Two years investing with Prosper peer-to-peer lending

For the last few years I’ve been scaling up my investments with the Prosper peer-to-peer lending platform. Since there is essentially no community information available (the Prosper forum on reddit has been silent for 7 years, and Bogleheads was even less help), I was accumulating datapoints from scratch. Now that I’ve spent some dedicated time on the platform, I want to share how investing with Prosper really works.

My investment parameters

As I mentioned back in May, I have Prosper’s “recurring order” function (not to be confused with “Auto Invest”) set up to invest in $25 increments in “AA”- and “A”-rated notes with yields of 10% and higher. This has two valuable functions. First, when I deposit cash in the account it is automatically invested as qualifying notes are added to the platform. Second, since interest and principal payments are added to the same cash balance, it keeps repayments from sitting idle and therefore contributes to compounding discipline. Whenever deposits or repayments result in $25 or more in my cash balance, it’s invested in the next qualifying note that’s added to the platform.

The ineffability of rates of return

At this point we have to make a digression into the metaphysical. Annual percentage yield (APY) is a common and useful metric of investment returns because, when properly calculated, it offers a like-for-like comparison between investment products.

If you read that sentence again, you’ll see “when properly calculated” is doing all the work, and in point of fact, APY is really only useful in a few specific contexts, like bank accounts and long-term zero-coupon bonds, where your entire balance earns the specified interest rate and interest payments are automatically reinvested at the same underlying rate. In other contexts you may calculate a sort of pseudo-APY to compare products, but it should not be confused with your actual, real-world rate of return.

This is obvious to anyone who thinks about it for a moment, so there are lots of alternate methods of calculating return which are useful in their individual contexts. The “SEC return,” which you often see in descriptions of mutual funds, is a set of formulae the SEC has authorized to be reported based on dividend payments. Likewise “dividend yield,” usually seen in stock and ETF listings, is a mechanical calculation based on the company’s most recent dividend payments and current share price.

Somewhat more exotically, you have the question of actively-traded funds and hedge funds which hold some of their investors’ money in cash. How should the return of these funds be calculated? Based on the total amount investors have committed to the fund, or on the actual investments the fund makes? Should investors count the cash held in a hedge fund waiting to be invested against their cash allocation or their investment allocation? Should their rate of return be calculated only on invested cash, or on the total balance held with the fund?

These questions aren’t mathematically hard, they’re hard because there’s no right answer: you should use the calculation that gives you the most useful answer for the question you’re asking.

This brings us to Prosper’s return calculation.

The Prosper return calculation

Before we continue, let me quote Prosper’s description of their return calculation at length. This return appears both on the app and desktop website (emphasis mine):

“Your Return is calculated using a formula where (A) the numerator is equal to the sum of all the interest received on active Notes, plus all late fees received on active Notes, minus all servicing fees paid, minus all collection fees paid, plus all net recoveries received on charged-off or defaulted loans, plus all net debt sale proceeds received on sold loans, plus all net sale proceeds received on Notes sold on Folio, minus gross principal losses, plus any investor promotions credited to your account; and (B) the denominator is equal to the sum of the amount of active principal balance outstanding at the end of each month since account opening. The results are then multiplied by 12 to get an annualized return. This gives us the ‘Return’ for your Prosper Notes.”

Within this paragraph we get a few answers to how Prosper answers the metaphysical questions I posed above. For example, we’re told that uninvested cash does not count towards the return calculation: only your invested cash (“active principal”) does. But the part I highlighted describes a different confusion you will encounter as you scale up your Prosper investments: invested principal counts towards your return calculation before a single payment is due.

Remember, Prosper makes individual loans to borrowers, and you are investing in a slice of those repayment-dependent notes. After a loan has become funded by investors, the money is distributed to the borrower. The borrower’s repayments start at least a month after you’ve put in your order for a slice of their loan. But until the first payment is made, your slice of the note counts only towards the denominator of Prosper’s return calculation.

This means Prosper’s return calculation will always be depressed by the amount of active principal not in repayment in any given month. This is a feature when it reflects a loan with late payments or that has been sent into settlement or bankruptcy, but it is misleading when it reflects an eventually-performing loan that simply has not begun repayment yet.

