Avoid CNote and Other So-Called Savings Alternatives

I was recently contacted by a journalist from a very well respected and widely circulated financial publication. She wanted my opinion of something called CNote, having already spoken with others (inside and outside the financial field) who were gushing over this product and company that had just won an award at South By Southwest in Austin.

I had not been familiar with CNote. I researched it. What I found was troubling, to say the least.

When I cofounded BestCashCow several years ago, the object of the site was to provide the largest and most comprehensive database of bank savings and CD rates in order to help people save and earn more without taking on additional risk. That remains the mission of the site today.

Alarm bells go off when I see people comparing anything to a traditional savings or CD product in order to induce people to put money that they cannot afford to risk into a product that bears none of the characteristics of a savings bank product. In the post-financial crisis era with increased consumer financial protection from the CFPB, selling a financial product that has completely different characteristics from a savings or a CD product (no liquidity parachute, no change in rates) and calling it a savings or CD product is highly troubling.

CNote is neither a savings product or a CD product. It is entirely illiquid – you can only recover 10% of your principal each quarter. This is a loan investment product with significant risk compared to a savings product from a bank. Unlike a savings or CD product, money you deposit with CNote is not insured by the FDIC, NCUA or anyone else.

CNote is now offering 2.75%. With online savings rates at or around that level and short-term CD rates much higher, the current yield that CNote is offering is quite simply much too low to justify the risk.

CNote presumably is legal under Tier 2 of Regulation A of the Securities Act of 1933 (as amended in 2015). But it is a loan investment product and bears the risk of a loan, not the risk of a savings product or a CD product. I suspect you may see regulators (the SEC and Treasury Department / Office of the Comptroller of the Currency) weigh in on the use of the terms “checking and savings” and “CDs” with the whole range of products now being promoted by the uninsured neobanks and Silicon Valley-backed outfits such as CNote. However, in the meantime it falls to you (the consumer) to product yourself by depositing money you cannot afford to risk only in products from FDIC-insured banks and NCUA-insured credit unions.

The thing that concerns me most about CNote and some of the Neobanks (such as Aspiration) is their effort to seduce consumers with their argument that they are “investing socially”. Implicit in this argument is the inference that banks and credit unions are not investing in things that are in the public good. In fact, the desire to do good is a powerful influence in FDIC insured institutions. Putting your money in local banks and credit unions that lend directly in your community is a great and perfectly safe way to keep your hard earned money working in your community (or some other community). (In fact, BestCashCow can help you to research credit unions and community banks that have goals and objectives that align with your social investing objectives).

If you cannot find a bank or credit union that meets your goals or want specifically to earn a higher rate of return by investing in, say, women-owned ventures or electric school buses, you can find social investing-oriented funds that offer rewards that are more consistent with the risk level.

You can learn more about CNote in this article in Forbes where I am quoted.

Bottom line: Steer yourself far away from CNote and products like it.