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Banks are a means to bridge safe-money to risk-having investments. People with money in the bank do not want to open up their phone to see their bank balance h
by Danieru 7y ago
Banks are a means to bridge safe-money to risk-having investments.
People with money in the bank do not want to open up their phone to see their bank balance has gone down by X%. People are okay with balances going up, but never going down. Thus banks are offering consumers a risk-less return.
Banks do this by themselves investing in a broad & diversified set of investments. The baseline is government bonds. Next comes government backed home-loans. Finally banks lend to businesses or investment loans. Everything beyond the government bonds requires the bank to take on the risk using their own money.
If you want to offer a "bank" account which exposes their money to risk, what you have invented is a brokerage account. Allowing people to auto-sell their investments is widely considered a bad idea because it leads to regular people leaving and entering the market often. It means incuring transations upon every purchase, and fails to help regular people with their fears.
The number 1 issue facing regular people is a lack of starting-to-invest. The number 2 issue is regular people attempting to time the market, which the surveys show they will do at the worst times.
Trading off issue #1, for issue #2 is an interesting question. I suspect the net result will be worse for consumers. They will see their balance dropping by hundreds of dollars a day on bad days, pull out, then panic buy in the next day.
In the real world such a bank account cannot be offered by a bank, as it is not a bank account. Banks already "invest" all the regular bank account money, the issue facing regular people now is that the world's risk-less rate of return is approaching zero. As such any such auto-investing "bank" account is going to be regulated like the brokerage accounts, at which point we've failed to solve issue #1, the hurdles stopping people are the same open-new-brokerage-account hurdles.
- toomuchtodo 7y agoThis is a fantastic comment. I think the end result is maybe more banks should have more brokerage functionality, as the line between brokerages and banks blur, but you need top notch UX to do this to communicate what is checking, what is FDIC savings (and when you have “enough” cash equivalents on hand to start filling other accounts), what is prime money market, and what is investment grade bonds and equities (in that order of investment operations; for argument’s sake, let’s just call it VTSAX total market). Throw in a line of credit underwritten by your income history and credit file if you want to shoot the moon; this would avoid selling investment assets to bridge between when you’re short and your next income event. You’re essentially creating a roboadvisor for personal finance, constantly optimizing based on your income, expenses, cash on hand, and liquid/semi liquid assets. I would love such a product. Reminds me of what BankSimple could’ve been before the BBVA exit.
- kccqzy 7y agoIn that case, why don't you get a regular brokerage account with cash management features? For example Fidelity offers a cash management account that can automatically withdraw from a linked brokerage account. It can also move balances above a certain threshold back into your brokerage account.
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- toomuchtodo 7y agoI have this account. It’s okay, but doesn’t meet my entire wishlist (I admit it gets somewhat close!). PNC also has something similar without the brokerage functionality called “Virtual Wallet”.
- toomuchtodo 7y agoReply due to edit window closure: Looks like M1 Finance is exactly what I'm looking for and describe.
- nostromo 7y agoThis exists. You have a brokerage account with a debit card. If you withdraw more cash than you have available, it comes from your available margin. It’s pretty close to what OP describes, except you can never go negative balance.
- leetcrew 7y agothe psychology is a huge barrier for regular people. I have a few friends who, after failing repeatedly at making proper budgets and building savings, just started buying two year bonds every time they had extra cash. or they do stuff like deliberately having their paycheck over-withheld so they get a big tax return at the end of the year. I can at least respect that they have the self awareness to realize they can't manage a portfolio, but it's kinda sad that they have to allocate their savings this way. at best, they end up barely beating inflation. this makes me wonder if there's a way to invest in something like a broad-market index fund but with an n-year lockup. obviously IRAs exist, but young people usually want to be able to access some of their savings a little earlier for a house. is there anything like this? it seems like "not being able to sell shares whenever I want" is actually an important feature.
- lonelappde 7y agoThose prople are doing a great job managing their risk profile. You should respect them. Beating inflation is exactly the right thing to do with money you can't afford to lose.
- leetcrew 7y agoto be clear, I'm talking about people with decent (but not huge) incomes who have a hard time not spending whatever's in their checking account. keeping all their excess money in bonds and tax withholding is a pretty terrible opportunity cost.