Why Cash Is King in the Era of Higher Interest Rates

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0:16Hi, Miriam.

0:17Telis Demos: Hi, Telis. Today, we are going to have a conversation about cash. My favorite topic. And not Johnny Cash. And not necessarily like cold, hard dollar bills type cash. We're talking about cash conceptually. And in an age of high and potentially rising interest rates, you can earn a lot on your cash these days. And that is having a big impact on investors and how they think about their portfolios and their money, but also on the financial system, on companies, companies that either lend or borrow. High interest rates really change the economics for a lot of those businesses. Yes, I think I, as a holder of a high yield savings account, have experienced this myself for a while.

0:57You know, in 2022, I saw the rate on my high yield savings account all of a sudden begin to rise. And then it started to cool off a bit. And I thought, OK, maybe this phase is over, but now it's going up again. And that's starting to make me think, is there a place that I could be putting it where I could earn even more?

1:14Telis Demos: Yeah, and we're going to have a really interesting conversation with somebody who's been thinking a lot about that for several years to kind of talk through some of the mechanics of that. But also, as an investor, the rest of your portfolio, your bank stocks, your real estate investment trusts, what's going on if you're somebody who owns some of these alternative assets like private credit? You've got to be thinking about what interest rates mean for all those businesses, too. Yes. And borrowing costs, as we've talked about, can affect some of the biggest drivers of the economy, including AI. The debt that's being issued to fund the AI build out, you know, could become more expensive for some of these borrowers.

1:50And will that slow down that build out, hence slowing down, you know, the stock market and the rest of the economy?

1:56Telis Demos: Yeah, because there's the good side of rising interest rates for many investors, which is that they get more yield on things. And then there's the downside or really actually in some ways kind of the point of rising interest rates is the Federal Reserve is trying to put the brakes on the economy. And so the question is, how high do interest rates need to get before it feels like that's accomplished? And we know that AI companies are racing for the trillion or quadrillion dollar, God knows, prize. But everyone else, you know, kind of has to live in a world where, you know, they used to be able to borrow at five and now it's seven.

2:32Telis Demos: And is it going to be eight? And that has an impact on a lot of financial decisions. So speaking of higher rates, tell us, you wrote a really interesting column this past week in which you pose the question to readers, are you a yield farmer or a bond trader? Can you explain what that means? Sure. Yeah, that was a framing that we cooked up down at the Hurt on the Street factory. And what it gets at is, are you the kind of person who should own an individual bond or are you the type of investor who kind of should have a bit more of a trading strategy? And what I mean is not that you're constantly buying and selling bonds, but that you're buying a bond fund, like an ETF.

3:08Telis Demos: There are many popular ETFs where the fund owns bonds, but it doesn't just let those bonds mature and hand you the money back. It uses those maturing bonds or the bonds that it sells to buy new bonds. And so that means that you are taking some price risk. That money is being reinvested at new bonds at higher yields. And so I just wanted to frame it like think about who you are, what your financial needs are, what your goals are. And that might help you figure out what kind of bond investing you should do, because I can tell you based on the feedback and the traffic numbers that we see, people are very interested in bonds and yields these days.

3:43That's true. And all this talk of bonds and yields makes me want to remind all you listeners that if you're going to be investing in this stuff, you should be doing it out of a tax deferred account like an IRA or even a 401k because you might not want to be paying all that current income tax on the interest income that you're receiving. Yes.

4:03Telis Demos: And that's Miriam's polite way of saying, you should read my stuff, too, because Miriam's written a ton about tax-aware investing and all the ups and downs of that. But let's get back to the point we started making a few minutes ago, which was like, what do these higher interest rates mean for the financial system and different financial players? Real estate. We had an episode a few weeks ago about higher yields are bad for real estate. That's generally the case. And sure enough, our colleague Peter Grant wrote an article about how a lot of commercial real estate deals, that is for like, you know, properties for those might be apartment buildings or malls or data centers or whatever.

