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Business Operations Business Models

How Does Betterment Make Money (Business and Revenue Model)

The Betterment business model

How Does Betterment Make Money?
Here’s what you should know:
  • What is Betterment, and how does Betterment work?
  • How does Betterment make money?
  • Account Management Fees
  • Advice Packages (Phone Consultations)
  • Payments From Cash Reserve Program Banks
  • Interchange Fees From Merchants
  • Betterment’s Subsidiaries, Acquisitions, and Exits
  • Betterment’s profit and revenue
  • What is the Betterment business and revenue model?
  • Betterment’s funding and valuation

How does Betterment make money if there are no fees? Here is a full, in-depth, breakdown of their four (4) revenue streams and the different products and services they offer, as well as the Betterment business model, their year-over-year revenue, and how Betterment works.

What is Betterment, and how does Betterment work?

Betterment is a financial investment company that provides financial advice and account management services.

To be clear, Betterment is not a bank. All Betterment banking services are provided by and issued by nbkc bank, Member FDIC.

Founded in 2008 by Jon Stein and Eli Broverman, Betterment now has more than 650,000 customer accounts with more than $30 billion assets under management.

How Betterment works is: When signing up, Betterment will ask customers a bit of information to find what best fits their goals. From there, customers can choose from one of Betterment’s four (4) types of financial accounts: checking, cash reserve, investment, and retirement.

Some of Betterment’s competitors include Chime, Varo Money, Ally, Dave, Acorns, SoFi, Robinhood, Stash, and other challenger banks.

Betterment App in Apple App Store | Betterment Business Model | How Does Betterment Make Money?
Source: Apple App Store | Betterment

How does Betterment make money?

According to Betterments homepage, Betterment has over 650,000 customer accounts and more than $30 billion assets under management. So how does Betterment make money off of all those customer accounts and assets under management?

Below is a breakdown of how much money Betterment makes and its revenue model. Including all revenue streams and how much they charge for their services.

Here are the 4 ways of how Betterment makes money (in 2021):

Betterment has a revenue model that makes money in four (4) ways – management fees, financial advice, payments from cash reserve program banks, and interchange fees from merchants.

#1. Account Management Fees

One of the ways Betterment makes money is by receiving a fee for managing customer’s investment and retirement accounts. This is done by receiving a percentage of the total amount in the account(s) they are managing.

Management fees range from 0.25 to 0.40 percent depending on the account. So for example, Betterment takes roughly $2.50 to $4 per year for every $1,000 they manage.

Betterment Management Fee:

  • 0.25% to 0.40% annual fee
Betterment Fees | Betterment Business Model | How Does Betterment Make Money?
Source: Betterment

#2. Advice Packages (Phone Consultations)

In addition to management fees, Betterment also makes money by offering over-the-phone financial advice through the consultation packages they offer.

These over-the-phone consultations range from 45 to 60 minutes and can cover financial topics such as retirement planning, college planning, and other types of financial advice.

Betterment Advice Package Fee:

  • $299 to $399 per package
Betterment Advice Packages | Betterment Business Model | How Does Betterment Make Money?
Source: Betterment

#3. Payments From Cash Reserve Program Banks

Betterment also makes money by receiving compensation from banks that participate in cash reserve programs.

The way it works is: Betterment customers’ signup for and open a Cash Reserve account through Betterment. From there, the customers’ funds are deposited (minimum deposit of $10) into one or more banks (“Program Banks“) where the deposited funds will earn a variable interest rate of ~0.10% APY. Of which, Betterment receives annualized payments of 0% to 0.25% of the average from the participating bank(s).

The 7 banks that participate in the Cash Reserve program, as of May 4, 2020, are The Bancorp Bank, Barclays Bank Delaware, Citibank, N.A., Cross River Bank, HSBC Bank USA, N.A., State Street Bank & Trust Company, and Wells Fargo Bank, N.A.

Note: You can check out the full list of banks that participate in the Cash Reserve program, here.

#4. Interchange Fees From Merchants

Like most challenger banks, Betterment further makes money through interchange fees as well.

What are interchange fees? These are fees paid between banks for the acceptance of card-based transactions. So, whenever cardholders use their Betterment Visa issued debit card, Betterment receives a portion of the interchange fee Visa charges the merchants.

The interchange fee that Visa charges merchants ranges between 1.15% + $0.05 to 2.40% + $0.10 of the charge amount.

Visa Interchange Fees | Betterment Business Model | How Does Betterment Make Money?
Source: Betterment

Note: It’s unclear what percentage Betterment receives from Visa.

Betterment’s Subsidiaries, Acquisitions, and Exits

To date, Betterment LLC has made a total of 2 acquisitions.

Acquisitions
Source: Crunchbase

Betterment’s profit and revenue

Betterment’s last reported income came in 2019. In 2019, Betterment reported $50 million in revenue.

Note: Because Betterment LLC is a privately held company, they are not required to make their annual reporting, such as Form 10-K’s, pubic.

What is the Betterment business and revenue model?

Betterment makes money through a few revenue models that they combine within their company, they are:

  • Fee-for-service (FFS) business model
  • B2B2C (partnerships) business model
  • Interest revenue model
  • Mergers & acquisitions (M&A) business model

Betterment’s funding and valuation

According to Betterment’s Crunchbase profile, Betterment has raised $275 million over 8 rounds and is estimated to have a valuation of $1.5 billion as of March 2021.