly have a customer service line without offering personal banking services. This means that a customer will need to set up accounts and apply for loans without the ability to talk through any challenges with a banker.
No minimum balance: Traditional banks often require minimum balances in accounts, while many online-only institutions do not. Limited services: To help keep costs low and be able to provide higher interest rates, an online-only bank will often offer fewer services than traditional banks.
Convenience: Mobile banking institutions are open 24/7/365. All a customer needs is internet access. Limited ATM access: It may be more difficult to find ATMs within the network
ATM availability: Online-only banks often participate in ATM networks so that customers can use them at no cost. Or, online-only banks may instead refund ATM fees for a certain number of withdrawals.

Consumers who bank online should take appropriate precautions to avoid fraudulent activity. Online banking is very safe, but nothing is completely without issues in this era of hackers and scammers. Wise moves include not accessing private information on public Wi-Fi, not checking banking information on public computers, and using debit cards on protected sites only. These steps may help to reduce the odds of security-related problems with online banking.

Recommended: Is Mobile Banking Safe?

Credit Unions vs. Traditional Banks

When you’re looking for a place to open a checking or savings account or find loan products like a mortgage, credit unions can be an alternative to traditional banks. Here’s a look at how the two options compare:

Traditional Bank Credit Union
Banks are for-profit institutions that are owned privately or are publicly traded companies. Credit unions are nonprofits typically owned by its members.
Banking services are typically available to anyone with a good financial track record. Services may only be available to members or family members of the community that the credit union serves.
Banks may have more branches and ATMs available. Credit unions often partner with other institutions to make more bricks-and-mortar branches available and to increase the size of their ATM network.
Banks may offer a wider array of options for banking products. Other products, such as credit cards, may offer more perks. Credit unions often offer enhanced customer services and may be cheaper to use than traditional banks.

Peer-to-Peer Lending vs Traditional Banking

In recent years, peer-to-peer (P2P) lending has sprung up as an alternative to traditional bank loans. It’s a form of direct money lending that bypasses official financial institutions in which investors provide funds to would-be borrowers. Here’s a side-by-side look at the two forms of lending:

Peer-to-peer Lending Traditional Bank Loans
P2P lending matches borrowers and investors directly—typically through an online platform—without the use of an official financial intermediary, such as a bank. Borrowers apply for a loan from a bank.
Borrowers fill out an application with the platform which assesses risk and credit rating before providing loan options and interest rates. The bank assesses borrowers’ creditworthiness and determines whether or not to provide a loan and appropriate interest rates.
Loans may be more accessible to those with low credit scores or looking for atypical loans Banks may offer a limited number of loan products and may have few options available to individuals with poor credit.
Loans may offer lower interest rates or lower fees due to higher competition between investors.

Switching Bank Accounts

If you’re happy with your current traditional bank and bank accounts, you may be content to stay put. However if you’re unsatisfied or looking for tools that aren’t available at your bricks-and-mortar bank, then there may be reasons to switch bank accounts. Here are some questions to ask yourself and reasons you might want to make a change.

•  Fees: Review what’s being charged, from minimum balance and maintenance fees to significant overdraft fees and more. If they’re adding up at a current bank, it may be worth researching alternative banking solutions to see if fees are similar or perhaps even less than what’s currently being charged.

•  Customer service: How long does it take for an issue to be resolved, such as a fraudulent withdrawal? During what hours is the customer service line available? Are you currently being treated as a valued customer?

•  Life event: Is a wedding or other kind of partnership in the near future? This may be a time to open a joint account. See if your current financial institution offers the right features for you and your partner.

•  Convenience: Is the brick-and-mortar bank branch location inconvenient, perhaps after a move? Do ATMs come with hefty fees? Can you conduct all the transactions you want to with your mobile device?

•  FDIC insurance: Is your current bank FDIC-insured or is your current credit union NCUA-insured? Are there any other safety and security concerns with that financial institution? Insurance can provide peace of mind.