4:37Exactly the kind of stuff we talked about on the episode. Exactly the kind of stuff.

4:40Telis Demos: REITs, real estate investment trusts that own those types of things. Deals are falling apart in the commercial real estate world because people are saying, oh, that price we were talking about doesn't make sense anymore if the interest rate is going to be, you know, 7 % versus 5%. Right. They might have started negotiating these deals six months ago. And as they're negotiating, getting down to the wire, rates are climbing and that makes the deal not possible. It might mean the deal falls apart, which Peter wrote about, or it might mean a price adjustment needs to happen. And in the same way, of course, you know, the mortgage that you might get on your house, those mortgage rates have gone up significantly.

5:16Telis Demos: And I think we've talked about that both in the context of like what that means for homebuyers, but also people who already own their homes that might be thinking of refinancing. and what it means for bond investors who own mortgage bonds where, I wrote about that too. You can go look in the journal for it. I won't explain all of it now, but there is convexity in mortgage bonds that higher mortgage rates have implications for. And it might not be great for your bond funds either in that sense. But for me, with my below 4 % mortgage from back in 2021, just over 3 % actually, I'm not moving ever, right?

5:51I'm stuck. But it has meaning. It does. It means something for the housing market because it means that I have a much lower willingness to pick up and move.

5:59Telis Demos: A hundred percent. It's part of, I think, why the Federal Reserve is having trouble kind of figuring out where interest rates need to be to slow the economy. How high do mortgage rates need to get before you see like a real slowdown in the housing part of the economy? And I did want to also bring up another sector impacted by this. And you've seen this reflected in their stock performance lately or the private asset managers, the world of private equity, because they are fueled by. And I know, Miriam, you wrote about this for many years, more than you care to count that that, you know, they are fueled by cheap debt.

6:30Telis Demos: Yeah, that's that's their business. So just as those commercial real estate deals are falling apart, private equity deals are almost certainly falling apart right now to the extent that there were any. Because similar to real estate, private equity was already in a trough. It was in a trough that was caused by the interest rate hikes in 2022, and it never really recovered from that. So now we're already back to a rate hiking cycle. So that's basically slowing down private equity's recovery and probably blowing up quite a few deals. And I'll call out the private credit part of that, too, because rising rates have an interesting impact on that because loans, which a lot of these deals are loan funded.

7:09Telis Demos: They're not bonds. They're loans. And what's different about loans is that they have floating interest rates. The way that they're priced is like, here's the base rate, and then you pay something on top of that. You pay a spread above the base rate. So as the base rate goes up, as an investor who owns loans, I'm actually getting more interest. So that's something you might want to own in a rising rate environment. However, the conversation has been on the borrower side of that, which is, okay, if I'm a company and I'm borrowing, my borrowing costs are going up. So here I am facing higher borrowing costs and all the disruption that comes from AI.

7:43Telis Demos: And so people are like, OK, on the one hand, private credit, sure, that's a floating rate instrument. You might like it. On the other hand, is there going to be a big jump in credit risk? And I think that's why people are watching really carefully the yields on junk bonds, which are bonds. They're different from loans. But I think people are using that as kind of a proxy. You know, so so the private credit side is is is tricky as well. Speaking of spreads, your favorite week is coming up. Tell us. You guys always say that. Bank earnings week. It's your Super Bowl. First of all, it's my World Series.

8:14Telis Demos: OK. No, I'm just kidding. We have a number of large banks reporting earnings this coming week. We have Goldman Sachs, Morgan Stanley and JPMorgan Chase. Those are some of the biggies. And, you know, interest rates affect banks a lot. Yes. Though, again, it's kind of complicated with banks because banks are both borrowers of money from all of us. They take our deposits. They also issue bonds. But banks also lend us money. And what's interesting about banks, and I wrote about this a little while ago, is that one of the big problems that banks had back in 2023, which was when the kind of regional banking crisis happened, and it happened after the Fed, again, hiked those interest rates significantly.