Your Prosper return gets more accurate as loans age into repayment

To illustrate this effect, I completely stopped making new deposits into my Prosper account in October, so that all my existing notes would have a chance to enter repayment (or become past due). Only money reinvested from repayments of interest and principal would affect the denominator of my Prosper return, and sure enough, you can see the return wobble depending not on the performance of my loans, but on the amount of my total balance that reflects new loans. This chart shows my Prosper return over 2024:

View fullsize

Those returns are recorded as:

• January: 10.58%

• February: 10.52%

• March: 10.53%

• April: 10.02%

• May: 9.05%

• June: 8.23%

• July: 10.19%

• August: 8.18%

• September: 9.19%

• October: 9.53%

• November: 9.04%

• December: 10.16%

The essential thing to understand is that this wild range, from 8.18% to 10.58%, does not reflect any underlying economic reality. It only reflects the amount of new principal invested each month, which contributes to the denominator of the return calculation, but is not reflected in the numerator until months later.

Calculate your own return based on mature notes

Fortunately, Prosper provides detailed account statements, which are usually available in the mobile app around the 5th or 6th of each month, and on the desktop website a bit later. These statements let you calculate your own rate of return depending on the metrics that matter to you. My preferred method is to base returns on the previous month’s “Principal Balance of Active Notes.” All of those notes should have entered repayment by the end of the following month, so it lets me focus exclusively on the interest earned on mature notes, disregarding uninvested cash and notes too new to have begun repayment. Here are my 2024 returns based on that metric (each month is shown as an annualized rate of return):

• January: 17.2%

• February: 12.8%

• March: 13.6%

• April: 15.5%

• May: 13.8%

• June: 12.4%

• July: 13.6%

• August: 11.3%

• September: 12.8%

• October: 12.3%

• November: 11.2%

• December: 12.8%

As you’d expect, the biggest differences between the return Prosper calculates and the return I calculate take place in the months where I’m purchasing notes most actively (July-September), and the smallest differences occur in the months I let my notes age into repayment (November and December), but my Prosper return will always be below my own calculation because Prosper will only show your return based on the entire lifetime of your account, and I have had my account for many, many years.

The significance of the early years, when I liquidated my notes on their resale platform at a loss (I was broke and needed the money), will be diluted over time but will never disappear from my Prosper return calculation unless and until they update their formula.

A note on “tax efficiency”

I am now required by the conventions of financial journalism to say something about tax efficiency, the idea that you shouldn’t care about the actual returns you earn from your investments, but rather how much of those returns go to your local, state, and federal governments.

I consider this a deeply unhealthy attitude that causes people to do preposterous things with their money, but the wisdom of our ancestors is in the simile; and my unhallowed hands shall not disturb it, or the country’s done for.

Interest payments on notes held in Prosper’s standard taxable account are taxed at your marginal income tax rate. Return of principal (78% of my December payments, for example) is untaxed, and losses of principal (bankruptcies, settlements, and charge-offs) are deducted from your interest payments to arrive at your total taxable interest amount.

One approach to tax efficiency might be a tax-exempt municipal bond mutual fund. Glancing at Vanguard’s list of state-based tax-exempt mutual funds, current SEC yields range from 3.14% for California (VTEC) and 3.83% for Pennsylvania (VPALX). Those yields are much lower than my returns to date on Prosper, but you can imagine someone investing on Prosper with a 50% marginal tax rate and 50% default rate ending up more or less breaking even between the two. My marginal tax rate is much less than 50% and my default rate is much less than 50% so I do not consider this to be a realistic concern. A high-income person investing in the riskiest loans is free to reach their own conclusions.

An approach I have more sympathy for is making Prosper loans in an Individual Retirement Account, which Prosper is set up to faciliate. Only cash can be contributed to IRA’s, so you can’t move your existing notes into an IRA, but you can contribute up to your annual limit and I assume you can move cash in from existing IRA’s, although I’ve never tried.

