Why do people still deposit money in banks?

Intern in IB - Ind

Might be a stupid question, but why exactly do people still put so much money in basic savings and checking accounts when the interest rates have been <1% for more than a decade? Read this recently. Apparently, there is currently about $3 Trillion in non-interest bearing accounts and $10 Trillion in basic interest-bearing accounts insured by the FDIC.

Brokerage accounts, ETFs, and mutual funds have never been more accessible, and even if you're completely incompetent, you should still be able to squeeze out at least 5% returns per year on average (several multiples more than the best vanilla savings account).

Even if you're relatively risk averse and value the safety of a savings account, you'd still make more money investing in investment-grade fixed income securities and enjoy a comparable amount of risk.

I understand that some of that money is in saving/checking accounts for liquidity reasons, but why $13 Trillion? That's about $40,000 per person in the US. Seems very excessive.

Just wanted to learn a little more about how the consumer side of the bank works.

Comments (39)

Most Helpful
Jun 17, 2020

Normal people don't give a shit about finance

    • 32
Jun 17, 2020

Also financial advisors tend to be idiots. I met a guy once who tried to convince me I needed a sizable allocation to actively managed bond funds (as a 23 year old!) and wanted to charge me 1% for his "advice"

    • 4
Jun 17, 2020

Never underestimate the combined powers of financial illiteracy and risk aversion.

    • 2
Jun 17, 2020

haha common people bad finance people smart lol xd

    • 9
Jun 17, 2020

You have to understand the underlying statistics of what you're talking about when you say $40k per person. The Federal Reserve's 2019 study showed that 40% of Americans could not come up with $400 in emergency money. The unbanked population of the USA is estimated to be 10-15% of the population.

So all of these funds are held by the wealthy, and perhaps the elderly retired. There are very good reasons to be holding cash in both demographics.

Finally, you have to take on principal risk to achieve your "5% returns." If you're not willing to take on principal risk, the best you can get in a high yield savings account is somewhere between 1-2%.

    • 15
Jun 17, 2020

Agreed with this point. Averages can be misleading

    • 1
Jun 18, 2020

This is what I was going to say. Earning 5% on an acct that only has like $1,000 in it (maybe) for the avg American makes no difference especially when risk is added in. Also accessibility is much more important to middle and lower class America.

    • 1
Jun 17, 2020

So what you're proposing is that I put my paycheck into an E-Trade account that holds Fixed Income? Forgetting the market volatility for a minute, let's break this down.

The purpose of a Retail and Business accounts is to provide quick access to capital. I get paid, money goes into my bank account. I can use that money to pay bills, have access to cash, etc. Considering that ~80% of Americans live paycheck to paycheck, having the funds readily available makes far more sense than putting it into the market. Even if you have something like an E-Trade checking account, you're still waiting for the cash to settle when you free up funds by selling a security. So if I have a bill coming due, I have to wait T+3 (T+1 for non-Money Market Mutual Funds) for the funds to be available. Then there's the tax issue. Money Market Fund Interest, for example, gets hit with the Medicaid Tax. Owning securities that pay interest income, I'm required to pay taxes on the interest unless it's fully tax exempt (ie owning Munis). Let's not forget capital loss, markets siezing up and limiting access to funds, or the fear of breaking teh buck. There's the actual time involved to do these things. For most folks, it's an added burden to actually understand what they are doing.

Likewise, if I run my own business or am self-employed, I have to pay significantly more in taxes than a W-2 worker (seeing as I'm on the hook for the Employer Portion and the Employee portion of the payroll taxes). As silly as it sounds, keeping those funds in a savings account means I am not losing any money on them if the markets tank. I'm still on the hook to pay those taxes. I don't get to offset those tax payments because the market tanked. I still need to pay them.

At the end of th day, the question is whether or not it's worth it for someone living paycheck to paycheck to try and eek out an extra point or two on savings when they need the money to survive.

Jun 18, 2020

One minor quibble here: Big chunks of the US market moved from T+3 to T+2 several years back. (2016 IIRC) Not that it invalidates any of your points though. I'm just technically correct--The worst way to be correct.

    • 4
    • 1
Jun 18, 2020

Okay. So it's T+2 instead of T+3. Not a big deal that it's one less day. Doesn't change the point. And it's good to know.

  • Intern in IB - Gen
Jun 17, 2020

Could be a noob question, but I have about $3k in my HSA to invest but I have yet to do so since there's about 20 funds to choose from and I don't have the time to research them all.

Should I invest that $3k in my HSA? If so, what type of fund should I choose? Long-term like 2060 funds?

Jun 17, 2020

Voo

    • 1
  • Intern in IB - Gen
Jun 17, 2020

100% into that? There's several other options like global equity, conservative growth, moderate growth, etc, mid cap, small cap, and then some 2040-2060 target funds

Jun 17, 2020

You have to have a goal to invest to begin with.

Jun 17, 2020

You have to have a goal to invest to begin with.

  • Intern in IB - Restr
Jun 18, 2020

$TQQQ

Jun 17, 2020

I agree, but one thing about putting cash into a bond-like ETF is that when you sell it might count as short-term capital gain (if there's a gain) and hence has tax consequences potentially, and it takes several days for the money to transfer to the bank unless you have a Stash or Robinhood card.

