Reflecting on our last Year in Review, it’s remarkable how much has changed in just 12 months.
In 2023, we experienced a rapidly rising interest rate environment, which contributed to the failures of several large banks. This highlighted our longstanding view that it’s important for depositors to diversify by spreading their cash across multiple banks, both to increase FDIC insurance coverage and reduce liquidity risks associated with concentrating deposits at a single financial institution. We were proud that Max was able to play a role in helping restore stability to the banking sector by enabling banks to attract more insured deposits when needed, stemming the tide of outflows that was leading to runs on banks. But if there’s one takeaway from 2023, it’s that uninsured deposits can be risky for both depositors and banks.
In 2024, the collapse of Synapse highlighted the other risk we’ve long warned against: single point of failure risk. Brokered deposit systems (often referred to in the industry as “cash sweeps”) rely on intermediaries that take custody of funds and manage a central ledger, commingling client funds in omnibus accounts and re-selling those deposits to other banks for profit. This approach introduces a layer of unnecessary risk into the banking system. As we note below, this risk is endemic to all other cash sweep programs — even those employed by large brokerage firms. This is why we structured Max differently, with no intermediary. With Max, clients hold all cash directly in their own bank accounts, so there’s no one standing between depositors and their own money.
Here are a few of the items we’re watching as we head into the new year:
Inflation and Interest Rates
In 2024, inflation moderated, demonstrating the effectiveness of the Fed’s monetary policy. While not fully solved, inflation is now below 3% and we’re in a lower interest rate environment more consistent with long-term averages. While the latest Fed ‘dot plot’ projects two more rate cuts, we don’t expect significant easing in 2025. Inflation isn’t entirely solved, and many of the policies proposed by the incoming administration, such as tariffs and the unwinding of global trade, could be inflationary. This may explain why the yields on 10 Year Treasurys have risen since the election. Unfortunately, this means little relief for prospective home buyers, since mortgage rates are pegged off of the 10-year Treasury, not the Fed Funds rate.
Miraculously, the Fed appears to have pulled off a successful soft landing. But downside risks to the economy remain. As an example, significant cuts to the government workforce — if enacted — could cause a recession. We’re also watching several other macro stories that could impact the economy.
Bull markets are said to “climb a wall of worry,” meaning that investors brush aside concerns as the market marches ever upwards. Eventually, markets correct, and investors point to all the worries that they had previously ignored as cause for concern.
While the outlook seems optimistic, there are plenty of reasons to be concerned, including an ever-increasing national debt and seemingly little willingness on either side of the aisle to exercise fiscal constraint; geopolitical tensions; weakness in the Chinese economy; and a widening wealth gap (which throughout history has led to revolution). Aside from a brief two-month correction during the COVID-19 pandemic, we haven’t had a true recession since the global financial crisis of 2007-2009. While part of the nominal rise in the equity markets since the pandemic can be attributed to inflation, an entire generation may have limited experience with business cycles, which could increase their likelihood of selling in a panic when the market next corrects. The fact that many of these younger investors rely on roboadvisors rather than human advisors could compound this effect.
Cryptocurrencies
The resurrection of cryptocurrencies also poses structural and systemic risks to the economy. Historically, sovereign governments have maintained the sole authority to create currencies. It’s somewhat surprising the degree to which the United States and other countries have allowed cryptocurrencies to erode and evade their control over monetary systems. Now a multi-trillion dollar market, cryptocurrencies could create systemic risks and shocks to the economy. Imagine the impact on the wealth effect if Bitcoin were to suddenly plunge in value, or even go to zero (possible, since unlike gold, which has industrial uses, cryptocurrencies arguably have little to no inherent value). While such a scenario may seem far-fetched, new technologies such as Google’s supercomputer that can crack cyphers could cause investors to lose confidence that Bitcoin represents a true store of value. In the event of a price collapse, would the government need to provide stimulus following such a widespread loss of wealth?
Despite such risks, digital dollars hold much promise, and we believe there is a compelling case for a global digital currency. Were Bitcoin to collapse, we expect another digital currency — likely a digital version of the U.S. dollar — would rapidly take its place. In 2022 we secured another patent that could leverage these new technologies to enable Max to offer optimizations and funds transfers that occur instantly. While faster funds transfers pose a unique set of risks to the banking industry, we believe that the ability to move money instantly, and globally, offers so much utility that it is inevitable.
Risk
As a result of this moderation in monetary policy and what seems to be a successful ‘soft landing’ for the U.S. economy, our banking system is much more stable than it was a year and a half ago. This is good news. But there are also uncertainties on the horizon. Banking-as-a-Service — the construct in which a fintech rents a bank’s charter to establish its own banking products — has fallen out of favor as regulators remain rightfully concerned that when a bank doesn’t get to know its own customers and relies on a third-party to manage its ledger, that introduces considerable risks. Even to this day, the brokerage industry relies upon deposit brokers, which use an omnibus account structure that exposes clients to the same risks inherent in Synapse’s failed approach. We’re only one tech outage away from clients losing access to hundreds of billions of dollars of their hard-earned cash. Should this happen, people will claim they had no idea that brokered deposits bore this risk, but the risk has been apparent all along. It’s the main reason we launched Max in 2014, to provide a safer way for clients to manage cash by keeping it safe and sound in their own FDIC-insured bank accounts (rather than brokered through an intermediary). Consider yourself warned.
Politics
A political transition is underway that is poised to result not only in much change, but also much uncertainty. Economic policies, tax rates and structures, the potential for global tariffs, reduction in the labor force due to changes in immigration policy — all of these factors could create a bumpier 2025. While the equity markets are ebullient at the prospect of less regulation, with every change in government policy there are winners and losers. Moreover, our capitalist system is built upon stable rule of law, and with the potential for so many changes in such a short time span, it makes it more difficult for businesses to plan capital expenditures and other investment decisions.
Markets will also need to feel confident that there is sufficient unity and alignment within our government to solve big problems. Here’s one thought experiment: were we to experience another global financial crisis, are we confident that our government could collaborate across both sides of the aisle to implement sound and coordinated financial policies to stave off financial disaster?
Banks
I was recently at the Piper Sandler balance sheet management conference, where Scott Hildenbrand, Piper’s Chief Balance Sheet Strategist and Head of Depository Fixed Income, noted that non-interest-bearing deposits at banks have fallen by 21% since the pandemic. That’s a big impact for banks, who have historically relied upon this sort of deposit as a low-risk source of net interest margin. Scott also highlighted generational shifts in loyalty and how depositors use banks, and how banks have been changing their focus to become more rate-neutral (so that they don’t get caught up in rapid rate shifts that caused some banks to fail in 2023). Fortunately, unlike two years ago, when data from that same conference accurately predicted the banking crisis that ensued the following year, the outlook for banks today looks much stronger, with seemingly few clouds on the horizon.
The Year Ahead for Max
In the coming year, we’ll be expanding our reach, adding more banks, broadening Max’s applications, and enabling other institutions to benefit from Max’s core technologies. Our data show that the more that clients use Max, the wider our rate advantage expands over other banks and cash sweep solutions.
Regardless of whether rates rise or fall, Max is here to help you make sure you’re earning the highest rates. Over the past 11 years, Max has consistently delivered the highest yields in the market, regardless of market environment.
We are grateful for the trust that you have placed in us, and are proud to serve the clients of more than 3,000 wealth management firms across the country, as well as self-directed investors who are looking out for their own best interest.
We wish you and your family good health, happiness, and success in the year ahead.