Traditional IRA’s allow you to deduct your contribution from your taxable income each year, but much more importantly allow your investments to compound tax-free inside the account. I do not know of a single person in history who has literally sold off their investments to pay their tax bill, but if you’re that person, then having your Prosper investments compound tax-free will save you the trouble of finding investments to liquidate to pay the taxes on your interest.

Another reason to consider this is that most investments people hold in their tax-advantaged retirement accounts are already quite tax-advantaged. Vanguard’s LifeStrategy Growth Fund (VASGX) only issued 2.3915 cents per share (0.054% of Net Asset Value) in short-term capital gains in 2024; the rest was taxable at the heavily-discounted long-term capital gains rate. Holding those long-term assets in a tax-advantaged account is a waste of the internal tax-free rate of return, which is best spent on highly tax-inefficient investments like Prosper loans.

The flip side is the difficulty of liquidating Prosper loans, inside or outside of tax-advantaged accounts. Once you have reached your risk tolerance for such loans, then you’d naturally want to turn off the reinvestment features and start moving the resulting interest payments into other investment vehicles. But tax-advantaged accounts, unlike taxable accounts, make this process onerous and increase the drag on returns of your uninvested cash.

To summarize, an IRA is the ideal place to hold Prosper loans because of their inherent tax inefficiency and the benefit of internal tax-free compounding, but actually doing so requires a level of sophistication and diligence that the overwhelming majority of people should not be expected to demonstrate.

Conclusion

I have much more to say about Prosper, which I surely will at a later date, but that seems like enough to chew on for now.

As I mentioned in my earlier post, the three most important risks to consider when investing with Prosper are platform risk (Prosper declares bankruptcy and your notes become unsecured claims against Prosper, not the individual borrowers), underwriting risk (Prosper got something fundamentally wrong when underwriting notes and they are in fact much riskier than they are purported to be), and macroeconomic risk (the notes are underwritten properly but an economic crisis drives even well-qualified borrowers into default).

Those risks are real. If they were not real Prosper would not offer returns 3-5 times higher than the risk-free rate on US Treasuries. But Prosper does offer such returns, and if you’re willing to bear those risks, you’re able to earn outsized (pre-tax) returns, until one or more of those risks comes to fruition.

If that happens soon, you’ll lose some or all of your principal. If that happens a long time from now, or never, you’ll make a killing. And that, to me, is the essence of investing.

Robinhood never understood what their appeal was

[edit 11/25/24: a trusted reader in the comments has the 3% cash back credit card, so it does really exist]

I’ve written a number of times about Robinhood, the free stock-and-ETF trading app, over the years, and back in March I wrote about what I described as “one of the best all-in-one financial products out there.” I was wrong, so today I want to explain both how I was wrong and why it matters.

Recap: the Robinhood Gold pitch

When I wrote that post, I described the new $5-per-month Robinhood Gold service as consisting of two unrelated components:

• a 5% APY interest rate on uninvested cash

• and a 3% cash back credit card (this product, to the best of my knowledge, still has not been launched, so set it aside for now).

Some people pointed out that this product also includes $1,000 in free margin in your investment account, but as will become clear, that is not worth nearly as much as it sounds. I would go so far as to say it is worth nothing, or less than nothing if it causes you to enroll in Robinhood Gold.

Market rates versus administered rates

My first mistake was misunderstanding how Robinhood markets the interest rates on uninvested cash, which illustrates the difference between “market” rates and what I call “administered” rates.

A “market” rate is like the one set on your credit cards or adjustable-rate mortgages: your loan agreement specifies a particular market index reported in some reputable newspaper and says you’ll pay that rate plus-or-minus an adjustment based on your down payment, credit rating, or the phases of the moon. The point being, the rate will change but it will change in a specified way known in advance: when the published market rate rises or falls.

An administered rate is set by the policy of the institution offering the investment or holding your funds. It is also subject to change, but it is set to administrative change, not mechanical or contractual change.

For example, US government Series EE savings bonds have an administered interest rate of (at least) 3.53% APY: the bond is guaranteed to pay out twice the invested amount after 20 years. If interest rates rise above 3.53% APY while you’re holding the bond, you also have the option to cash it out (with a penalty) and invest in the higher-yielding asset instead.