8:55Telis Demos: recently banks had bought a lot of treasury bonds and so as interest rates went up the value of those bonds went way down at the same time that their deposit costs because as we talked about all that cash people wanted a lot more money on their deposits that mismatch ultimately you know various things went into it but that's basically what killed silicon valley bank and a few other regional banks now banks are in a little bit of a different position i wrote that actually they've been doing a lot of lending to the private credit world they've been doing a lot of other commercial lending lately, credit card loans, the proportion of their assets that are floating rate are higher than they were a few years ago.

9:31Telis Demos: And the proportion of their assets that are debt securities like bonds has gone down. That means without having to do anything, they're collecting more interest just because rates are rising. Correct. However, there is a big concern that this awakening on cash is going to cause deposit costs to rise faster than they have in the past. I think there There are a lot of questions about whether or not the sea of people out there who for many years have just left their money in the bank and done nothing with it and didn't really think about what interest rate they're going to get that everyone has woken up and said, wait a second, I can earn how much on this money?

10:02And I think that's really interesting because these big banks don't tend to be the ones that pay the highest yield on cash. But, you know, we might go to them anyway because they have a lot of ATMs or because we just want a bank that's convenient and has good technology. But our guest today, Gary Zimmerman of Max My Interest, has a different view. He thinks we could be thinking of cash as more of an asset class. And he's not talking about the cash that's in your brokerage account. He's talking about the cash that you have sitting out there in your savings account and mostly don't think of as an investment.

10:40Gary's business is something that he'll talk about today, but we're not here to promote it. We just thought he had an interesting perspective on the way investors could be thinking about cash.

10:49Telis Demos: Yeah, Gary and I have been talking about deposit pricing and banking and cash and technology for many years. And Gary just, I think, has an interesting perspective, having worked in the bowels of that world for a while. And, of course, there's an AI angle to this as well. So stick around to hear how how muse might be playing a role in how people think about this. All right. We're going to have that conversation with Gary Zimmerman of Max My Interest when we come back.

11:34See what's next at claude.ai slash wsj.

11:43Telis Demos: Welcome back. And, Gary, welcome to our show. Well, thank you very much, Talis. It's nice to be here. So cash is our topic today. And I know a lot of people might know the phrase cash is trash, right? You didn't get anything in your cash. Why bother having it? What about cash is king, Talis? Well, that's what's changed in our markets in the last few years, right? When the Fed started raising interest rates, you went from getting nothing on your cash to getting something on your cash. And I think this has been maybe discussed enough, but maybe even under discussed for how profound of a change it's been.

12:16Telis Demos: So, Gary, talk to us about what it's like been like the last few years to be in the business of wealth management and money and finance as we've gone from, you know, getting nothing on cash at rest to being able to earn something. It's been a really exciting couple of years, Talis. You know, we've been in the cash management business for 13 years. So we've seen nearly two full market cycles. What was a typical kind of savings account? Well, actually, the origins of Max date back to the financial crisis. And around then, interest rates were not dissimilar from where they are, roughly around 4 % if you're managing your cash properly.

12:51And then, of course, the financial crisis hit and rates went to zero. And then they came back up and then they went to zero again during the pandemic. And what's interesting to me is that an entire generation has grown up thinking that zero interest rates are normal. They are not normal. Thinking that low mortgage rates are normal. They are not normal. You know, today we're in a fairly average, historically average mortgage rate environment and interest rate environment. So I think rates are not high and they're not low. They're just kind of average right now. Then what really fascinated me and what caused us to start Max, the company, was that cash was this overlooked asset class.

13:26Most people don't even think of it as an asset class. But the average high net worth household in the United States keeps about 24 percent of their liquid assets in cash, according to Capgemini. And all told, there's about$20 trillion in bank deposits in the United States. Now, the equity market and bond market are both about$60 trillion in size. Money market funds that people think of as a cash alternative are about$7 trillion in size. But there's$20 trillion of cash sitting in U.S. commercial banks. And almost all of that cash is under-earning or under-insured or both. And so our mission as a company and really sort of what drove the curiosity around this was, why is it, how could it be that such a massive asset class is so poorly managed?

