In a world of sub-zero bonds a way to earn an extra one percent on overnight cash deposits seems very exciting. That’s the proposition offered by Maxmyinterest, a new software system that allows clients to allocate and re-allocate their own cash across online banks to chase the best interest rates.
In March of 2009, Maxmyinterest founder Gary Zimmerman was in Japan running a bulge bracket bank’s cross-border M&A business and pondering the very shaky status of the institution he both worked for and held his money in. Its share price had fallen to 97 cents; it was unclear whether it was going to survive until the next day. Zimmerman realized that his bank accounts made him, in effect, an unsecured creditor of this bank, which also happened to provide his paycheck and bonus. But out in Tokyo, when it was nighttime in the United States, his single option to maintain US government deposit insurance was to move his cash to online banks, the only ones open at that hour. In addition to solving his immediate problem and minimizing his exposure, Zimmerman made an additional discovery.
Challenged by a lack of personal interaction but also freed from the cost of operating a wide branch network and the costs of “all those tellers and pens on strings,” the online banks competed for customers by offering generally higher interest rates than traditional brick-and-mortar financial institutions. As he diversified his holdings, Zimmerman noticed that the various online banks he had spread them across often offered varying interest rates themselves. But online savings accounts are in many ways a commodity, as long as the balances in them stay below the FDIC insurance limits required to maintain the guarantee of the US government. The result, then, was a risk-free arbitrage, and Zimmerman began a habit of manually moving funds from one bank to another to chase the highest yield.
After his return to New York, as Zimmerman relates it, he had two epiphanies: first, the labor-intensive process was a colossal waste of time. Second, he had personally earned an extra $40,000 in the process without taking any additional risk. So he started looking for a way to automate the process and in so doing realized the magnitude of the opportunity.
The top one percent of the US population -- the one and a half million highest-earning households -- is sitting on one-and-a-half trillion dollars of cash and cash equivalents in the form of CDs and money market accounts that earn next to nothing. A typical checking account pays zero. A typical savings account might pay 10 basis points, which rises to 15 or 20 at a private bank. Money market funds pay one basis point today. Even a five-year CD at a bank only pays in the region of 55 basis points today. What Zimmerman discovered was that it is possible to earn 100 or 105 basis points through these online banks.
So how does Maxmyinterest work? The company's mantra is quite simple: whatever portion of a portfolio an investor has chosen to keep in cash should be invested as efficiently as possible. A client starts with his existing checking and savings accounts; he -- or an advisor acting on his behalf -- then opens a number of online savings accounts at large, reputable banks: GE Capital, American Express, and Barclays are all on the platform.
The last steps are linking all of these accounts with the previously existent savings and checking account and then onto the Maxmyinterest platform. Once a month its system takes a snapshot of balances across these accounts, compares that snapshot to an optimal allocation model that takes into account current interest rates, FDIC insurance limits, or any other per-bank limit that the client has set, as well as his desired checking account balance. To the extent that the allocation cash differs from that optimal model, Maxmyinterest instructs the client's bank to send cash between accounts to re-balance it, to re-position that cash in an optimal manner. This happens automatically, aided by a limited power of attorney clients grant Maxmyinterest. In other words, Zimmerman has automated the practice he developed in Japan in a moment of panic, and turned it into a powerful investing product for cash reserves.
The site sells no advertising and does not traffic in user data. Maxmyinterest instead charges a fee for its service: eight basis points per year, or two per quarter. Zimmerman projects an average yield for his clients more than 12 times that: 99 basis points. And smaller clients benefit from Maxmyinterest's “waterfall” structure: the top bank of the five on its platform offers 105 basis points; those with less than US$250,000 of cash earn that rate; the next $250,000 would earn 100, the next 250 would earn 99. The yields vary depending on the spread of banks, but the units of $250,000 correspond to the limit of FDIC insurance. To benefit from FDIC protection -- issued by banks, not by Maxmyinterest -- an individual can deposit up to $250,000 and a couple can deposit up to $500,000 in a joint account at a given institution. Zimmerman thinks his product will work effectively across 10 to 20 banks of size, so clients, via a combination of single and joint accounts, can put up to around $10 million of investible overnight cash on the platform.
Maxmyinterest can work with checking accounts at the four largest banks in the US: JP Morgan Chase (including its private bank), Citibank (and its private bank), Wells Fargo and Bank of America. The company also has customer support for public banks, allowing it to potentially capture -- in Zimmerman's estimation -- 40 percent of US deposits. And, as Zimmerman points out, there's really no limit as to how much the system can handle. “Recall that we don't take custody of funds. You can think of Maxmyinterest as being more like air traffic control for cash, simply directing your banks to send cash between one another,” he told The Octavian Report. As he puts it, you never lose control over your own money; all the accounts are yours and are opened in your name. Maxmyinterest can help with the additional paperwork if necessary by consolidating statements, but the customer maintains control over everything and can monitor and even turn off Maxmyinterest with a specially designed app or online.
All of that money flying fleetly from account to account makes, of course, a juicy target for digital thieves. But Zimmerman brought in topline advisory talent to keep the cash safe. One of his big guns was Harriet Pearson, the former head of data privacy and security for IBM and a lawyer in private practice at Hogan Lovells, where she heads their privacy practice. And they worked with Gary McGraw, the CTO of digital security firm Cigital and another huge name in industrial-strength protection measures. Zimmerman is so confident in the platform's security that he stated to The Octavian Report that he could “publish my login and password at Maxmyinterest on the internet today, and the only thing that people could do is see my balances, and sub-optimally allocate cash among my own accounts.” Maxmyinterest is just getting started, but in an era of non-existent yields, an extra hundred basis points more than pays for itself.
Sam Munson is editorial director at The Octavian Report.