Online bank launching highest yielding bank account

Branchless bank Green Dot is launching the highest yielding bank account in the industry. The Pasadena, California-based bank, which gained traction with prepaid cards in the dot-com era, launched a new bank account Tuesday with 3% annual interest on savings, and 3% cash back on all online debit card purchases. The average rate for savings accounts, according to Bankrate.com, is 0.1%.

The 3% rate on a savings account is the highest for any bank in the country, according to Bankrate. Green Dot founder and CEO Steve Streit said despite being 30 times the national average and above the current Fed Funds rate, the 3% APY is sustainable and meant to be permanent.

Green Dot is hardly the only one luring in customers with high-yield, low-fee options. But many of them have come from non-bank, fintech start-ups or challenger banks, which instead partner with FDIC-insured banks. Betterment launched a checking and savings product last week with a 2.69% APY following Wealthfront, which offers 2.57%. SoFi offers 2.25%. Chime, which has a .01% annual yield, meanwhile has ushered in 4 million customers by offering advances on paychecks, which Green Dot also plans to offer with its new account.

"The start-up banks out there are effectively marketing companies that use other people's assets to create a bank product," Streit said. "There's nothing illegal about it. But it does mean that you're paying a lot - and to have a banking product they need to do that."

Green Dot's offer is also above the Fed Funds rate, or the rate at which banks lend money to each other. That is likely to drop this week after a widely expected rate cut by the Federal Reserve. In June, Goldman Sachs' consumer arm Marcus cut interest rates on its highyield accounts from 2.25% to 2.15% ahead of the central bank's move. Ally Bank also lowered rates to 2.1% from 2.2% ahead of the Fed decision. Still, Streit said a single 25 basis point drop after this week's FOMC meeting wouldn't change Green Dot's ability to profit off of the savings product.

"If rates were lowered precipitously quarter after quarter we may have to look at it," Streit told CNBC in a phone interview. "But there's certainly nothing in the near term that we're worried about."

Streit started Green Dot in 1999 with prepaid debit cards geared towards internet users who wanted to shop online. The company went public on the New York Stock Exchange in 2010 and a year later, got into the banking business by acquiring Utah-based Bonneville Bank for $15.7 million. In the years since, it has partnered with Uber, which uses Green Dot checking accounts for its drivers, and powers Apple's Pay and Intuit's TurboTax. It also has an agreement with Walmart to issue the retailer's prepaid debit card.

The stock has had a tough 2019 though with shares of Green Dot down more than 37% year to date while the broader market rallied. Streit said this announcement is part of his promise of a turnaround to shareholders.

"We promised investors that our new products were going to not only embrace our legacy customers, but that they were going to open themselves up to a broader collection of customers to expand our total addressable market," he said. "We've done that here."