It's fascinating to see how brokerages these days are offering no-commission trades, fractional share ownership, and debit card-linked accounts. With this combination of features, maybe we're getting closer to the day when we can buy a $2.50 coffee with 0.007 Tesla shares.
Right now, a debit card purchase can only proceed if there are uninvested cash balances in the linked-to account. But what if the securities held in your brokerage account could also be debit-cardized?
Imagine going to Tim Hortons, ordering a double double, and paying with your RobinHood MasterCard debit card. Behind the scenes RobinHood, an online brokerage, checks your account. All you own is a few shares of Tesla. RobinHood won't actually transfer the shares to Tim Hortons. Instead, it quickly sells a small fraction of these—0.007 shares—for $2.50 cash.
Since RobinHood doesn't charge commissions, selling the shares costs you nothing. MasterCard signs off on the transaction and presto, you've got your coffee. You own 0.007 fewer Tesla shares while Tim Horton's will soon get $2.50 in cash from RobinHood.
Stock markets aren't open on the weekend. So what happens if you want to buy groceries on Sunday? Maybe you've got 2.1 shares of Tesla in your RobinHood account. They were worth around $825 at Friday close. Something catastrophic could occur over the what remains of Sunday, but RobinHood is pretty sure that come Monday morning, those shares probably won't be worth less than $500. And so it will allow you up to $500 in weekend debit card payments. When the market opens on Monday it sells whatever Tesla shares are necessary to settle up your grocery purchase.
If the option of paying with volatile assets like Tesla were to be widely adopted, you'd expect traditional banks to get into the game. Right now banks offer deposits denominated in fiat units like dollars or yen or pounds. But there's no reason they couldn't provide Tesla-denominated checking deposits. The fact that banks don't do this is a good tip-off that there isn't a very big demand to make transactions using volatile instruments.
Why do people prefer to pay for things using stable instruments rather than volatile ones like Tesla shares? My guess is that it has something to do with FOMO.
Given a choice between paying with their regular bank debit card or a RobinHood card, most people will choose their regular card. Spending away Tesla shares could mean that they miss out on a potentially big jump in price. But spending away fiat-denominated deposits doesn't produce any negative emotions, since deposits can always be replaced at the exact same price come next week's paycheck.
(As I suggested last year, this is a weird example of Gresham's law, where lottery-type instruments like Tesla don't get recruited as money because the market puts less value on them than a hopeful individual does.)
If no one wants to use Tesla shares to buy coffee, they might prefer to set up their RobinHood debit card to sell lower-risk securities. For example, a RobinHood customer could have their card draw down on a bond ETF like the iShares Short Treasury Bond ETF (SHV), which primarily invests in US Treasury bills.
Since SHV's price hardly fluctuates, anyone who uses SHV units to buy coffee needn't fear missing out on a big payday.
At the same time, they'd earn far more than they would on checking account. SHV currently pays around 1.68%, which after a 0.15% management fee comes out to around 1.53%. That's about the rate you could get on a high-interest saving account, which aren't usually designed for everyday spending.
Will this sort of debit-cardization of stocks & ETFs ever happen? I don't know. There could be regulations that prevent the practice, or maybe some sort of hidden cost that makes it too expensive. On the other hand, cryptocurrencies and gold have already been debit-cardized, the gold and bitcoins being sold the moment that a card purchase is initiated. I don't see why it wouldn't be technically possible to do the same with other exchange-traded liquid assets like stocks.
Crypto-linked cards haven't been very successful, probably due to the FOMO problem I mentioned earlier. (Last year, Coinbase shut down its Shift crypto card). Tesla shares would probably suffer from the same. But a low-risk ETF held in a Robinhood account wouldn't be quite so hobbled.
Mercado Pago is already doing something like that in Argentina. You can invest the cash balance you have in the platform into a mutual fund, and when you make online payments with the app the cash are rescued from the mutual fund and applied to the payments.
ReplyDeleteDo you have a link?
Deletehttps://www.mercadopago.com.ar/ayuda/Ayuda_con_tus_Rendimientos_4048 (It's in spanish)
Deletehttps://www.mercadopago.com.ar/asset-management/mercado-fondo-comun-de-inversion-online
Deleteliquidity is the main reason. Imagine if attempting to buy the coffee resulted in Err_NoBuyers or a non-limit trade at an unreasonable price (7 TSLA shares for the coffee because of the wrong pricing).
ReplyDeleteTo minimize illiquidity issues, RobinHood would have to rig things so that the debit card is only linked to highly liquid securities.
