
Hybrid Bank Account (2017) - luu
https://www.jefftk.com/p/hybrid-bank-account
======
Danieru
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
This 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
In 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.

~~~
toomuchtodo
I 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
Reply due to edit window closure: Looks like M1 Finance is exactly what I'm
looking for and describe.

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patio11
Most people on HN who are optimizing interest/etc to the penny, and I count
myself among this number, have a hobby with similar economic returns to World
of Warcraft but poorer graphics. The biggest lever you have available, by
orders of magnitude, is optimizing the returns to your career or business.
That disclaimer out of the way:

One of the folks who works at M1 Finance pitched me on the following, for
folks who have similar cashflow characteristics to the median HNer. (They've
essentially productized this, and with slightly more work you could get it out
of Interactive Brokers. It's hard to do with most discount brokers due to
prevailing margin rates.) It captures most of the advantages of the "hybrid"
account and is actually available in the status quo, which is an advantage.

Deposit your paycheck. It is automatically invested. Spend on margin; repay it
the next month on payday, when you repeat the cycle. Change this only if you
experience long-term unemployment, which you a) probably will not and which b)
savings is the least effective financial product to prepare you for it.

Their theory is that the ~3% impact of margin is less than the fundamental
return of an equity-heavy portfolio measured in small increments over a long
period of time, so you should prefer to be perpetually ~100% invested in your
taxable accounts rather than "materially less than totally invested", which is
what most well-paid professionals are given usage of a checking account and
poor decisions embedded in their financial products. (e.g. If you have $50k
net worth, $8k in post-tax payroll per month, and are saving $2k per month,
you're no higher than 86% invested and if you are following common financial
advice you with a six month buffer in a non-investment emergency fund you are
~24% invested.)

This sounds strikingly plausible to me, for what it is worth, again contingent
on one being a well-compensated professional with predictable cashflow in and
out and a temperament amenable to discipline and commitment. It is not not not
not the consensus of advisors to the American middle class.

~~~
divbzero
Very intriguing. Thanks for sharing.

Sounds like what M1 offers is indeed very close to the “hybrid bank account”
described by OP. Official statements from their website [1] reveal their
hybrid nature:

> _Securities in M1 Invest accounts are insured up to $500,000 by the SIPC._

> _M1 Spend checking accounts may be insured up to $250,000 by the FDIC._

[1]: [https://www.m1finance.com/](https://www.m1finance.com/)

~~~
patio11
Most of the top discount brokers either own a bank or have a sweep arrangement
with banks, specifically to get FDIC insurance for large cash balances, _which
you do not want to have._

The specific things M1 offers that make them close to this blog post are a)
low margin rates (3~3.25%) and b) autoinvestment of deposits (including
payroll deposits), which is _grumblegrumble_ rarer than you'd guess.

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jwilliams
This is common (in principle) in Australia and the UK. Functionally you have a
mortgage account and then an “offset” account that is automatically deducted
(ie reduces) from interest payments.

More sophisticated accounts also include unsecured credit (credit cards). But
that’s less common. Most just opt for automatic payments from the offset.

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ipython
Many banks (I'm thinking Capital One 360 here) will give you a line of credit
at (reasonable) daily interest. Very useful to keep a low balance in your
'transactional' checking account and let it dip temporarily below zero for a
few days at a time, paying a few cents to a dollar in interest for the
privilege.

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darkerside
So you make a big purchase that drops you below an arbitrary number, and your
portfolio is immediately liquidated? No thanks.

~~~
jefftk
It wouldn't liquidate your entire portfolio, just enough to cover your
spending.

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alexwasserman
The investment / checking side sounds very much like a normal sweep-account
setup:
[https://www.wikiwand.com/en/Sweep_account](https://www.wikiwand.com/en/Sweep_account)

Commonly available where you have business or high-net-worth accounts.

The credit side is basically an overdraft, and having overdraft protection
today does the moving of funds around that he alludes to.

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jedberg
I have an account like this. It's my ETrade account.

