Gary Zimmerman did not need to become a fintech entrepreneur in order to find success. But in the wake of the financial crisis, Zimmerman came up with the seed of an idea that ultimately compelled him to leave the world of international investment banking behind. That idea was grounded in his decision during the peak of the crisis to open up a number of online bank accounts to simultaneously maximize the FDIC coverage and yield of his savings. But as time passed, Zimmerman found the process of allocating and reallocating his cash deposits time consuming and highly cumbersome. Inspired by a desire to fix that problem, Zimmerman launched MaxMyInterest, a cash management solution that has enabled investors to earn significantly more interest on their bank deposits and has helped financial advisors foster closer ties with their clients. The FR’s Gregg Schoenberg caught up with Zimmerman recently to learn more about Max and his plans to continue his company’s rapid growth.
The Financial Revolutionist: Welcome Gary, and thank you for taking the time.
Gary Zimmerman: Thank you, Gregg.
FR: Can you provide an overview of your career prior to starting Max?
GZ: I spent the first 14 years of my career as an M&A banker, advising companies in a number of industries. In 2007, I moved to Tokyo where I ran cross-border M&A for Citigroup. After returning to New York, I became Global Head of Strategic Solutions for Sovereign Wealth Funds, where I advised sovereign wealth funds on M&A and direct investments.
FR: When you hit upon the idea for Max, did you immediately say to yourself, ‘This is it, I have to leave my banking career behind for this?’
GZ: No, I wasn’t planning on starting a company. But the more I thought about the idea for Max, the more I realized that it met all of the criteria I had developed for evaluating companies. I was also motivated by the mission of transforming a multi-trillion dollar market that suffered from a lack of efficiency and transparency, in a manner that helps individual investors.
FR: But did you have an entrepreneurial burning? That thread within you that always wanted to build something on your own as opposed to being a part of a big bank?
GZ: Actually, I loved my time as a banker. But my parents always encouraged my sister and I to follow our interests and pursue things we were passionate about. My mother is an entrepreneur. She started in computer science before women were told that they couldn’t be in computer science, and ran her own business throughout my childhood. So I was surrounded by that environment growing up.
FR: When you told your mom that you were leaving the bank to pursue your entrepreneurial project, what did she say?
GZ: She was very supportive. One thing that always stuck with me – and that may have influenced how we ultimately built Max – was a mug that my mother kept from graduate school, when she was earning her Master’s in Computer Science. On it, there was a picture of a forlorn cartoon character slumped over a stack of books. The caption said, “I may be lucky to be moving so slowly, because I may be going in the wrong direction.” A lot of young companies go out and raise a large amount of capital and run very fast in a direction without necessarily knowing whether it’s the right direction. We took a different approach, building a lean company and spending perhaps more time than most trying to figure out what that right direction is.
FR: As you thought about your strategy, did you ever contemplate making Max a deposit-taking institution or custodian of customer funds?
GZ: In the early planning stages, I contemplated whether Max should be a bank, but I quickly discarded the idea. Since launch, the core of the business has not changed. What has changed is that Max was initially conceived as a pure B2C solution primarily focused on high net worth individuals. We focused on B2C because when we started, we thought the large banks and brokerage firms would not be so enamored of our mission. But we’ve learned over time that by building a product that was designed solely based on what was in the best interest of the customer, we ended up building a solution that is better for banks and wealth management firms, too.
FR: So Max’s transformation wasn’t related to high customer acquisition costs as is often the case with consumer-oriented fintech start-ups?
GZ: No, it wasn’t a function of customer acquisition costs because we have never spent money on advertising to acquire customers. The rapid customer growth we have experienced has occurred through word of mouth and referrals. However, we discovered that individuals who had heard about Max were reaching out to their financial advisors directly, and many of those advisors were then caught flat-footed. A client would call her advisor and say, “I would like to use Max for my cash, what do you think?” The advisor would say, “I’ve never heard of Max.” So instead, we decided that we’d be better off first educating the advisors, empowering them with knowledge of Max. Then they could reach out to the clients for whom they thought Max made the most sense.
FR: Does Max work for people sitting on cash-heavy brokerage accounts waiting for a selloff?
GZ: The average high net worth household in North America is holding 23.7% of their assets in cash. And 53% of those people say that their cash is being held in reserve to deploy when market opportunities arise. Our system uses the ACH network to transfer funds, which typically settles between one and three business days. That’s fast enough to bring cash back to a brokerage account in time to clear a trade. However, part of the beauty of Max is that our customers retain direct access to all of their online accounts, so if they ever needed cash on the same day, they could still access it directly. As ACH moves to same day settlement, fund transfers through Max will get even faster.
FR: Can you share any metrics to give a sense of Max’s growth and typical client?
GZ: We don’t disclose too much information about our members because we have very strict privacy policies. But the average Max member has linked about $500,000 of cash. The total deposits being optimized by Max have grown 187% over the last 12 months, with double-digit month-over-month growth.
FR: But even without knowing your absolute numbers, you are looking at a huge, untapped market, right?
GZ: Yes, absolutely. When we first started working with wealth advisors, we were signing up those managing $100 million to $300 million in AUM. Now we’re in discussions with RIAs who manage from $10 to $40 billion of AUM, as well as some of the largest private banks and wealth management firms in the country.
FR: Is it reasonable to one day aspire to have enough leverage with your online banking partners to negotiate special rates for Max customers?