•  Mobile features: Are more features available at an alternative banking choice that are of interest? This could mean mobile check deposits, reimbursement of ATM fees, overdraft forgiveness, or a more user-friendly online portal.

How Many Bank Accounts Should You Have?

If a person decides to open an alternative bank account, does it still make sense to hang on to whatever traditional accounts they may already have? The short answer is that the number of bank accounts a person maintains is an individual decision. There may be benefits to having multiple accounts, but it’s also more to juggle.

Reasons it makes sense to have multiple accounts can include:

•  Having separate accounts for different purposes; for example, one savings account could be earmarked for emergencies, while another might contain funds being saved for a down payment on a house or for college expenses.

•  Couples may decide they like the idea of having separate accounts as well as one for joint expenses.

•  Freelancers and small business owners may want to separate personal banking from business banking.

Challenges associated with maintaining multiple accounts can include:

•  The risk of overdraft

•  More banking fees

•  More logistics involved to manage them all.

If more than one bank account is open, it can be important to find out how to transfer funds from one account to the other, as needed. If all of the accounts are held at the same institution, most banks have simple procedures to set up transfers, such as ones from a checking account to a savings account. This can often be done by filling out a form. Or, this can often be done through an ATM.

If bank accounts are held in different financial institutions, the information needed to complete a transfer will typically include routing numbers and account numbers. Banks may have slightly different procedures.

Recommended: How Many Bank Accounts Should I Have?

The Takeaway

There are many different ways to manage your money today, including whether you keep it with a traditional bank, a credit union, or an online bank or other kind of fintech. You’ll also have options like a standard savings account vs. a cash management account vs. money market account. Understanding the options available and the pros and cons of each will help you make the best decision for you. There usually isn’t a right or wrong choice, but an option that checks more of the boxes on your wishlist. It’s up to you!

If you’re in the market for a bank that offers competitive interest rates and no fees, take a look at what SoFi offers for online bank accounts. When you open our Checking and Savings with direct deposit, you’ll enjoy a competitive APY and pay no account fees. Plus, we offer a network of 55,000+ fee-free ATMs to make banking that much better.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.


1SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per depositor per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by banks in the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at SoFi.com/banking/fdic/terms. See list of participating banks at SoFi.com/banking/fdic/receivingbanks.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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14
2023
What Is IntraFi Network Deposits?

What Is IntraFi Network Deposits?

By | Budgeting & Goals, Financial Independence, money | Comments Off on What Is IntraFi Network Deposits?

IntraFi Network Deposits is a banking network that allows customers to deposit more than $250,000 and have the funds be FDIC-insured. The FDIC (or Federal Deposit Insurance Corporation) offers $250,000 of deposit insurance for most bank customers in the event that the bank fails. This applies per depositor, per institution, per ownership category.

While this may be more than enough for many people, individuals with very high net worths or businesses may have the need for additional FDIC insurance on larger sums. For those in that situation, there are an array of strategies to get the insurance coverage needed for peace of mind.

One option is to use IntraFi Network Deposits. This allows you to work with one bank which facilitates your money being spread between multiple institutions to make sure that you remain under the FDIC limit. Here, learn more about this process by diving into:

•   How does IntraFi Work?

•   What steps do you take to use IntraFi?

•   What are alternatives to IntraFi?

How Does IntraFi Work?

IntraFi Network Deposits (previously known as CDARS or ICS) is a network that links many of the largest banks and financial institutions in a shared network. If you have more than $250,000 in savings accounts or certificates of deposit in an investment plan, you might want to consider using the IntraFi network. It can help you bank your money while maintaining FDIC insurance.

You create an account with one custodial bank in the network. Think of that bank as managing your relationship with others, because they spread your total deposit amount out over multiple different financial institutions.