Jun 17, 2020

These days banks are primarily used as a parking place for cash. Actually, with interest rates so low, you are not going to get a much higher return on a non bank investment that has comparable risk. Most young people do not invest at a bank. Its is primarily the older people who still view bank products as an investment because most of them have a super low risk tolerance.

Jun 17, 2020

Liquidity, Immediacy, Risk, and in the finance world, reporting.

Liquidity: I can't spend the money I have in an investment account.

Immediacy: With an ETF I'm normally looking at T+2 settlement. Add in the time to transfer the money to a bank account, and I'm looking at a week for access.

Risk: Good luck getting 5% risk free. At best you're probably beating your savings account by 1%/yr with an ultra short term fund (and even that is added risk) Is that worth it?

Reporting: If I sneeze on a fund I need to file a report. Bank accounts make my life easier, as they don't need to be reported.

    • 4
Jun 17, 2020

I had to convince my family (non-Finance people) for the longest time to trust the markets. They got burnt on some shitty active funds back in the early 00's, and pretty much refused to invest in financial instruments afterwards (rather pouring all their money into housing).

Jun 17, 2020

There are rewards checkings and savings accounts where you can easily get nearly 3% even now, I got a 1yr CD for nearly 3% about 6 months ago (you can only get 1.3% now). You just have to look around. https://www.varomoney.com/savings-account/ https://www.myconsumers.org/bank/accounts/free-rew... https://www.quonticbank.com/cash-rewards-checking/

A 1-3 yr treasury etf posts similarly solid returns without any effort and you can withdraw whenever you want unlike a savings account. It isn't FDIC insured however which is the real reason so much money is in bank accounts.

Array

Jun 18, 2020

comes in

sees frieds, synergy, and whatever have commented

y'all are good, nothing to add

much love

Jun 18, 2020

wealth management services feed off the stupidity of those unfortunate to understand what a stock is and how it's valued.

    • 1
Jun 18, 2020

probably enough people like @m_1 who would hold cash just waiting to jump into investments are tipping the scales.

Also a decent amount of people who only hear scary stories from their uncle about how they lost everything (mostly because that uncle took stupid stock advice). I know a few who are the city folk just because they're one of the few to even have bank accounts in their circle

Jun 18, 2020

A lot of it is escrow accounts and stuff like that

Jun 18, 2020
Intern in IB - Ind:

Even if you're relatively risk averse and value the safety of a savings account, you'd still make more money investing in investment-grade fixed income securities and enjoy a comparable amount of risk.

The logic here is flawed. In the past yes, this is accurate. However, with vanishing yield cushions your duration risk is asymmetrical. In pretty much every market drop until 2020, global bond returns were positive when equities were down with a few exceptions. In more recent times this trend has began to hold less merit as bond prices rose. Here are a few statistics to reiterate that.

Nov 2007 -> Mar 2009 Global Equity Drawdown (GED) -59% Global Bond Return (GBR) +10%

May 2011 -> Oct 2011 GED -23% GBR +3%

May 2015 -> Feb 2016 GED -19% GBR +4%

Sep 2018 -> Dec 2018 GED -18% GBR +1%

Feb 2020 -> Mar2020 GED -34% GBR -1.1%

As these bond yields approach the zero bound, there is not much more prices can go up unless investors are willing to lock in negative yields.. might that happen.. sure.. but I don't think they can go deeply negative. Now look at the opposite, if rates begin to rise, the price of these bonds will plummet. This is the asymmetry, limited upside, with vastly more downside potential.

I'm not saying rates are going to skyrocket in the near future. I'm also no where near smart enough to determine what the best play is in this environment. Many have thrown the phrase TINA around.. and I'm really not sure what to make of it. But with yields this compressed, it is impossible to say an investor would certainly make more in investment grade securities compared to cash.

    • 3
Jun 18, 2020

Less about banking and more about the building blocks of an investment program - whether for retail or even institutional clients.

Start at the liquidity needs - daily, weekly, monthly and annual cash burn (operating expenses or personal expenses). That becomes, roughly, a liquidity bucket in a portfolio (give or take - vastly simplifying at the institutional level). This needs to be effectively a checking account - for the vast majority of people, this is all they need. They don't have much in 'excess' cash - even what they do, they spend down and build back up throughout the year.

Your goal, there, is to match duration of cash needs with investment horizons. For retail, that's generally going to mean a checking account. Institutions have some slightly better options - MMF's or similar type vehicles that can provide daily liquidity - but you get my point. For cash that you may have today, but won't spend for 6 months or so - opens up some other options for you but again, for RETAIL, that generally is going to be a savings or CD program probably.

Anyways - i'm going way off topic here, venturing towards some of the things we do for institutional clients who are thinking about investing both liquidity and longer term assets. My overall point is that we tend to think about investing as simply 'maximize returns at all costs' when it much, much more complicated than that.

    • 3
Jun 18, 2020

I worked in retail banking and it boils down to one thing - FDIC. Yes, you heard me right.

There is a lack of knowledge for a lot of people, especially the older generation. FDIC coverage is something that matters to them. It even goes so far to individuals maximizing the amount kept in several banks ensure there is enough coverage for FDIC. I work for JPM. You don't know how many times I had to explain that if JPM were to collapse, we have bigger issues to worry about than your $250K coverage. These of course are extremely conservative people and would probably have a heart attack if their portfolio dropped by a dollar.

  • VP in IB - Gen
Jun 18, 2020
Jun 23, 2020

shie

  • Consultant in Consulting
Jun 18, 2020
Comment