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The fintech app Revolut is making an attempt to seduce US savers at a market charge of 5% – however there’s a catch

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The British Revolut has announced a new "bonus" of 4.5% on top of its annual base rate for American savers.

Revolut

LONDON – With major U.S. banks forced to cut interest rates on high-yield savings accounts during the coronavirus pandemic, a fintech challenger is moving in the opposite direction.

The British Revolut announced on Thursday a new "bonus" of 4.5% on top of its annual base rate for American savers. It is an annualized rate that is calculated daily and paid out every month. Users who have subscribed to Revolut's "Premium" and "Metal" accounts, which are $ 10 and $ 17 per month, respectively, receive a rate of 5% on their savings, while standard customers receive a rate of 4.75%.

The top 5% rate is far higher than the current market-leading 0.83% offered by online bank Vio according to the personal finance website Bankrate, and more than 50 times the national average of 0.09%. In particular, Revolut is not a typical bank, but a so-called e-money institution that works with a government-regulated lender, the Metropolitan Commercial Bank, who holds customer deposits on its behalf.

Rather than earning interest the traditional way through lending, Revolut pays out the 4.5% bonus directly from the revenue from fees that merchants charge every time merchants use their card. It's worth noting that these exchange fees make up the vast majority of Revolut's income at 63%.

"The model is designed to ensure that customers must use Revolut as their primary expense card in order to benefit from full price," a Revolut spokesman told CNBC when questioning its apparently cash-intensive model. "Because the exchange rate is so high in the US, we won't create any loss-making customers."

However, Revolut's "savings bonus" has some limitations. First, you can only earn the top 5% rate if you are a paying user. Second, you only get the additional interest on the total amount you spent in the previous month. So if you had $ 400 in your account in the month before an interest payment but only spent $ 100, the 4.5% bonus will only apply to the $ 100.

However, personal finance experts say online banks are a better choice right now than the ones responsible for the income from savings. The Federal Reserve cut interest rates close to zero this year to prop up an economy ravaged by the Covid-19 crisis.

"Even in a low-interest world, anyone looking for a home for their savings should shop in the market to ensure they are getting the best return on their money," Tom Selby, senior analyst at AJ Bell, told CNBC. "It is possible that the highest rates available will be with newer entrants such as fintech companies looking to do new business."

"Whoever you entrust your money with, it is important to check that the institution is in good faith and regulated, otherwise you may be defrauded."

Revolut argues that its model works as it encourages users to spend more on their accounts. Many so-called neobanks – like Monzo and Chime – have struggled over the years to convince users to use them as their main account instead of having it as a backup to the main account they deposited their salary into.

Revolut was founded in 2015 and is Europe's most valuable neo bank. Revolut received a $ 5.5 billion valuation earlier this year following a new round of funding. However, the company made heavy losses to grow rapidly. In fiscal 2019, the company posted a loss of £ 106.5 million (US $ 137.4 million), more than three times the loss of £ 32.9 million the previous year.

The company was founded in the United States in March – just as governments around the world began enforcing bans to curb the spread of Covid-19 – and has since gained over 150,000 customers in the country. That’s nowhere near the millions of people who do banking at big institutions like Citi and JPMorgan. It's also a long way from Chimes' 8 million users and is behind the 500,000 of German rival N26.

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Katherine Clark