The rate on those bonds is administered by the US federal government, but in fact a lot of institutions work this way, normally as a way to gain customers. A bank or credit union can lose a little bit of money by paying above-market rates if their new customers also move in their lower-rate deposits or, even better, take out higher-interest loans like credit cards. This type of account is often marketed as a “Rewards” or “Kasasa” checking account, and I keep an eye on them at depositaccounts.com (although I’m sure there are other sources; I have no relationship with that website, I just use it).

Robinhood offers bad market rates, not good administered rates

In my post on Robinhood Gold I said, “The 5% APY offered on balances up to a million or so dollars of insured deposits[…]is competitive, but it’s not best-in-class; Vanguard is paying 5.28% on uninvested cash in their own brokerage’s sweep account as of today.”

But while Robinhood was advertising the Gold product as offering 5% APY, that was not true. It was just advertising its current below-market interest rate, and when interest rates went down, its below-market interest rate also went down.

This has happened twice since my post, and Robinhood has continued to misleadingly advertise the product in this way: first “earn 4.75% APY on your cash,” and now “earn 4.25% APY on your cash.”

Vanguard’s default federal money market settlement fund has a 4.58% 7-day SEC yield as of November 22, 2024. In other words, Robinhood started out earning less than Vanguard, and instead of becoming more attractive as an administered rate it has rushed ahead of them to become less attractive as a (below-)market rate.

The Robinhood Gold fee is administered

Hopefully the problem is now coming into focus: Robinhood charges a flat $5 monthly fee, but pays a fluctuating rate on uninvested cash. At a 5% APY, it takes $2,400 in uninvested cash to break even with the monthly fee. At 4.25%, it takes $2,824.

As interest rates fall and fees stay steady, it takes more and more uninvested cash to merely cover the fees on the account, before it even makes sense to start comparing interest rates.

You cannot hold both uninvested cash and use margin

The final issue, and why I didn’t bother mentioning it in my March post, is that you cannot take advantage of the free $1,000 in margin offered as a benefit of the account while also taking advantage of the interest rate offered a benefit of the account.

You can think of this in two different ways:

• the first dollar of a stock or ETF you buy always comes out of your uninvested cash;

• and the first dollar you receive when selling a stock or ETF is always used to repay your margin first before it begins to earn any interest.

Conclusion: don’t sign up for Robinhood Gold for any of their advertised benefits

I like to think that what makes this site different is that I always try to be as honest, straightforward, and accurate as possible, so lest any of my beloved readers get misled: I plan to continue paying for Robinhood Gold.

I’ve been experimenting with Robinhood extensively and have found some specific uses (unrelated to investing) which I’m not able to describe in detail right now, but which I’m happy to pay $120 per year to continue experimenting with.

What I certainly won’t be using it for is to hold my uninvested cash: cash is too valuable to hold with people whose business model is to make sure you get as little value for your money as possible.

As for investing with the account, I’ll be using $1,000 in cash and $1,000 in margin to partially or wholly offset the annual fee, as well as hold the free stocks they give me when people (very) occasionally use my personal referral link.

Another improvement, and giving up on Venti, the gimmicky travel savings account

I’ve written before about signing up for Venti and about some improvements they made after reading my initial post. To recap, you deposit money through them with a partner bank, and you earn a notional interest rate on your deposit of 9% APY (the earning rate used to vary by account type, but they seem to have suspended that for now). The “interest” is credited as “points,” which can be used through through their booking portal to pay for part of your flight and hotel reservations.

I recently finished withdrawing my cash and redeeming the last of my points through Venti, and don’t plan on adding any more. I’ll explain why in a moment, but first I want to mention an additional feature they added recently.

Topping up cash interest with points

On July 12, 2024, I got an e-mail announcing Venti was partnering with credit unions to offer points on top of the cash interest earned on your self-managed credit union accounts, in addition to the points you earn on your “Venti Classic” balance. They call this new “cash-and-points” earning option “Venti Pro.”

As a reminder, your Venti Classic balance is held at Veridian Credit Union, but can only be managed through the Venti interface: you’re not given routing information to make deposits or withdrawals, and in fact you’re not given any information about “your” account at all. That balance earns 9% APY in Venti points, which can only be redeeemd through their hotel and airline booking portals.