14:11And can we make the market more efficient in a way that benefits depositors and their advisors and banks as well? 24 % seems like a lot of money to me. Why do people love cash so much? Well, Miriam, it's a real quandary because cash is not a good asset class, right? At best, it will keep pace with inflation, maybe slightly outperform inflation. Most people are lagging inflation, which means they're losing real purchasing power every single day. So they think that their cash is safe in the bank. But what does safe mean if you're lagging behind inflation? If you're earning 3 % today, you're lagging behind inflation and effectively losing money.

14:46That's right. So why do people hold cash? This is actually really more of a psychology question. This is what behavioral economists are fascinated by, right? Why do people hold cash? And we believe that it's because it enables them to sleep better at night. And it actually can make you a better investor, because if you think about it, most financial advisors will give you the advice, stay invested. Right. Don't panic when the market dips. If the Nasdaq falls 12 percent on Monday, you know, don't worry about it. It will be fine. And so it's not entirely irrational. What I think is irrational and we can dig into this is why are people keeping cash where they're keeping it?

15:23Why are they keeping it in bank accounts that pay basically nothing, often not even fully insured?

15:30Telis Demos: Well, and is that still the case? Because obviously I think people have woken up over the last couple of years to the potential of their cash to get a decent interest rate. And I know that this is something – I've been covering banks and other financial institutions. This is something that's been roiling them, right? Like the money that they used to take for granted that people would leave with them and that kind of inertia. show. Now, everyone's worried about, okay, these deposits are starting to cost me something. But as a whole, you're saying we're still under earning on our cash, arguably.

16:00Dramatically, right? And this is really what fascinated me back in 2009. And then 2013, when we started the company is, how could you have a$20 trillion asset class that's so inefficient? And today's show is not about equality or distribution of assets or income. But - Solve that next week. Most of the, you know, if you think about the bottom 96 percent of the population, they don't hold very much cash. People are living paycheck to paycheck. So the idea of having excess cash might be foreign to them.

16:27Telis Demos: That did change a little bit during the pandemic, right? People have built up a little bit more cash, started with stimulus and has continued to sow. Yeah, but I think it's already eroded away again. It has. And so that bottom 96 % of the population, that cash is quite stable because it's mostly sitting in people's checking account. That's sort of their operating account. Money comes in, money comes out. So where we're really focused is the top 4 % of the population. So often they're not even fully FDIC insured. And what is the FDIC insurance limit? Well, it's complicated. The simplest answer is$250 ,000, but that's per depositor, per account type, per bank charter.

17:05Okay. So I'll break it down and make it a little simpler. If I have an account, I'm insured up to$250 ,000. If my wife has an account at that same bank, she gets another$250 ,000. If we open up a joint account together, we can get another$250 ,000 each for another$500 ,000, so for a total of a million per bank. So you would think that there aren't that many people in this country who are sitting on more than a million dollars in cash. But it turns out there are. There are actually quite a lot of them. And even if you're not so fortunate to be in that rarefied space, chances are your money is sitting in a bank where it is earning dramatically less than it could be if you were just a little bit more competitive with sort of where you allocated your cash.

17:45And that to me was so interesting. We would run across people who would say, oh, well, I already have a bank. our view is that's great. Your primary banking relationship is great for checking and branches and bill pay and there's no need to switch banks. But for the excess cash you hold there, might it benefit from shopping around a little bit? This isn't which bank am I going to pick today for the rest of my life. It's let me pick a portfolio of banks and let them compete against one another. And sometimes bank A will need more deposits and they'll be willing to pay a higher rate and other times bank B will need more deposits and they'll be willing to pay a higher rate.