GZ: Without disclosing too much about our future plans, I think it’s safe to say that we expect there will be some very interesting, special benefits for Max members that exceed what they might otherwise be able to achieve on their own.
FR: As you know, new rules pertaining to money market funds have gone into effect. Is this new regulation good, bad or neutral for Max?
GZ: I think what matters is whether these new rules are good for individual investors. Under the new rules, retail-held money market funds will be able to put up curbs on redemptions and impose redemption penalties of up to two percent during periods of financial stress. This means that money market funds are no longer a true cash equivalent. So yes, these new rules are good for Max because our solution delivers roughly three times higher yield than money market funds and provides full liquidity on a client’s cash.
FR: How does your security compare to the typical cash sweep technologies that exist?
GZ: We viewed security and privacy to be the two most important elements of the Max system when we were devising it. That’s why, from the outset, we built a strategic advisory board that included several key functional experts including Dr. Gary McGraw, who is the chief technology officer at Cigital. Cigital is one of the leading software security consulting firms, which advises 19 of the 20 largest banks in the world. Under Dr. McGraw’s guidance, we believe that we have built a system that is as or more secure than any of the banks.
FR: Turning to the competitive landscape, you are undoubtedly aware of the deposit brokers out there. What’s your take on their approach?
GZ: Yes, and their approach was novel a dozen years ago when it was devised, and it has served customers well. But our system is very different. We’re not a broker. We do not stand as an intermediary between banks and we don’t get paid by the banks for deposits. We operate independently with a sole focus on serving the individual depositor. As a result, we’re able to deliver higher yields to customers while giving them greater visibility and control over their accounts.
FR: So as far as you know, nobody has the same model that Max has?
GZ: That’s correct. Everyone else who we’ve seen in this space is a broker being paid by the banks, and it turns out that our business model is in many ways more advantageous to the banks than the traditional brokered deposit system.
FR: On that note, can you talk about how you settled on two basis points per quarter as your pricing strategy and if you have designs on incremental revenue streams?
GZ: The business model was very simple. We wanted to create a radically transparent, pure fiduciary solution for customers; a model where customers know that we are focused on their best interests and only their best interests. So rather than be paid by the banks for referrals or be paid for deposits, we decided that we’d be paid solely by the customer. That way there are no conflicts of interest.
FR: So over the course of a year, Max is earning about eight percent of the 100 basis points or so of added yield?
GZ: Correct. But what’s interesting is that Max is really a pure alpha strategy: higher return without higher risk.
FR: Or an arb?
GZ: You could call it an arbitrage. If you look at most of the alternative asset managers that are pursuing pure alpha strategies, their typical price is two percent of the total assets and twenty percent of the upside. Many people tell us that we’re charging too little for what we’re providing, since instead of charging ‘2 and 20’ we’re charging ‘0.08 and 0.’ We’re satisfied with charging too little for Max. Max is a scale business and we want to help as many people as possible.
FR: What could mess up the arb? Would negative interest rates or inflation potentially threaten the value proposition?
GZ: What’s driving the difference in yield between the traditional brick and mortar banks and the online banks is a difference in business models. When you take away the overhead associated with operating brick and mortar branches, you save about 150 basis points worth of costs. Today, these online banks are passing on the majority of those savings to depositors in the form of higher rates. So this arbitrage is really a function of newly evolving business models.
FR: But eventually, if most banks shifted towards an online-driven model, that would not be good for your business, right?
GZ: It would be great for depositors, as the incremental yield would accrue to their benefit. We believe that this differential in the market is sustainable in the medium-term to long-term because the large money center banks are still reliant on foot traffic into the branch to originate loans. And even in a world in which all banks are online-only, banks will always have different levels of appetite for deposits, which will continue to drive differences in rates that fluctuate over time.
FR: So you believe that the physical branch will remain a loss leader?
GZ: You might call teller services a loss leader much in the way that a supermarket might offer a low price on milk to bring people into the store. But we also believe that banking relationships are very sticky. With Max, we aren’t asking people to switch banks. We are simply supplementing a customer’s core banking relationship with additional institutions that are able to pay a higher yield. The client gets the best of both worlds: a high-touch, full service in-branch banking relationship along with the higher yield that’s available through the efficiencies of online banking.
FR: Let’s talk about Goldman Sachs’ Marcus. Do you think Goldman can become a sizeable player in the online consumer banking space?
GZ: The leaders in marketplace and online lending have built efficient online loan origination platforms. But without a balance sheet, they are reliant upon secondary markets to securitize the loans. By pairing the online origination piece (Marcus) with a deep balance sheet (GS Bank), Goldman is the first entity of scale to put both pieces together. I think it will be highly successful.
FR: A final question: I’m sure you’ve talked to many of your former colleagues who are still fighting the good fight as investment bankers. What advice do you give to investment bankers who want to get into fintech?
GZ: I loved being a banker, and I think there is no substitute for the intensity of that experience. But there is nothing more difficult and simultaneously nothing more personally rewarding than building something from scratch. Unlike investment banking, which is a 16 hour-a-day job, starting a company is an 18 hour-a-day commitment. You can’t turn it off. So you really have to have a passion for the underlying business. Absent that, there is no better risk-reward trade than being an investment banker.
FR: Thank you, Gary. I wish you great success in pursuing your mission.
GZ: Thank you very much, Gregg. It’s been a pleasure.
This interview has been edited for content, length and clarity.
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