Venti Pro allows you to earn Venti points on up to $25,000 in savings balances on your external accounts at their partner credit unions. They currently have four such partners:

• Wings Credit Union

• Meriwest Credit Union

• MSU Federal Credit Union

• and Georgetown University Alumni and Student Federal Credit Union.

You continue to earn cash interest as usual on those externally held accounts. But by linking them to your Venti account (through one of the usual third-party services), you’ll also earn 3% APY in Venti points on your balances up to $25,000. The program is sparse on details, so there’s no indication of how many linked accounts you can earn Venti points on, another of the many oversights Venti has shown since they launched.

The page also includes this tortured sentence: “This promotional offer is limited to new credit union accounts created within the last 30 days of your Venti account.” I’m sure this makes sense in the original Estonian, but I can make no sense of it in English.

This is such an obvious extension of Venti’s original business model that I assume it was part of the plan all along and they have been working out the kinks, either on the business or technology side. Just like with Venti Classic, credit unions pay Venti to harvest deposits for them. Venti then divides that payment by the (lower) amount they value Venti points at on their books, and turns the result over to their customer in points.

To illustrate this with some sample numbers, if in a Venti Classic account Veridian pays Venti 3% on an uncapped balance, and Venti values their points at one third of a cent each, they pay customers 9% APY on the balances they manage.

If Venti Pro credit union partners pay Venti 1% on new balances up to $25,000, then the same transformation results in the 3% APY they pay on Venti Pro-linked balances. This is surely also the reason for the tortured sentence I mentioned above: Venti Pro partners only want to pay the finder’s fee on new balances; they don’t want to pay another 1% in interest fees on existing accounts!

The MSU Federal Credit Union only pays the advertised rate on the first $999.99 in savings, and I can’t find the avertised GUAS FCU savings rate at all, but the Wings Credit Union savings account is nationally available (with a $5 membership fee to some non-profit). It offers 4.75% APY, with a $25,000 minimum opening balance and no interest earned if your average daily balance is below $25,000. The final option, Meriwest, offers 5.5% APY on the first $10,000 of your Premier Savings balance, but enforces its geographical requirements (in my experience), so is probably most interesting to folks who live in Northern California or Pima County, Arizona.

Is it worth opening a Wings account to earn additional Venti Pro points? My answer is a qualified yes: it is if you want to deposit exactly $25,000 and value Venti points at or close to their nominal value of $1 each. 4.75% APY in cash and 3% APY in “travel funds” is a great return on $25,000 in self-managed, insured cash.

But it’s not for me.

Goodbye to all that

Perhaps the most essential characteristic of a travel hacker is being game, and I’m game for just about anything. I once took the train to Philadelphia to open a prepaid debit card at a check-cashing place to earn 5% APY on the linked savings accounts (remember, interest rates were 0% for close to a decade). But when you’re game for anything, you also have to be unusually alert for warning signs.

I’ve mentioned various warning signs about Venti that were flashing yellow from the start: the slim-to-nonexistent documentation and the inconsistent descriptions of the various products did not make me terribly optimistic about the product or its long-term future.

But after all the warning signs, my red light only came on during my first Venti redemption, when I booked a flight deliciously close to the $250 point-redemption level (you can use points to pay for the first $250 of flight reservations). I booked a $258.20 flight, paying $250 with Venti points and $8.20 with my credit card (an option they added after my first post).

As soon as the flight populated to my American Airlines account, I saw that I had been booked into Basic Economy, even thought the checkout page and confirmation e-mail only said my ticket was in Economy. Since I wasn’t sure about the dates of the flight, and needed to maintain flexibility, I canceled the flight immediately through my American Airlines account. Since I’d booked the flight just minutes before, it was obviously eligible for a refund, and sure enough the $8.20 was refunded to my credit card immediately. Venti was another matter.

First, a confused Markus (who I assume runs the company, since he’s the only person I’ve ever interacted with) asked whether I had canceled my flight. I thought this was a nice personal touch, and assured him I had and mentioned why (being unable to identify a Main Cabin flight).

