Shorting the Stash "Stock-Back" Debit Card
Updated: Mar 22, 2019
Why the "stock-back" reward may be the best example to-date of fintech overshooting in a deposit banking disruption effort.
Last week, the investment app "Stash" announced a foray into deposit banking. In short, when you use the debit card to make purchases at publicly traded retailers, then you earn fractional shares of that retailers stock. If I spend $100 at Amazon, then I receive the equivalent of .125% of the $100 ( = 12.5 cents) back in the form of a fractional share of Amazon. Purchases at non-public companies qualifying for shares of a Vanguard exchange traded fund.
There's tons of fine print accompanying this product, but here's the good: (1) No overdraft, monthly or set-up fees, (2) Get your pay two days early, (3) 19,000 free (in-network) ATMs, and (4) FDIC insurance thanks to its partnership with Green Dot Bank, like most non-chartered fintechs looking to accept deposits which require a traditional bank partnership to function.
Now here's the bad, in my opinion: (1) Investment account costs $1 / month, and (2) investment account over $5,000 is assessed a .25% administrative fee on the total balance, whereas many other apps - like Robinhood - are truly fee free.
And here's the REALLY bad part, again - in my opinion. Dealing with fractional shares of stock, even in a pooled environment, can be a pain in a short term scenario. Here, to acquire our one hypothetical share of Amazon would cost $1,686 as of the market close on 3/14/19. At .125% of Amazon purchases, we would have to spend $1,350,000 to acquire one complete share. Let's say I had $1,350,000 to spend at Amazon to acquire that one share and I bought that share at the market peak in September 2019 when Amazon hit $2,050 per share, but then the share price proceeded to decline 17% to that March closing price of $1,686, then by my calculations, I've lost the value of the rewards I earned for spending $239,050 using my Stash stock back card due to market volatility.
Wait, there's MORE bad news. Now, let's say the opposite happened and my one hypothetical share of Amazon gained 17% and I decided to sell it at its peak. Let's assume the users of this app are not sophisticated investors. Come tax time, I fail to file a form 8949 accounting for my capital gains tax owing on the appreciation from the share sale off the $1,686 basis and the IRS issues me a CP2000 letter requesting additional documentation and an amended return. Now you're out of pocket on the capital gains, stressed about the IRS inquiry, and paying a tax preparer to assist you in a response all because you thought an app with .125% stock back rewards was a good investment when spending $1,350,000.
Instead, if you had put that same 12.5 cents of every $100 spent at Amazon up to $1,350,000 (or $1,686) into a compounding high yield interest account at 2.5% at even increments over 10 years, then you would have earned $443.65 in interest for a total of $2,129.65 at no risk. Granted, the real Amazon stock share has grown at 500% over the past 5 years but Amazon is a unique case. Imagine how you'd be feeling these days with this debit card if you were an avid Sears shopper!
Between you and me, I think Stash could have had an excellent deposit offering just with the: (1) No overdraft, monthly or set-up fees, (2) Get your pay two days early, (3) 19,000 free (in-network) ATMs. For some differentiation, they could have waived the $1/month investment fee and may offered a round-up or sweep feature like Acorns, but into a simple guaranteed fixed income portfolio. It's not as sexy, but would definitely be a competitive offering.