The marketplace lending industry has never had to deal with an environment where interest rates are increasing. We’re not talking about how loan interest rates affect returns, but instead how platforms handle idle cash. When interest rates were close to 0% it was no big deal that platforms paid nothing for the idle cash that builds up in your account. But now that many money market and savings accounts offer 2% or more there has become a real cost to keeping cash just sitting in a marketplace lending account.
For some platforms this is not much of an issue since there are plenty of loans available and the minimum investment per loan is relatively low. But for many platforms, particularly in the real estate space minimum investments are high and cash builds up, sometimes to several thousand dollars before an investment can be made. These platforms may need to consider offering an incentive to investors to keep them happy.
YieldStreet Becomes First Platform to Offer a Return on Idle Cash
YieldStreet is one such platform. The minimum investment is often $10,000 or more in new deals so cash has to build up significantly before it can be reinvested. Also, with investor demand strong it is not easy to deploy idle cash since many of the deals are fully funded within minutes and there is no auto-invest feature. So, cash tends to build up and the cash drag problem has an impact on investors overall returns.
YieldStreet’s solution to this problem is YieldStreet Wallet which is a savings account that earns 1.6%. What’s interesting is that while you must be an accredited investor to invest in investment opportunities on the YieldStreet platform, this is not a requirement to hold a YieldStreet Wallet account. Similar to other savings accounts, users are restricted from making more than six transactions per month, deposits excluded. Funds are FDIC insured since the account is held at Evolve Bank & Trust which is an FDIC insured bank. One of the major benefits to investors is that they no longer have to worry about timing ACH transfers for new investments since the account is held at YieldStreet. Distributions and payments will also be made to the YieldStreet account so you automatically earning interest as loan payments come in.
My account was automatically upgraded to the YieldStreet Wallet and I have been earning 1.6% on my idle cash for over a month now. And for new transfers cash starts to earn interest as soon as the money is received.
Will Offering a Return on Idle Cash Become Standard Soon?
YieldStreet’s offering could be the start of a new trend. They are the first to address the problem of idle cash but they most certainly won’t be the last. The Federal Reserve is expected to increase interest rates three times in 2019 which will put the federal funds rate near 3%. As interest rates continue increase there will be more pressure on platforms to provide investors with a yield on their cash. Seems like a no-brainer to me to keep investors happy.
Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.