He replied and explained that “It skips because our broker does not provide that step for one-way flights.” Interesting, but none of my business.

He then replied a few days later and assured me that it was my user error, since he thought the website made it clear the reservation was in Basic Economy. Again, agree to disagree, none of my business.

But then Venti didn’t refund my points, which made it my business. So, I pulled my money out and redeemed the last of my points. I’m not going to war over $250 in travel credit, but if $250 is worth $83 to them (in the illustration above), it’s worth $0 to me if I can’t refund a refundable ticket, and interest rates are too high to earn 0%.

Conclusion

I’ve strived while writing about Venti to be gracious to a fault. A group of entrepreneurs struggling with English started an American company in one of the most regulated sectors of the economy to use technology to squeeze some arbitrage out of the banking system in a somewhat novel way (although it is in some ways patterned on the much-closer debit card relationships between Delta and Suntrust, Alaska and Bank of America, and American and UFB Direct).

And after all this, I still do not think that Venti is a scam. I think they really do deposit your funds with Veridian Credit Union. I think deposits really are federally insured up to the relevant maxima. But banking is an industry that is built on trust, and when you run out of trust, you run out of money pretty quickly afterwards.

Further reading:

• What Happens When Your Bank Isn’t Really a Bank and Your Money Disappears?

• Your Online Lender May Not Be a Bank. Here’s How to Keep Your Money Safe.

Quick hit: mobile balance loads trigger refreshed Amex personal Gold credits

I applied for an American Express Gold card back in April so have been following especially closely the recently announced changes to the card: a $325 annual fee, $50 semiannual Resy credit, and $7 monthly credit at Dunkin Donuts.

I already knew that purchases at any Resy restaurant would trigger the semiannual statement credit because of my experiments with my American Express Delta Business Platinum card, but I wasn’t sure whether the $7 monthly credit could be triggered without going into a Dunkin location.

So, I bought $7 of credit in the Dunkin Donuts app on Monday, July 29. On Wednesday, July 31, I received an e-mail alerting me that I’d received a $7 statement credit for the purchase.

I’m not a great consumer of either fast food coffee or fast food donuts, but as the saying goes, I’ll take any bank’s money as long as they’re giving it away. This benefit is already live, so start using it today.

Quick hit: no, Freedom family product changes don't reset your quarterly bonus spend

One of my favorite techniques is requesting product changes from Chase personal credit cards where I received a signup bonus to Freedom cards that earn 5 Ultimate Rewards points per dollar in their quarterly bonus categories, on up to $1,500 in spend per account.

This technique doesn’t get written about as much as it used to because most travel hackers prefer to chase signup bonuses, which quickly puts them over Chase’s rules for approving personal credit cards.

As a reminder, you usually can’t get a Chase signup bonus if you already have a specific card, or have received a signup bonus for it in the last 24 or 48 months, depending on the card. One way to start that clock ticking again is to request a product change to another card. My current preference is for the Freedom Flex card, since it combines the quarterly bonus categories of the Freedom (not available for new signups) and the uncapped 3 Ultimate Rewards points per dollar spent at drugstores of the Freedom Unlimited.

I had done this a number of times in the past, so I was sitting on 3 Freedom cards on which I had already reached the quarterly cap when I applied for and completed the minimum spend requirement on my new Freedom Flex. Once that signup bonus posted, I called in and requested product changes from my Freedom cards to Freedom Flex cards. Note that when doing this a new card and card number will be issued, so be sure to keep an eye on any recurring bills that are charged to your cards.

What I was unsure of was whether these product changes would reset my quarterly bonus earning cap, because I had never changed products within the Freedom quarterly bonus family; I had only moved to and from quarterly bonus cards, not between them. If product changes reset the quarterly bonus counter, then during promising quarters you could max out each card twice, as a kind of backdoor “upgrade bonus.”

But, regrettably, the quarterly bonus counter was not reset by my product change, so even though the Freedom Flex cards have new numbers, it appears everything else about the old Freedoms was saved and ported over to the new accounts.