18:21But why is it that there is such a vast differential between what certain banks are willing to offer and others are offering? That's a great question, Miriam. I think it comes down to two things. One is their cost structure. So if you think about a large brick and mortar bank, they offer a wide range of services. They operate often a large network of physical branches. Each branch needs its own real estate, air conditioning, security guards, video cameras, those pens on chains that they have in every branch. All those costs add up. And when you're a customer of that bank, you're paying for that.

18:51And I'm not saying you shouldn't pay for that. But there emerged around the time of the financial crisis and ever since a group of what are called online banks that don't operate physical branches or operate few physical branches. And they're able to be a lot more efficient. And as a result, they're able to afford to pay a higher yield. So that's half of it. The other half of it.

19:10Telis Demos: Well, but just to stop you there, because the online banks, it's not just fly-by-night operations, right? Like there are some very large established brands that will offer online bank accounts essentially, right? Like, you know, you might say like an American Express, right? It offers like a higher-yielding online account. They're not a retail bank in the same way that, you know, Bank of America or Chase might be for most people. But so I just wanted – like the online bank runs the gamut, right? Correct. It's not just bank.com or whatever. No, absolutely. And, you know, someone like American Express is what you call a monoline bank.

19:46In other words, they have one type of lending, right? They are a credit card company. That's their primary line of business. And they need to fund those loans somehow. And attracting deposits online is a really cost-effective way to do that. Now, their rates are not terribly competitive today. And we can chat about that. They're better than you might find at a brick-and-mortar bank, but they're not nearly as good as you might find at other online banks. The beauty of all of this is that in 1933, FDR started the FDIC, the Federal Deposit Insurance Corporation. And the idea coming out of the Great Depression was to give people comfort that their deposits were safe no matter where they banked.

20:25Right. They didn't want to create one or two national champions. They wanted there to be competition in the market for bank deposits. And so the beauty of FDIC insurance coverage is that it basically turns every bank, at least as it relates to a savings account, into a pure commodity. As long as you keep less than$250 ,000 in that bank, it is exactly as safe as the bank next door. And that's because it's all backstopped by the full faith and credit of the U.S. government.

20:50Telis Demos: All right. All right. Hold that thought. I want to come back to that. But first, we need to take a quick break. And when we come back more with Gary Zimmerman of Max My Interest.

21:07All right.

21:08Telis Demos: Welcome back. So you mentioned that there are obviously people who have a lot of excess cash and, you know, in the millions of dollars sometimes. And they have woken up to or are more aggressively thinking about and have services like Max that can help them kind of maximize that interest. I think what the new frontier is, and we can talk about the technology element, but also just the conceptual idea here, is that in the age of AI or agents or whatever, that the people who don't necessarily have millions, who might only have a few thousand dollars or tens of thousands of dollars, but, you know, is a little bit more than they absolutely need at this given minute.

21:47Telis Demos: Can those people also be maximizing their yield as well? Like, I think that might be the new frontier. Yes, they can. Interestingly, at Max, we've never had any minimum balance requirement. So we are open to anyone regardless of size. Our view is it's none of our business. And how much do you charge for the service? I mean, would it be cost prohibitive for a person with, you know,$20 ,000 in cash? No, those clients can still do better. So we charge 16 basis points. That's 0.16%. So basically the same as you might pay for, let's say, a Vanguard money market fund. But we've been able to consistently deliver better yield with better safety and liquidity.

22:28So it really doesn't matter how much cash you have. I think what's interesting, though, is that this is really behavioral, right? At a small balance, do people really care? The big opportunity we see is all the money that's sort of, you know, languishing in ordinary bank accounts that's under-earning and under-insured.

22:45Telis Demos: That's money that people don't think of as part of their portfolio. They think of their portfolio often as, OK, what's in my investment account? And what you're saying is that, like, maybe people should think of all of the money that they have from their checking account through their investment account and then say, oh, am I getting the best yield on that cash that I can? Yes. At Max, we believe that financial advisors can give their best, most holistic advice if they can see the whole picture. And often they don't because what happens is a client will bring money to their advisor and they will say this.

