I actually think this is a really intriguing idea once you push yourself past the knee jerk reaction of "wait you want me to put my whole checking balance in mutual funds?!"
As you know if you read enough about banking, and as the intro points out, banks already invest your balance in risky stuff. Namely they lend it out to small businesses, homeowners, and others at substantial risk for default. There are mitigations like collateral and sometimes securitization, but the risk is real and there and has blown up countless times in the past.
Yes, the stock market can "blow up" too. But at least you're capturing the upside of the risk with this model. Even interest bearing checking accounts share an infinitesimally small fraction of the return the bank can make on your money.
I'm not saying this is for everyone. When I was younger I would routinely deplete my balance and I do not think this is a good setup for people in that position. But at a more advanced age people tend to start carrying significant balances in their checking as a matter of course, and I actually think there is some strong if slightly counterintuitive logic here in this idea.
They’re both tradeoffs. In my FDIC checking account, I know for certain I will lose the rate of inflation every year on my carried balance (~4 percent historically) but I won’t lose due to the bank’s investment (if I’m under the FDIC balance limit).
In the other account, based on the same history, I’ll stay well ahead of inflation most years, but lose far more in some.
This is a huge departure from the point you made above, where you claimed “the risk is real” for money in FDIC-insured checking accounts due to risky bets by banks with my money.
“There are trade offs for the user” isn’t really in dispute. The major concern being raised throughout the comments here is that advertising FC as a “checking account” is deceptive: it encourages people to think of it like a checking account, despite having a very different set of trade offs.
In engineering, we would similarly talk about violating the principle of least surprise. If my library has a function for saving files that’s very fast but sometimes loses data, I don’t call it super_fast_write, I call it unsafe_write. I think the idea behind this project is super cool, but it’s not high_upside_checking, it’s high_flexibility_brokerage.
The risk is real in banking. I wasn't just referring to customers there, but to the whole system, since the criticism of this idea has been quite broad. But there is some real risk for customers. There are caps on FDIC coverage and there can still be significant disruption even if you are insured and will be made whole.
I think there are two reason why you should care how your bank invests money. 1) For society, because the government has to bailout your bank if they take risky bets. 2) As a customers, because you don't have any choice about how much risk/returns you get (which might be fine, if low risk/low reward is what you are after).
As a consumer with insured deposits I want my bank to make the highest risk/reward bets they can get away with by law. Let them make their money that way so they don’t need to go after me for nickle and dime fees.
My deposits are always under the FDIC limit per account so outside the inconvenience, there’s no true risk of loss.
That's a good point, but just covers the case where your bank fails. In the event of currency depreciation, your (e.g.) dollar-denominated account can lose a lot of value. Of course this may be accompanied by a crash in the same stocks they're proposing you invest in.
The risk level of my checking account becoming less valuable due to currency inflation/depreciation is minuscule compared to the risk of putting that money into the stock market.
The comment I replied to above suggested that checking accounts hold risk due to the bank making risky investments, which is fundamentally wrong for everybody operating with in the FDIC coverage limits (which is the overwhelming majority of Americans).
Your first sentence is wrong for many scenarios and is meaningless without a time interval. Over a period of 10 years the risk historically is absolutely higher from inflation than a total market mutual fund.
If people were good at sweeping excess balances into their investments I think this idea would be less appealing. But for a variety of reasons, many perfectly rational, people like having a nice cushion in there. It feels safe. Long term, it isn’t. These guys should lean into that in their marketing.
My checking account (and the checking account of the majority of Americans) isn’t measured in intervals anywhere close to 10 years.
The reason perfectly rational people like having a cushion in their checking account is that rent payments don’t care about 10 year historic trends; they’re just due when they’re due.
I’m sure there’s a decent collection of people here with enough disposal income that the idea of just having all their capital invested sounds lovely. But we’re inside a bubble here.
The idea is intriguing, but I think the gist of it lies in your point about this "not being for everyone." This essentially makes a super common financial decision... "for everyone," in the sense that if you weren't sophisticated enough to set up a proper investment vehicle, or properly allocate all the money in your checking account, you don't need to worry about that anymore. However, I think the set of those folks and the set of folks you consider that this prob. "wouldn't be for" is probably pretty large. It's just an assumption, but I'd hazard a guess that most folks who don't set up more sophisticated investment vehicles are also folks who simply can't afford to, or who'd struggle with a checking account which suddenly could have less money than the day before. If you are not in that camp, I think you're very likely well versed enough to know you have a lot of options on what to do with your money should your checking account balance exceed your needs for a daily/monthly use.
Also, I think the point with the bailout is a bit disingenuous on their part. True, if your account is not FDIC insured, then the government wouldn't need to bail YOU out. However, if we experience a similar crisis like we did in 2008, they will bail EVERYONE ELSE out. You just happen to be the sucker who will have paid into it but not been covered. If the argument were for eliminating FDIC insurance altogether, I'd be super onboard.
> As you know if you read enough about banking, and as the intro points out, banks already invest your balance in risky stuff.
Not really. They invest primarily in mortgages which they package up and sell to Fannie Mae.
More importantly checking and saving deposits are insured by the FDIC so the risk of loss for the end consumer is zero below $250K (per account!).
Investment accounts would have SPIC insurance against insolvency but the actual risk of market loss is borne entirely by the end consumer. If you’re riding your mortgage payment on whether you don’t lose in any given month, things could get ugly. Ditto for the tax consequences of churning to cover bills.
I completely agree, what a nice summary :) I also agree that this is not for everyone, and honestly one thing that's on our mind is making sure we give the users the tools to know what kind of risk they should and should not take on. We are not there yet, but we're hoping to have some very cool modeling tools available that help with this.
But I'm also curious, what other steps could we take to make sure people use this in an appropriate way?
It seems you are reducing the friction in using a more sophisticated investment vehicle, which is awesome. But I can only imagine that there will be far more friction with "where did my money go?" since there is quite a bit of history/custom that you are fighting with in terms of the checking account. Somehow gracefully setting up a slider-like ability to determine what amount REALLY NEEDS TO BE IN MY ACCOUNT OR ELSE I CANT MAKE RENT and everything else would probably be important; your wonderful value-add could be in the background doing all the necessary operations to match that user preference.
As it stands now, I need to consciously pick a fund, make a transfer, check it, withdraw, etc... But ultimately all I care about is broad definitions of how aggressive my portfolio looks and what I have in what is essentially cash. If you'd just modify all of those transactions into a simple slider for me, the value prop. would be super clear, and I'd also sleep well at night not fretting suddenly having less money than I need.
The right approach here is to market it as a brokerage with a game changing UX for deposits / withdrawals / risk modeling, rather than a checking account with a shocking amount of risk.
As you know if you read enough about banking, and as the intro points out, banks already invest your balance in risky stuff. Namely they lend it out to small businesses, homeowners, and others at substantial risk for default. There are mitigations like collateral and sometimes securitization, but the risk is real and there and has blown up countless times in the past.
Yes, the stock market can "blow up" too. But at least you're capturing the upside of the risk with this model. Even interest bearing checking accounts share an infinitesimally small fraction of the return the bank can make on your money.
I'm not saying this is for everyone. When I was younger I would routinely deplete my balance and I do not think this is a good setup for people in that position. But at a more advanced age people tend to start carrying significant balances in their checking as a matter of course, and I actually think there is some strong if slightly counterintuitive logic here in this idea.