Your funds are split up into multiple accounts of $250,000 or less, each fully FDIC-insured, at various institutions, with IntraFi Network acting as your hub. This can be a valuable solution for high net-worth individuals as well as businesses.

Think about the big picture: Most investors want to make sure that they are investing in safe accounts; ones that are unlikely to lose value. There are, of course, various ways to accomplish this. Security is one reason you might look at how CDs compare to bonds, for example. IntraFi Network Deposits is an avenue for those who appreciate a consolidated approach to investing large sums of money and enjoying FDIC insurance.

FDIC Limits

The FDIC is an independent agency of the United States government, tasked with insuring bank depositors against a bank failure. FDIC deposit insurance guarantees that money up to $250,000 per depositor.

If you have more than that to invest, you might consider spreading out your money to different institutions. This will help make sure that all of your money is protected. You can also look into another option: Some banks participate in programs that extend the FDIC insurance to cover millions1.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


Using IntraFi Deposits

IntraFi Network Deposits can be thought of as your one-stop shop for dividing your money into separate, fully insured accounts. Read on to learn how exactly this organization functions to help make this process easier for you.

Participating Banks

The first thing that you will want to do to use IntraFi Deposits is to find a participating bank. Most of the largest banks in the country belong to the IntraFi network, including 84% of the largest banks in the country. You shouldn’t have a problem finding a network bank that will fit your needs. Check with your current bank or other ones in your area, if you like, or use a search engine to locate one. Found one you are ready to bank with? This is called your custodial bank.

Deposit Funds

Once you’ve found a participating bank, the next step is to complete the required paperwork and then deposit funds (say, by transferring money from another bank account). Even though your funds will be spread throughout several different financial institutions, you will always work directly with your custodial bank. You will deposit funds through that one bank, and they will set the interest rate that you’ll earn on all your funds across the network.

Your custodial bank will be responsible for separating your money into FDIC-insured accounts, each of $250,000 or less, and managing them.

Track Your Funds

Your custodial bank is responsible for verifying your identity, accepting your deposits, and handling all communication with you. How certificates of deposit work with IntraFi is similar to how it would work if you only had an account with one bank. You will receive regular statements from your custodial bank, just as if you had an account directly and only with them.

If you have questions about which financial institutions your money is invested in, you can track that information through your custodial bank and the bank statements they issue.

Is IntraFi Safe?

Savvy investors are concerned with which investments have the lowest level of risk. While no investment is 100% safe in all situations, the IntraFi Network has been tested with billions of dollars over its lifetime. In addition, it has been endorsed by the American Bankers Association.

How Much Does the IntraFi Service Cost?

IntraFi Network Deposits does not charge a fee directly to consumers who take advantage of the service. You will choose a product and a rate directly with the custodial bank that you elect to sign up with. That rate and product will determine your total return on investment (ROI).

How Many Banks Participate in the IntraFi Network?

Nearly all of the biggest banks in the United States participate in the IntraFi network. The IntraFi network includes more than 3,000 financial institutions, representing around 50% of the total banks in the country. Of the banks in the network, 95% are community banks, and 66% of minority-owned banks are members. This means it should be fairly simple to find a participating bank that works for you.

Alternatives to IntraFi Network Deposits

Of course, there’s the possibility that IntraFi Network Deposits doesn’t align perfectly with your needs and goals. If you have more than $250,000 in funds that you want to deposit so it’s FDIC-insured, there are other options to consider, listed here.

Open an account with a bank that offers higher insurance limits

As briefly noted above, some banks participate in programs that extend coverage to millions. This can be a convenient option for some individuals.

Open accounts with multiple banks

One alternative to using the IntraFi Network Deposits program is to just open accounts with multiple banks yourself. You would just need to keep the total amount at less than $250,000 per ownership category, per institution.

While this does give you more control, it also increases potential headaches as you try to track all of your money manually. Another possible negative is that you may not be able to get the highest rates with every financial institution. Deciding how many bank accounts to have is a personal decision, depending on your money style and your goals.