23:18I would like to invest. I want your help. I want your guidance. Right. Investing can be a pretty daunting thing. And when they sit down in front of the advisor, the advisor asks, well, what's your risk tolerance? Oh, I'm I want equities and I want private equity and my private credit and I want all this risk. And then they go home and they squirrel away a couple hundred thousand dollars in cash as a hedge against what they've just asked their advisor to do.

23:38Telis Demos: Well, and this is what I think is so profound about this is that that inertia or that instinct to be like, OK, I'm taking this risk over here. So I'm going to leave my cash not just in the bank, but just in the absolute. It's almost like earning nothing on the cash makes you feel like you're doing the right thing because it's ultra safe. Because it's not an investment. Nothing's happening to the cash. And what is the conversation that we're having now is can agents, artificial intelligence and other technology start to overcome that inertia or more readily surface to you that actually that money can be just as safe in an FDIC insured account but can actually earn a little bit?

24:21Well, there's a lot of excitement right now about AI, and I think it's well-founded. But really what people are excited about is automation. How that automation happens is less important to people, but they like the idea of someone helping them out in an active way. Because the real hurdle is the inertia, right? Filling out the application for another bank account takes time, and then managing these various accounts takes time. It's exactly right, Miriam. And we've often said that our three biggest competitors as a company are not other companies. They are actually three human traits, which are awareness, apathy and inertia.

24:57Right. So awareness is I didn't know I could be doing better. You'd be shocked how many people haven't looked at their bank statements, don't know how much they're earning. They couldn't tell you as they're walking down the street how much they're earning on cash or even how much they earned the last two years or three years or 10 years. So overcoming that awareness gap is important. The second is apathy. Right. Oh, I don't care. It's just cash. People don't really think they're earning that much with this. And we've been conditioned that way, right? We've been lulled into this idea that cash doesn't yield anything.

25:27It doesn't need to yield anything. It's utter nonsense.

25:30Telis Demos: It's a penny wise pound foolish. That's what it feels like to care about your cash. But the third piece, Miriam, that you picked up on is inertia. And that's really, really important. Because even if I now I know I could be earning more and I decide I do want to earn more, is it the top thing on my to-do list? And this is really what we've spent the last dozen years or so working to overcome, which is how can we make this so simple? And so what we ended up doing, we borrowed from the world of college admissions. So anyone listening who has a child who's applying for college right now, I'm sorry, it's a tough process.

26:00But luckily, unlike when I applied and filled out all those applications, you know, in ink by hand, now there's the common application. And the beauty of it is that the student can fill out one form with her name and address and SAT scores and sort of click on the names of the schools to which you'd like to apply and magically all the applications go in. It's a little harder than that, but that's the gist of it. And we decided we want to do the same thing for opening bank accounts. After all, how can you actively shop bank accounts if you don't have those bank accounts? And in the early days of Max, if I go back to 2013, we started out by doing what AI is trying to do today, right?

26:41Could we collect logins and passwords and log into people's accounts on their behalf. It's terrifying. No one wants to share their passwords. I feel very confident that no one is going to, very few people will feel confident sharing their bank logins and passwords with a bot, nor should they, frankly, because there are no legal protections. If the bot sends money to your friend or to a long lost cousin or to someone you've never heard of, you have no recourse in this AI age. The regulations haven't caught up. And so we decided that we were going to get rid of logins and passwords and instead enable people to open new bank accounts using this common application.

27:14So today, Max clients can come to our website. They can fill out a single application form or their financial advisor can pre-fill it for them. They click on the logos of the banks where they'd like to open new accounts. And 60 seconds later, the new accounts are opened, titled directly in their own name, their own account numbers. And then from then on, our software can help them actively manage those accounts to make sure they're always fully insured and earning as much as possible. But there's no AI bot running behind the scenes. No one has your credentials. And all of the funds stay in your own bank account.

