this week i'm thinking about – #11 – checking & savings accounts

Hey friends,

Welcome to the ~100 new subscribers since last edition! Feedback and suggestions are very welcome, especially from the new folks.

I’m writing an occasional blurb about something I learned that’s broadly tech-related. If you have thoughts, I'd love to hear from you, and I'll paraphrase the best responses in the next newsletter. My goal is to start conversations with people thinking about similar topics through different lenses. If you know anyone who would be interested in the discussion, please do forward this along or have them subscribe here.


What I learned about: checking & savings accounts 💸🏦
I’m stating the obvious when I say the Robinhood checking account failure was the largest fintech faux pas of 2018. The tl;dr of the Robinhood scandal was that they launched a 3% APY (annual percentage yield) “checking & savings account” to consumers in December, which let them (or so they thought) circumvent the FDIC insurance required for both “checking accounts” and “savings accounts”, and instead insure the accounts with SIPC insurance which doesn’t actually cover a decline in the accounts’ value. This was a pretty blatant circumvention of the FDIC rules, and unsurprisingly, they rolled it back within days and issued a semi-apology. It sounded too good to be true when it launched, and it unfortunately was.

That made me think we may be quite far from a world with 3% APY checking accounts. But I then learned a bit more about a new wave of high-APY savings accounts (read: money market accounts) from Wealthfront, Varo, and Empower. There’s clear product-market fit for high-APY savings accounts, despite the friction of maintaining both a checking and savings account: Goldman’s 2.25% APY savings account via Marcus has earned them ~$25B in deposits with a sub-$80M annual marketing budget. I have become hopeful that there’s a wedge for fintech companies to win on acquiring new customers by getting creative:

  1. APY optimization: Compete in the APY race, where the incumbents are surprisingly bad. Bank of America, for example, offers a comically low 0.07% APY for money market accounts and 0.03% APY for savings accounts. With the rise of financial product aggregators like Nerdwallet and Creditkarma, high APY accounts will be rewarded – think of what OTAs have done for flight price standardization. One creative example of APY optimization I’ve seen is Varo, which juices their effective APY up to 2.8% by making up margin in other departments: to get promoted to their highest APY tier, you must have under $50K in your savings, Varo must be your primary direct deposit destination, and you must use the Varo debit card 5 times per month. You can imagine companies getting creative here: “invite 10 friends to unlock 10bps of APY”.

  2. Blending checking / savings accounts: Ideally a bit more subtly than Robinhood did. There are fairly stringent requirements that limit what banks can invest in from checking account deposits, making high-APY checking accounts tricky. But at the same time, savings accounts have federally-mandated limits like 6 transactions per month, so they’re impractical as a daily driver. If fintech challengers can control the money flow between checking and savings, they could effectively simulate a high-APY checking account by keeping the vast majority of the balance in the savings account, and transferring funds to the checking account on an as-needed basis (within the 6-transfer limit, of course).

The large banks are able to offer near-zero APY because they control an oligopoly on consumer trust, and the switching costs between banks eases competitive pressures. This is basically ~$11T of nearly interest-free money for them, until new players put pressure on banks’ standard interest rates. New fintech strategies to drive up APY will undoubtedly be a dance with the regulators. Robinhood went too far; Varo and Wealthfront perhaps haven’t gone far enough. Have you seen any creative solutions pop up, either in the US or abroad? How should we be regulating checking and savings accounts?

See these links if you want to read more about checking & savings accounts:

What I’m reading 📚

What subscribers said about the last edition (remote driving, European advantages):
Axel on Europe’s greatest tech advantages: highly digitized governments, strong telecom infrastructure, cheap labor, free vocational education, regulatory arbitrage between countries (gambling, taxes, fintech), pro-esports culture.

Athena came up with interesting applications of virtual rigs beyond remote-controlled ridesharing: remotely controlled TSA screening, for example. This is likely a regulatory headache, so we may need to find other high-ROI but less regulated applications… remote-controlled farming or construction, perhaps? Intuitive Surgical has unlocked lots of possibilities in medicine with a remote-controlled robotic surgeon, though their core value proposition has been precision versus labor savings.