Open different types of accounts

FDIC insurance covers up to $250,000 per depositor, per FDIC-insured bank, per ownership category. One way to enjoy that FDIC coverage when you have more than $250,000 to deposit is by opening up different categories of accounts. There are a number of different types of account ownership categories, including such options as:

•   Single accounts

•   Joint accounts

•   Revocable trust accounts

•   Irrevocable trust accounts

•   Certain retirement accounts

•   Employee benefit plan accounts

Check with your financial institution to see if this might work for you as an IntraFi alternative.

Accept the risk of bank failure

You do also have the option to keep all of your money in one bank account, even above the $250,000 FDIC limit. This can involve taking on a substantial risk however. If that bank fails, you may lose any money held by the bank above the FDIC limit. This really boils down to a matter of your personal comfort level.

The Takeaway

If you have more than $250,000 in funds that you want to invest in a savings, money market, or certificate of deposit account, you may want to spread your money out to make sure that it is all FDIC-insured. FDIC insurance will cover $250,000, but beyond that, you may well need a solution. One way to do this is through the IntraFi Network Deposits program, which will divide your money into separate accounts that are fully insured. They can simplify this money management process for you and help you enjoy more peace of mind.

If you are looking for a bank that is a member of the IntraFi Network, SoFi can help. What’s more, SoFi recently announced that deposits may be insured up to $2 million through participation in the SoFi Insured Deposit Program. But even if you have much less money to stash, online banking with SoFi can also be a great choice. When you set up our Checking and Savings with direct deposit, you’ll enjoy a competitive APY and you’ll pay no account fees.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

Are IntraFi accounts safe?

While no investment can be guaranteed as 100% safe in all situations, the IntraFi Network Deposits program has been tested with thousands of depositors and billions of dollars over the years.

How do you use IntraFi?

Whether you are creating an investment plan for a child or want to invest a large amount of money for another reason, using IntraFi is very straightforward. First, find a participating bank and complete the required paperwork. Then, you will make your deposits, and your funds will be placed into CDs or deposit accounts with other banks in the network. Your custodial bank will send you periodic statements with the details of your activity.

What is the interest rate for IntraFi?

IntraFi does not set the interest rate on deposits. Instead, it is your custodial bank that sets the interest rate for the total amount deposited. Whether you have a no penalty certificate of deposit or any other type of account, the interest rate will be up to your custodial bank. You will also receive your statements and other correspondence from the bank where you made your initial deposits.

Photo credit: iStock/fizkes

1SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per depositor per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by banks in the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at SoFi.com/banking/fdic/terms. See list of participating banks at SoFi.com/banking/fdic/receivingbanks.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Apr
13
2023
What Are Countercyclical Stocks?

What Are Countercyclical Stocks?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Are Countercyclical Stocks?

Countercyclical stocks tend to perform relatively well during economic downturns and underperform during periods of economic expansion. These stocks are typically associated with industries or sectors that provide essential goods or services in demand, even during periods of economic hardship. Examples of countercyclical sectors include consumer staples, utilities, and healthcare.

Countercyclical stocks can be a vital component of a well-diversified investment portfolio. As the economy experiences ups and downs, these stocks can help to provide stability and even generate profits during difficult times. Understanding countercyclical stocks and how they can benefit your portfolio is crucial for investors looking to maximize their returns and minimize risk.

How Countercyclical Stocks Work

Countercyclical stocks — sometimes called non-cyclical or defensive stocks — work by providing stability to an investment portfolio during economic downturns. Investors can use these stocks in a defensive investment strategy, as they tend to perform well even during economic hardship when other stocks are underperforming. This can help increase diversification and reduce the risk in an investment portfolio.

In contrast to countercyclical stocks, cyclical stocks tend to follow the broader economic cycle, with returns correlated to fluctuations in the market.