27:47So in 12 years, 13 years of operation, we've never touched a single dollar of client money. All we do is we communicate with their banks on their behalf and then the banks move the money.

27:56Telis Demos: So you raise a good point about the trust factor with an agent, right? Do I want to hand my passwords over to an agent? But, you know, in effect, people are – well, tell me about how you got over that trust barrier, right? Because I think this was an issue for – you know, I remember starting to write a lot about fintech companies, you know, 10 plus years ago. And I think there was that same concern, right? And there was a lot of debate about, well, if I want to open this account, I'll have to enter my bank password into this other website. And is that being protected? And I won't get into all the nitty gritty, but that a lot of litigation and banks fighting with fintech companies and rules being written.

28:35Telis Demos: So how did you get over that trust barrier of kind of, you know, okay, tell us your info and we'll apply to all these different banks? Like, how does that work for you? Well, the first thing we did, which is really different from any other cash management solution, is we decided that we did not want to be involved in anything financial. So we're really not a financial technology company. We're just a technology company that happens to help people in financial matters. You mean you're not managing people's money? We're not managing money. You're not holding people's money. Correct. You don't even recommend cash as an asset class, right?

29:05No, no. That's the funny thing. We're not trying to convince people to hold cash. We just know that they do. In the early days, if we go back to 2013, yes, the first version of Max looked a lot like what AI is trying to do. And one of the big hurdles we had to overcome technologically was how to persist that access so that we could help people even when they weren't present. AI hasn't figured out how to do that yet, but I'm sure they will. And so what we did instead was build the system where clients were opening up new accounts. And when we passed along that common application to the bank, the bank sends us back a token.

29:38and now we can communicate with the bank on the client's behalf referencing something secure, but we don't ever have to be privy to the login and passwords.

29:46Telis Demos: So did you have to work with the bank on that? Did you have to sort of negotiate with them to be in that technology partnership? Yes. Yes. And actually, this was really interesting because this is not how we originally envisioned the company. We didn't think that any bank would be interested in this. After all, you're there to tell people where to get a better interest. Why would a bank want these deposits? At least that was our initial thought. And then banks started coming to us saying, gee, what you've built here is really interesting. And it turns out that the reason that banks like our approach is, number one, it's safe and secure, right?

30:17Number two, it enables them to attract direct relationships with and core deposits from high net worth customers nationwide without them having to spend any money on advertising. And it enables them to then manage their balance sheet up or down through the simple active rate setting. So, you know, when you think about running a bank, most people think about a bank as a place where you go place deposits, right? That's not what a bank is. A bank is a lender, right? Banks lend money. Deposits are one of the ways that they fund that lending activity. And historically, they would build big, imposing-looking physical brick-and-mortar branches, and that's really expensive.

30:51As banks have moved online, even most brick-and-mortar banks have an online presence now. They were able to take that cost out of the system. But what Max does is helps them diversify their sources of funding. At this point, the technology is not really the issue. It's the behavior. And that's why I'm not worried about a bank run. So, you know, Torsten Slock.

31:08Telis Demos: Right. That was raised. But yeah, yeah. Please explain. What did he say? So a couple of weeks ago, Torsten Slock, who's the chief economist at Apollo, put out a brief note on a Sunday. I think it was only about two paragraphs. And in it, he mused, no pun intended, that Muse and other AI agents could cause a bank run and destroy the U.S. banking system. I remember seeing it drop into my inbox on a Sunday. I'm like, oh, lovely thought on a Sunday. Hot take from Torsten. Exactly. And look, it's a great headline. I just don't think it aligns with reality. Even today, and I played around with some of these agents to see if I could get it to manage cash.

31:44They are years away, I think, from being able to do anything. And even if they can, they still won't be able to overcome the trust issue.

