Like the old idiom, we found a significant amount of cash under my grandparent’s mattress after they passed away. It was 1983 and I was 14 years old. And no, it wasn’t some “sketchy” revelation about their lives like something out of Ozark. Instead, it was my first lesson on how people value cash and where they deem it safe.

My grandparents were fairly savvy financially, having built a bit of wealth through small businesses and real estate investments. Yet, even at my young age, I felt the “cash in a mattress” management tool was an odd contradiction and a bit naive. In fact, I believed I could have taught my grandparents about the time value of money and how keeping cash at home actually resulted in loss of value.

Later, I realized their behavior was shaped and informed by personal experience during the Great Depression of the early 1930s. Banks failed, savings were lost, and access to money was restricted. Those events are powerful instructors of the financial system and the real versus perceived liquidity. Still, it wasn’t until the 2000s financial crisis did I fully appreciate how that cash discovery actually taught me important aspects of banking and access to cash that remain ever true today:

1. Instant Access to Cash Is A Value;

2. Banks Should Pay Better Than A Mattress; and

3. Safety and Banks Are Not Synonyms

Instant Access to Cash Is A Value

My grandparents operated a store, restaurant and fish house in a small, seafood industry based community dependent on their products and services. Then as is now, cash and working capital are vital components to most businesses, and a common business practice is to keep three to six months of operating or emergency cash on hand. Access to cash in the 70s and 80s was a much different proposition than today. Banking services were largely in person, with limited times and convenience, and ATMs were just beginning to grow in practical access. Given these restrictions, it was more than normal for businesses to keep an on-site safe with operating cash.

With the growth of technology, connectivity, increased banking efficiencies and cash management tools, modern access to operating and emergency cash has generally eliminated the need for large amounts of physical cash on hand. Online banking and ACH / Wire capabilities along with the reduction of cash and checking for principal payments enable businesses and individuals to transact almost virtually.

“However, what was once true remains true - instant access to cash reserves remains a paramount need and concern.”

This advancement led to growing methods of holding cash within the banking system. Banks and financial institutions now offer ever increasing options, from simple savings accounts and CDs to money market and other funds. However, what was once true remains true - instant access to cash reserves remains a paramount need and concern. In the modern world, this access is typically represented as having the “same day” ability to move money to third parties. This is generally enabled through bank checking accounts, leading most businesses and individuals to hold their needed and immediate reserve cash in such accounts.

Banks Should Pay Better Than A Mattress

The time value of money is the concept that a dollar today is worth more than a dollar in the future because today’s dollar can earn a return. Said differently, a dollar is worth less in the future unless it is earning a return today. Furthermore, the earned return after taxes must exceed inflation to gain any true value or maintain purchasing power.

However, the time value of money is also a relative concept. In other words, cash in a safe or even a mattress will be worth less tomorrow, but so will any other option that doesn’t pay a return. During the time of my grandparents, banks were not permitted to pay interest on cash in checking accounts. Therefore, in their minds, my grandparents had instant cash access without any comparable loss in value relative to a bank checking account.

“This is an important point. The customer needs instant cash access, and banks rely on that need to offer easy access via checking accounts without having to pay allowed “market” rates on that cash.”

Beginning in the 1980s, banks were permitted to pay interest on cash in checking accounts, in part due to the inflationary environment and the dilemma that money in bank checking accounts was losing relative value. This is very interesting, because the current rate paid on checking account cash today is less than 7 basis points on average - 0.07% (not even a 1/10 of one percent) - and in many cases is zero. In other words, banks were granted the ability to help customers preserve the value of their cash in checking accounts but generally do not. This is an important point. The customer needs instant cash access, and banks rely on that need to offer easy access via checking accounts without having to pay allowed “market” rates on that cash. Oddly, or perhaps smartly for many banks, the financial system has eliminated the need for businesses or people to physically hold cash outside of banks while not offering sufficient returns for putting it in banks. Said differently, they offer returns that are not much different than what a mattress offered my grandparents.

Fortunately, that is not the complete picture. The average interest paid on deposits is less than 0.45%, but of the nearly $21 trillion dollars of deposits, we estimate over $9 trillion receives above 2%, with the highest currently near 4%. These rates are offered by large banks to large corporations, by regional and online banks, and via a bank secondary market where big and small banks trade their own customer deposits. The challenge, however, is that businesses and individuals have to work to find ways to access these rates.

Safety and Banks Are Not Synonyms

During the Great Depression it is estimated that over 9,000 banks failed, roughly 1/3 of the banks, and approximately $1.3 billion of deposits were lost (basically $25 billion in today’s dollars). This period certainly influenced the behavior of my grandparents and several others of that generation. While the financial crisis of the 2000s averted the same magnitude, we did re-experience runs on banks, bank failures, and the fear of access to funds. That period certainly influenced me into keeping a large amount of cash on hand and spreading the cash around a number of banks below standard FDIC insurance limits, which is currently $250,000 per bank, per owner. (This insurance was implemented following the Great Depression).

There have been more recent bank failures that highlight the continued importance of bank safety, but, in general, there is greater faith in the current soundness of the overall banking system. Still, these events do highlight the risks of deposits beyond standard FDIC insured limits. The fact that the FDIC offers insurance is a reminder that the system itself believes bank risks are not zero.

“Safety in your bank choice is of obvious importance, but also understanding the availability of FDIC insurance across several institutions is of equal priority.”

Another way to look at the issue of cash safety is to explore how we protect assets. Cash is one the most important assets of any business or individual. Sound management of asset security typically includes insurance coverage. Safety in your bank choice is of obvious importance, but also understanding the availability of FDIC insurance across several institutions is of equal priority.

Reimagining The Value and Safety of Cash with Robora Financial

The days of cash being held under mattresses is long past, but the principles employed by that generation remain. Businesses and individuals alike should think of their cash as an important asset that requires access without loss of appreciating value or risk of loss. One way is to have a conversation with your bank about the best rates available without sacrificing “same day” access. Depositors with significant balances greater than the standard FDIC limit should also speak with their partner bank about diversifying their holdings among other institutions to expand their insurance.

Another solution is to utilize an elegant solution like Robora Financial. Robora is the brain child of Cory Frank, a decades-experienced banker, who reimagined the value and safety of cash to maintain and expand it as an important asset. Robora did the work to find the better rates on cash without losing “same day” access and without changing existing checking or banking accounts. It simply links existing checking accounts to a partner bank account and the largest banking network of its kind. This link enables unneeded cash for upcoming payments to earn high rates and tens of millions of FDIC insurance through the banking network.