Outlet Finance Review 2023: Crypto Lending Positioned As A Savings Account

Outlet Finance recently announced they were shutting down on June 1, 2023.

There is a persistent correlation between risk and reward when it comes to saving and investing. Deposit accounts like savings accounts and certificate of deposits (CDs) usually come with FDIC insurance, which guarantees (within limits) that you won't lose your initial principal.

But in exchange for that security, most deposit accounts offer interest rates that are far lower than the average annual return of the S&P 500. But the stock market can also tank at any time (as we've been recently reminded of), making it a bad place to stash money you might need in the short-term like your emergency fund.

Some financial institutions try to give savers a bit of the best of both worlds by offering high-yield savings accounts with rates above 1.00%. Outlet Finance, however, says they can blow those accounts out of the water by offering up to 5% interest while still offering principal safety.

Is Outlet Finance able to live up to its lofty claims? Keep reading our full review to learn what you need to know before opening an account. You can also see how Outlet Finance compares with other crypto-based savings accounts.

Who Is Outlet Finance?

Outlet Finance is a fintech that utilizes blockchain lending services to generate high interest rates for its deposit customers. Patrick Manfra is its co-founder. Outlet Finance is backed by Consensys, which is a blockchain solutions company. The company launched in the summer of 2019.

What Do They Offer?

Outlet Finance tries to describe its product as a savings account (i.e., “built for Saving & Earning”) or alternative savings. However, it is far from a savings account. Savings accounts are FDIC-insured deposit accounts held at a bank or through a fintech in conjunction with a bank charter.

Outlet Finance is none of those. This is not to say the company isn’t offering value. But it's important not to confuse a traditional savings account with what Outlet is offering.

Rather, it's best to view Outlet Finance has a higher-risk investment alternative.

Related: The Top Savings Apps

Up To 5% Interest On "Savings"

If Outlet is not a savings account but customers deposit money with Outlet and earn interest, then what exactly is going on behind the scenes? Outlet uses blockchain technology to lend digital dollars and generate interest as high as 5% for its customers.

Getting back to Outlet’s blockchain technology, it uses stable coins to complete transactions. Stable coins are meant to act as a fiat currency rather than fluctuate like most cryptocurrencies. When you deposit funds with Outlet, those funds become available to borrowers, which is where the high interest comes from.

Overcollateralized Loans

Can someone default on these loans? Absolutely. But Outlet Finance tries to mitigate your risk by only working with what their network of "overcollaterialized" lending partners.

Here's how they explain what that means:

"This means that if the borrower wants to borrow $100, then they must put up at least $120 (in many cases much more) worth of collateral. If they do not pay back the loan, then they lose their collateral. This incentivizes the borrower to pay back their loans, otherwise they lose more money than they borrowed."

With Outlet Finance, the collateral that's being used is a digital asset, like Ethereum for example. So on the alternative money markets where Outlet Finance lends money, here's how they say it might work if someone wanted to borrow $100.

"For example, if I want to borrow $100 at 8% interest, I would lock up $150 worth of Ethereum. In order to get back my collateral I would need to pay back $108. If I choose to not pay up, then the lender keeps the $150 worth of Ethereum. On Outlet this is immediately liquidated (sold) and converted back to digital dollars for you."

So, theoretically, you should be made whole but any hard-fast legal documentation on those details is unavailable. Plus, smart contract lending is a very young technology and there are virtually no companies that have established a long enough track record to prove that the model is sustainable.

Smart Contract Insurance

While Outlet can’t provide FDIC insurance, it does provide limited insurance coverage. This is done by insuring against smart contract risk, which is basically a failure of the smart contract code, resulting in a loss of funds.

The company that Outlet is using for its smart contract coverage is Nexus Mutual. Nexus Mutual is not an insurance company. It's an insurtech company that was founded in 2017.

If you check their website at https://nexusmutual.io, you’ll see there are still a lot of links to whitepapers. In the cryptocurrency world, whitepapers don't mean much other than someone's opinion on how something will work - vaporware. 

Is that the case with Nexus Mutual? That’s difficult to say since Nexus Mutual does have paying customers. I’m not aware of Nexus Mutual ever paying on a claim through, which will be the most important test of their viability. Similar to traditional insurance companies, it can deny claims. Additionally, smart contract insurance technology is still in its infancy.

Also, the company has a purchase link to its own cryptocurrency right at the top of the homepage. This is like a traditional insurance company pushing its stock from its website.

Are There Any Fees?

No, there are no administrative fees whatsoever. There are also no fees on deposit or withdrawal transactions.

How Does Outlet Compare?

Outlet Finance is pretty unique in that it simply offers a set rate for return. You don't really deposit your crypto and earn various returns on tokens. Instead, it acts similar to a savings account.

Here's a quick comparison to other products on the market:

How Do I Open An Account?

You can open an account by downloading the app. You’ll find links to both Android and iOS apps at https://outlet.finance. Outlet doesn't currently offer desktop access to its platform.

Is My Money Safe?

There are a number of risks associated with Outlet Finance. First, your money is not FDIC-insured or SIPC-insured. While Outlet does provide smart contract insurance, that is very narrow in its scope of protection. Basically, you are depositing your money with Outlet and hoping everything works out. 

Outlet Finance could disappear at any time. What would happen to your money? Their FAQ page offers no answers. What if a lot of borrowers default on their loans, overwhelming the system?

What happens if either company is hacked (as seems to happen quite frequently in the crypto space)? There are so many questions that savvy savers and investors will have when it comes to Outlet Finance. But unfortunately, there are few answers at this time.

Is It Worth It?

As a savings product, no. The high interest that Outlet Finance may pay isn’t a free lunch and the risks are real. If you're looking for a safe place to stash your emergency fund while earning a solid interest rate, check out our favorite high-yield savings accounts instead.

If you're trying to compare Outlet to the risk you might take by investing in the stock market, there isn’t any comparison. The stock market is heavily regulated. Brokers must be members of FINRA and have insurance with SIPC. There is no regulation at all with Outlet. 

Even as a peer-to-peer lending platform, Outlet Finance's track record, transparency, and investor protections are all lacking. If you're looking to invest with peer-to-peer lending, Prosper, Lending Club, or Funding Circle are all stronger options.

If you choose to use Outlet Finance at all, you should probably view it as an alternative investment. And, as such, you'll want to limit the funds you hand over to Outlet to a small percentage of your overall investing portfolio (preferably less than 5%).

Outlet Finance Features