💡 Recommended: Cyclical vs Non-Cyclical Stocks: Investing Around Economic Cycles

Countercyclical stocks are closely related to specific industries or sectors. Industries such as consumer staples, utilities, and healthcare provide products and services considered necessities, so they tend to be less sensitive to changes in the economy. This means that even during tough times, people will still need to buy these products and services, providing a stable source of income for the companies that produce them.

For example, during a recession, people may cut back on discretionary spending, such as dining out or buying expensive clothes. However, they will still need to buy groceries, pay for utilities, and seek medical care. As a result, companies in these sectors may see stable sales and profits, which can drive up the value of their stocks even during a bear market.

It is important to note that not all stocks within a countercyclical industry will necessarily follow the countercyclical trend. Factors such as changes in government policies, technological innovations, and shifts in consumer behavior can impact the performance of these stocks.

Additionally, some countercyclical stocks may underperform during economic expansions when the demand for their products and services is lower.

It is essential to conduct thorough research and analysis before making any investment decisions, including investing in countercyclical stocks. Research may include reviewing the company’s financial performance, analyzing industry trends, and considering the political and economic environment. By taking these steps, you can identify the best countercyclical stocks to add to your portfolio and potentially generate profits even during difficult economic times.

Examples of Countercyclical Businesses

As noted above, countercyclical businesses tend to perform well during economic downturns and underperform during periods of economic expansion. Investors tend to add countercyclical stocks to their portfolios when investing with the business cycle.

Here are some examples of countercyclical industries and the types of companies that can be considered countercyclical:

•   Consumer staples, such as food, beverage, and household products, provide products and services that are considered necessities, so they tend to be less sensitive to changes in the economy. This means that even during tough times, people will still need to buy these products, providing a stable source of income for the companies that produce them. Examples of businesses in this industry include grocery stores, packaged food manufacturers, and beverage companies.

•   Utilities, such as water, electricity, and gas, provide essential services that people cannot do without. As a result, these companies tend to be less affected by changes in the economy and can even benefit from them as people continue to use these services even when they are cutting back on discretionary spending. Examples of firms in this industry include utility companies, water treatment facilities, and energy providers.

•   Healthcare companies provide medical services and products. During economic downturns, people may cut back on discretionary spending but still need to pay for medical care and other essential health services. This means that healthcare companies can provide a stable source of income even during difficult times. Examples of businesses in this industry include hospitals, pharmaceutical companies, and medical equipment manufacturers.

Risks of Countercyclical Investments

Investing in countercyclical stocks may provide stability to an investment portfolio during economic downturns, but several risks are also associated with these types of investments.

Here are some of the risks to consider:

Market Volatility

The stock market can be volatile and unpredictable, and market fluctuations can impact even countercyclical stocks. For example, during a recession, even the most stable countercyclical industries can experience a decline in demand for their products and services.

Company Specific Risks

Not all companies within a countercyclical industry will perform equally well, even during difficult economic times. It is important to conduct thorough research and fundamental analysis to identify companies with strong financials and a history of stable performance.

Dependence on Government Policies

Countercyclical industries like healthcare and utilities may depend heavily on government policies and regulations. Changes to these policies can impact the performance of these companies and the industries in which they operate.

Interest Rates

Interest rates can impact the overall stock market’s performance, including countercyclical stocks. When interest rates are low, investors may be more likely to invest in stocks, which can drive up stock prices. Conversely, when interest rates are high, investors may shift their investments to bonds or other fixed-income investments, which can drive down stock prices.

💡 Recommended: How Do Interest Rates Impact Stocks?

The Takeaway

Investing in countercyclical stocks can provide several benefits to your portfolio. These stocks can help to provide stability during tough economic times and can even generate profits — through dividends and price appreciation — when other stocks are underperforming. By diversifying your portfolio to include countercyclical stocks, you can reduce your overall risk and potentially maximize your returns.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

Photo credit: iStock/Eoneren

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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