When I have a negative balance, they charge me interest. When I have a
positive balance, they sweep it into a low interest investment. And when it
gets really high it buys ETFs for me (which are then collateral for when it
drops if I don't sell them for cash first).

~~~
jefftk
Can you use it like a regular bank account? The two main things I'd want from
it are the ability to use it for paying bills (credit cards, mortgage,
utility...) and writing checks.

~~~
jedberg
Yes. It has a debt card (and checks!) and it has bill pay. I pay all my bills
from it.

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fernly
Pretty much the Schwab One account. I have a checkbook and can write checks
against what is basically a brokerage account. (They wouldn't support negative
balances, though.)

[https://www.schwab.com/checking](https://www.schwab.com/checking)

~~~
modeless
> They wouldn't support negative balances, though

Withdrawing from the brokerage account when there's no cash in it
automatically creates a margin loan, so it does support a negative balance.
You can also set up automatic investments. I think Schwab Bank is exactly what
was requested.

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kccqzy
> It can be hard to predict when charges will hit your bank account, so
> managing this manually generally requires leaving a buffer to be sure
> everything will be accepted.

Even when you have a single account, don't you also need to have a buffer
that's solely invested in safe assets, like bank sweeps or treasury bills or
money market funds? If you can't predict when charges will hit your bank
account, and you definitely can't predict the stock market, what happens when
a big charge unexpected hit when the stock market tanks? What if that big
charge was actually fraudulent and was refunded a week later, but the stock
market has soared?

~~~
jefftk
If your net worth is low enough that this would be a major problem then yes,
this wouldn't be a good product for you.

For people with higher net worth, constantly having a buffer that is
uninvested loses you more money in expectation.

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kwhitefoot
The bank I use in Norway, Sbanken, allows to to agree an overdraft facility,
and also to skim money off the current account into a high interest account so
that, for instance, you never have more than 20 kNOK in the current account.
Together with the ability to buy and sell funds and stocks via the website or
app or automatically every week or month means that you can get most of the
same effect fairly easily with a little bit of manual work to top up the
current account from the high interest account when necessary.

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parliament32
I can kinda do this with my bank (a small credit union) with a feature called
Recipes. Basically a Recipe is a IFTTT-like interface where I can say "if my
balance in CHQ drops below $1k, transfer $3k from LOC to CHQ". Likewise when
the balance goes over a certain threshold, I can pay off the LOC, or if that's
all paid, transfer to mutual funds or what have you.

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Taniwha
I've had something similar to this - moved back to NZ, bought a house, decided
to wait for a better exchange rate deal to move the rest of my $$, bank gave
me a combined mortgage/checking/ATM account - at the ATM it started off with a
large negative value, eventually became positive over time - didn't have the
high value investment component though

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hyko
Egg experimented with the first two of these features in the 1990s UK:
[https://en.wikipedia.org/wiki/Egg_Banking](https://en.wikipedia.org/wiki/Egg_Banking)
No idea what happened to the idea, but neither the product nor the company
exist anymore.

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every
A negative balance is a dunning notice with a demand to pay. A modest positive
balance is a coffee can or cigar box stuffed with cash and hidden under the
bed. A large positive balance is an enticement to play the numbers or bet on
the horses. None of these things is like the other...

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seshagiric
Back home in India, some of the banks already offer such hybrid accounts, tied
to a mortgage.

As you keep putting money into the a/c, so much is reduced from the
outstanding principal when calculating interest for that much period.

Even more surprising, this is one of the state run banks (State Bank of
India).

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davego
Auto-investing? No thanks, I like my investments modular where I can fire them
if they don't work

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epicgiga
I know a fintech startup founder already working on precisely this

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bbimbop
How about when it goes negative invest in Tesla?

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phamilton
Sounds like an all-in-one mortgage.
[https://www.investopedia.com/articles/mortgages-real-
estate/...](https://www.investopedia.com/articles/mortgages-real-
estate/08/offset-mortgage.asp)