Impressed by first MaxMyPoint hotel award alerts

A few weeks ago I read a post comparing various hotel award alert tools that concluded MaxMyPoint was the only one that did the job (since the internet is no longer searchable I can no longer find that post; if you wrote it, let me know and I’ll link to it!).

Years ago I used and recommended Seth Miller’s Hotel Hustle to find award availability optimized by point value, but the functionality of that tool died before too long and we were back to searching for award space manually.

Fortunately for me, I actually had a very specific need for an award alert, and to my shock, MaxMyPoint met it perfectly and saved me a few hundred dollars by swapping my paid reservations for award nights.

Two missing nights in Prague

The last time I visited Prague, World of Hyatt had finally secured a property in the city: the Lindner Hotel Prague Castle. To my genuine surprise and delight, it was a Category 1 property, costing between 3,500 and 6,500 points per night.

Compare this to the other obvious properties in Prague. The Hilton Prague and Hilton Prague Old Town, both great hotels I’ve stayed at many times, have standard pricing between 40,000 and 50,000 Hilton Honors points, or roughly $200-250 in value. The three centrally-located Marriott properties all cost 33,000 points and up. IHG starts in the same range: they’re non-starters.

So Hyatt giving away nights for $65 was pretty exciting. The property is located in the heart of Hřadčany flush up against Prague Castle, so while it is in a tourist area, it’s not actually an area where most tourists stay, which makes it remarkably quiet in the evening once they decamp to their hotels in the city center.

I had a simple problem: my first, third, and fifth nights were available on points, my second night was available with cash and points (for a premium room), and my fourth night was only available with cash. So that’s how I booked it: five reservations for five nights.

Then I set a MaxMyPoint alert for the entire 5-night stay, on May 17.

On May 27 at 3:22 am, I got my first alert (subject line “Your Hotel Alert Update”) saying the nights were available. Perhaps because the alert came while I was asleep, by the time I checked availability it was no longer there, if it had ever been.

On June 4, at the perfectly sensible hour of 12:08 pm, I got my second alert. This time, awake as I was, I immediately popped over to the Hyatt app and saw the alert was correct: all five nights were available. I canceled my existing 5 reservations (technically risky, but I didn’t want to transfer over another 26,500 Ultimate Rewards points if I didn’t have to) and was able to successfully complete the reservation.

Then, as if icing on the cake, MaxMyPoint sent another alert at 8:32 pm that the award space was no longer available, a charming free reminder that they had done their job for me.

Conclusion

As indicated by the history of Hotel Hustle, it’s not a great idea to let your own skill and intuition atrophy every time new tools come along to replace them, because that puts you at the mercy of the toolmaker. But it’s equally foolish to ignore when tools are introduced that you can integrate into your workflow to make your life easier, and MaxMyPoint gave me the information I needed just in time to take advantage of it. Kudos to them, and I’ll be a repeat (non-paying) customer as long as they keep it up.

Quick hit: two more free options for manufacturing debit transactions

I wrote recently about some tools I use to manufacture debit card transactions in order to trigger the highest rates on rewards checking accounts (often but not exclusively marketed under the “Kasasa” brand).

Doctor of Credit then joined in the fun, noting that one of the easiest options, adding credit to your Amazon balance, has become onerous to the point of uselessness as they raised the minimum balance reload amount to $5 from the previous $1 minimum. Unless you’re a big Amazon spender, you’ll quickly end up with more money in Amazon credit than in interest.

With that in mind, I ran a few more experiments and found two more possibilities that are working for me for now. Note that individual banks and credit unions may code transactions differently so you’ll need to verify for yourself whether these meet the transaction requirements for your accounts.

Robinhood

Robinhood, the free stock- and crypto-trading app I write about occasionally, allows you to fund your cash balance using a debit card with no fee and a minimum deposit of $1. The money is immediately available in your account to withdraw or invest, as far as I can tell, and Robinhood does support fractional share ownership so you could even use this technique to drip some of your interest into the stock market, one of many ways to exercise compounding discipline.

