What you need to know about hybrid bank accounts

KOHO Save

KOHO’s hybrid account, which is still in the works and should be available in the coming month, has striking structural similarities and offerings as Wealthsimple. As it turns out, KOHO has the same backer as Wealthsimple—Paul Desmarais III, chairman of Portag3 and senior vice-president of Power Financial. (And Michael Katchen, founder of Wealthsimple, is on KOHO’s board of directors.)  Since KOHO also funnels the deposits through ShareOwner, your funds won’t be covered by CIDC but will be protected by CIPF.

KOHO Save clients will earn 2% interest with no minimum balance required, and the other account features will depend on which pre-paid reloadable Visa card (issued by Peoples Trust) option you choose. There’s a no monthly fee card that provides 0.5% cashback;  a premium $9 per month (or $84 annual) card that provides 2% cashback, no foreign exchange fees, and one free international ATM withdrawal per month; and a metal card, which has a one-time cost of $159 (or $50 if you refer two new clients to KOHO). 

Manulife Advantage Account

Manulife offers a decidedly unimpressive interest rate of  1.15%—not even enough to match inflation. While there’s no minimum balance required to earn that rate of interest, you’ll need to keep at least $1,000 in the account if you want the benefit of free transactions. Otherwise, you’ll pay a per-transaction fee of $1 or more on withdrawals, bill payments, debit card purchases and e-transfers. On the plus side, your deposits are CDIC-insured.

What is a hybrid bank account?

The idea of a hybrid account, which was hatched by a handful of traditional brokerages and fintech startups in the United States, seeped north of the border a few years ago. EQ Bank* was the first adopter in Canada, but the concept didn’t really catch fire until the ever-innovative Wealthsimple team introduced its hybrid account, Wealthsimple Cash*, earlier this year and marketed it with the promise of a snazzy Tungsten metal prepaid Visa card.

Originally called cash management accounts, hybrids provide the higher interest rates you expect on savings accounts, plus the services associated with traditional chequing accounts, such as bill payments, e-transfers, deposits and withdrawals. Instead of using a standard debit card, most hybrid accounts allow you to access your money either with a prepaid credit card, or by transferring funds through a linked external banking account.

Hybrids are still quite rare in Canada, and generally limited to smaller brokerages and low-fee online banks. 

Who should consider a hybrid bank account?

While you may think Canadian savers would benefit the most from hybrid accounts, spenders actually have the most to gain. Savers already have high-interest accounts available to them; hybrid accounts are for big spenders with large rolling expenses who want to earn a good interest rate on the thousands of dollars they keep in their chequing accounts. If, for example, you normally maintain a $10,000 balance in your chequing account to cover the monthly mortgage, utility, daycare and grocery costs, it will feel great to earn a few extra dollars of interest before you pay your bills.

Hybrid accounts are also best for those who are comfortable with online banking and no access to a teller and have at least one additional external bank account since hybrid accounts don’t yet offer services such as drafts.

When is a hybrid bank account the wrong choice?

Canadians who plan on saving for medium- to long-term goals would do better by first maxing out their contributions to registered accounts—including Tax-Free Savings Accounts (TFSAs), which allow you to withdraw your money at any time without penalty, Registered Education Savings Plans (RESPs) to fund your kids’ post-secondary education, and Registered Retirement Savings Plans (RRSPs) for your golden years—since interest earned within these accounts is not subject to income tax. 

If you’re drawn to a hybrid because of the high-interest rates on offer, that shouldn’t be the only reason to sign up; a few credit unions, such as Maxa Financial*, Motive Financial and Outlook Financial, offer equally high rates with the added advantage of sheltering your funds inside a TFSA. And if you’re saving for a specific purpose, such as a down payment, there’s something to be said for having a separate savings account that’s difficult to access, and where you can track your progress to help you stay motivated. 

Similarly, if it’s simply a low-fee chequing account you’re after, good options already exist with more robust services, including at online subsidiaries to the Big 5 banks such as Tangerine (Scotiabank) and Simplii (CIBC).

Bottom line

Hybrid accounts are best for those who prefer to keep high balances in their chequing accounts, but still want to earn a decent interest rate on those funds. 

The main advantage of a hybrid account is a high interest rate, with the added flexibility to pay bills, withdraw and e-transfer funds, with low to no fees. Will they provide any additional advantages if you already bank online at a high-interest, low fee institution? The answer will depend on the particulars of each account, so read the fine print. Specifically, be sure to ask about ATM access, minimum deposit requirements, CIDC insurance, interest rates and any applicable fees.

Compare the Best Savings Accounts in Canada*

MORE ABOUT BANK ACCOUNTS:

• The best RRSP investments
• Should you switch to a no-fee or low-fee bank account?
• Best high-interest savings accounts in Canada
• What types of Tax-Free Savings Accounts (TFSAs) exist?