31:52Telis Demos: It reminds me about when, again, you know, I was writing a lot about fintech companies, you know, about a decade ago. And it was right around the time when Uber was becoming really big. And so there was a I forget which bank. It was a famous banker who said, is banking going to have its Uber moment? Right. Are banks taxis that are about to be put out of business by financial technology? And what quickly became apparent was that no, actually, like the biggest banks in that time have only gotten bigger, have hoovered up even a greater share of our deposits. And they still aren't paying us the highest rate.

32:24And they still aren't paying us the highest rate.

32:25Telis Demos: So it just goes to show you that between the inertia and the technology and the trust, it takes more than just like a clever piece of technology to overnight kind of transform a business as critical as finance and where our money sits. I could not agree more. And that research note was Glenn Shore at Evercore ISI, and it was actually about Max. And then he went through this analysis. Is this an existential risk for banks? And I don't think it is, in part because only a portion of a bank's funding comes from these marginal accounts. I think the biggest risk in banking is uninsured deposits. And if you look at Silicon Valley banks collapse, there are two reasons why we thought they were risky.

33:06One of them is what's been heavily covered in the media, which is this idea of concentrated deposits. So the risk has always been there. I think that the key to stability of the banking system is to encourage people not to keep more than the FDIC insurance limit in any one bank. And if you diversify and spread your cash around much in the way that a squirrel is smart and berries its acorns under different trees, you can reduce risk for yourself and earn significantly higher yield over time. And for, you know, a client with$250 ,000 in cash, they could earn an extra$100 ,000 in interest income over a 10-year period just by being a little smarter about how they manage cash.

33:44So it's real money.

33:44Telis Demos: That is real money. What about somebody who doesn't have millions of dollars, who has money in a checking account and it's a little bit more than they need, but it's still essential money? Can even that person be thinking about maximizing what they earn on that? Tell us. I think every dollar counts. And most economists have this concept of the diminishing marginal value of the dollar, that an extra$1 ,000 in interest income might mean more to someone with less money than it does to someone with more money. There's really nothing that Max does that you couldn't do on your own, certainly in the early days of what we did.

34:12And Max started because I manually managed my own portfolio of bank accounts for three and a half years before deciding, gosh, this is not worth my time on a Sunday. Let me find, see if there's a way to automate this. What has changed is that many of the banks on our platform now offer preferential rates that aren't available to the general public. And they do that because they don't have to pay for customer acquisition. So they're saving so much money through Max that they said, well, we can give some of it back to the customer. So in the sense of preferential rates, you couldn't get those on your own, but you can get most of the way there on your own by doing it manually if you think it's worth your time.

34:47And I was an investment banker working 16 hours a day, and I still thought it was worth my time. So I think, you know, anything that people can do to help themselves and just pay a little more attention, a small investment of time up front can yield significant dividends over time. All right.

35:04Telis Demos: Just the wake up call that we all need. I know. I got to go back and check the rates on all my cash. I definitely know a lot of people who have way too much money and they're checking in. This is the episode for them. Well, Gary, this has been a really interesting conversation. Thanks for joining us. Thank you for having me.

35:22Telis Demos: And that's everything you need to know to take on your week. This show is produced by Alexis Moore and Michael LaValle. Our supervising producer is Katie Ferguson. Michael LaValle is also our sound designer and wrote our theme music. Aisha Al-Muslim is our development producer. Chris Zinsley is our deputy editor. Leetal Mollad is our senior director of shows. And Samantha Hennig is the Wall Street Journal's head of multimedia. For even more, head to WSJ.com. I'm Talas Demos. And I'm Miriam Gottfried. Until next time. NIM is like a term in banking. And so whenever I hear it, I'm like, we are the knights that say NIM.

35:59Telis Demos: Though actually, actually, we could say the knights who say NII because N-I-I is net interest income, which is like the dollar version of NIM.

36:13For 175 years, MassMutual's commitment to the long-term interests of our clients, members, and policy owners has been shaped by our roots in mutuality. Because when you're built to last, you don't think in quarters. You think in generations. Learn more at MassMutual.com.