DeleteThis probably won't happen because of the way debit cards work. The theory of a debit card is that there's a demand-deposit on the other side of the card, so the total extension of in-flight credit for the transaction by A) the merchant's bank and B) the card issuer represents a very, very tiny risk. Whereas, if you need to execute a brokered transaction to recover the cash required to effect the debit, then the merchant's bank and the issuing bank are now both extending credit to their clients for a much longer time, and the credit is theoretically (but not actually) collateralized by the shares in question, the value of which are the source of repayment, and the collateral is secured by the cardholder agreement which then has to act as a contingent sale agreement.
ReplyDeleteBasically, nobody is going to do that, because it's not a good idea. Unlike gold or even Bitcoin which you can treat as commodities, derivatives or even FX, corporate securities are not like that at all. It's pretty easy to argue that, whether regulators like it or not, crypto is a Tier-2 asset because there are qualified dealers who will trade it for dollars on demand, and a firm quote is firm. Same with gold. But a corporate security at sale doesn't have a settled value until the trade executes and settles, and that can be 24 hours or more. Plus, that assumes that it settled in USD--if it was a foreign asset denominated in Pounds Sterling or Euros, you then have to cross-settle the FX which means it has to price again.
Plus, it opens up the companies for whom those securities are actually shares of their real companies to a continuous, rapid-fire stream of unpredictable sell-only shareholders whose behavior is governed by how much caffeine they need after a long night at the bar last night. You can bet that exchanges would immediately begin selling listing benefits that include, "Opt out of broker-dealer transactions that clear routine cash management transactions via card."
Here's the thing: there are good ideas out there that are in this vicinity, but they're a long sell because the client can't understand them. For instance, the client could sell the right to aggregate their underlying portfolio FBO derivatives and options traders, and in exchange, the traders would rebate their successful contracts back to the client as interest rate offsets on a credit card (because otherwise the amounts are too small to return in some other way). So depending on what you're holding, sometimes your card rate would be whatever the issuing bank's base price was to you, but sometimes the rebate would wipe the rate out, and you'd effectively be making money for buying groceries.
But this would be a hard sell--a card like that wouldn't have points and promos, because those are expensive. And it's impossible to explain to a typical consumer. Plus, it only applies to consumers who happen to have a self-administered portfolio, and that portfolio would need to contain stuff in which traders needed aggregate holdings. So that's like... less than 2% of US adults?
So yeah, not the first time someone has brought this up (obviously). But lots of reasons why it doesn't work and also there are many products that would be more valuable to the customer because they could convert cash management activities into a net benefit rather than just a convenience.
Great comment!
Delete"...then the merchant's bank and the issuing bank are now both extending credit to their clients for a much longer time, and the credit is theoretically (but not actually) collateralized by the shares in question, the value of which are the source of repayment, and the collateral is secured by the cardholder agreement which then has to act as a contingent sale agreement."
Yes, the issuer's bank would be extending credit for a day or two. But I'd argue that this is a very safe type of credit to extend. The price of the stock sale is already locked in, so there is no price risk. The bank is just waiting for the cash to be delivered. Ultimately, any failure to deliver is backed up by the clearing house. And a clearing house is an incredibly safe creditor to have.
"Plus, it opens up the companies for whom those securities are actually shares of their real companies to a continuous, rapid-fire stream of unpredictable sell-only shareholders whose behavior is governed by how much caffeine they need after a long night at the bar last night. You can bet that exchanges would immediately begin selling listing benefits that include, "Opt out of broker-dealer transactions that clear routine cash management transactions via card.""
Alternatively, it means that people will hold more safe ETFs and fewer checking account balances. What ETF wouldn't love that opportunity? The bigger the ETF, the more the issuer makes!
"For instance, the client could sell the right to aggregate their underlying portfolio FBO derivatives and options traders, and in exchange, the traders would rebate their successful contracts back to the client as interest rate offsets on a credit card (because otherwise the amounts are too small to return in some other way)."
I'm not really sure I understand. You're selling the right to a trader to do what?
I already have this.
ReplyDeleteI have a margin account at Schwab. I use my debit card to get cashoney when I travel. I can have a negative balance because I have a margin account.
Every week I sell stock if necessary to cover the withdrawals. I try to keep my cash balance as close to 0 as possible.
Thanks for the comment. If I recall Interactive Brokers offers the same thing. What I had in mind in this post was a little different, since it wouldn't require a margin account.
DeleteThis could be a tax nightmare, which is the reason crypto debit cards don't really work right now. You are taxed when the security is transformed into coffee (cash) so unless the debit card app tracks every transaction sale price and your basis then you'll have a disaster trying to do your taxes. This also already assumes you can download the transactions into trubo tax because even tesla --> into coffee via RH would such to type out manually for every day.
ReplyDelete"so unless the debit card app tracks every transaction sale price and your basis"
DeleteYep, that would be the idea. The brokerage automates the process.