PayPal

PayPal also allows you to add money to your balance with debit cards, again with a minimum of $1. PayPal in principle supports multiple cards per account, so you could use a single PayPal account to meet the debit requirements on more than one high-interest accounts. However, since PayPal also doesn’t have much in the way of identity verification, if you’re considering this I would personally suggest using a new PayPal account for each debit card you plan to use, so that if one account is frozen or closed it won’t necessarily impact the others you’re using.

Conclusion

Two final quick points. First, on the account I’m currently experimenting with, both Robinhood and PayPal transactions post as “signature” transactions so should count towards my qualification requirements, but that’s something that you’ll need to monitor for each of your accounts and each of your methods. No one else can do it for you and datapoints age fast in this game.

Finally, as hinted at above, with any service you’re experimenting with to manufacture transactions you need to keep in mind two parameters: how many accounts can you have, and how many cards can you link to each account? Venmo works great for my round-up savings account because it allows transactions under $1, but I can’t link additional debit cards. The Cash app and Robinhood (with their $1 minima) only allow one debit card to be linked at a time. PayPal is more flexible on the number of cards you can have linked, but many of us have horror stories about past account closures (even though mine ultimately ended with a fat settlement check).

"How do we scale this?"

One of my favorite questions travel hackers ask is “how do we scale this?” The implicit answer is, usually, “we don’t.” Contrary to what economists pretend to believe, the world is in fact chock-full of arbitrage opportunities. What is true is that most of those opportunities are difficult or impossible to scale.

Here’s my personal breakdown of techniques used to increase scale, and the obstacles to doing so.

Brute force and constant returns to scale

The most obvious scaling strategy is to multiply your own effort. If you have a technique that generates a known amount of value per hour you spend on it, then you can get twice as much value by spending twice as much time, usually up to some limit. In a simple example, if it takes you an hour to manufacture $10,000 in in-person spend at one grocery store, and you have identical access to five grocery stores, then you can spend 5 hours and manufacture $50,000.

Automation and transformations

A lot of high-volume travel hackers focus on automation as a way to scale their techniques, and automation is one of the many tools I put in the broad category of “transformations.” Transformations are when the design of programs can be understood differently by the customer than by the business in order to scale techniques, either to get a higher return from the same amount of time or money, or to reduce the time or money needed to get the maximum return.

To give a classic example from my own practice, for many years the US Bank Flexperks Travel Rewards Visa offered 3 points per dollar spent on charity, worth up to 6% when redeemed through their travel portal. They also coded Kiva, the microlending website, as charity. People were thus able to earn as much as 6% in travel on loans of as little as a few months, and many of us did, transforming a modest discount on charitable giving into an extremely high-yield investment vehicle.

A more contemporary example is the rewards (often branded as “Kasasa”) checking accounts that offer some of the highest-earning, most liquid savings vehicles. They typically require 12-15 debit card transactions along with a direct deposit in order to earn their advertised rates. Meeting these requirements as they intend would seem to require, as they intend, reorienting your entire financial life around doing so. But when you’ve broken down the requirements to their individual parts, you can transform meeting them into a matter of a few minutes per month.

American Express cards have acquired a reputation of being “coupon books,” but a lot of the pain of redeeming those coupons (and getting back the value of your annual fee) can be transformed into painless routines:

• American Express Hilton Honors Surpass cards can be used to buy $50 in physical gift cards on the first day of each quarter to trigger the quarterly statement credit;

• Monthly statement credits for Resy and rideshare services or Shake Shack and Grubhub can be triggered by gift cards or subscription services.

All these are transformations: the company wants them to dominate your thoughts, but a few simple calendar reminders can guarantee you maximize the value of each credit without having to keep track of any of them individually.

Teammates, comparative advantage, and the benefits of trade

I call teammates everyone you partner with in order to take advantage of different circumstances, what economists call your “comparative advantage.” These can take all sorts of forms: some people have access to grocery store manufactured spend while other people have access to gas stations. Some people have more Chase cards than they’ll ever be able to maximize the value of, while others pile into American Express cards and are blocked from signing up for new Chase cards.

A lot of bloggers have a kind of “view from nowhere,” where every person has access to every credit card and each can follow prescribed steps from scratch, but it takes almost no experience to know that’s absurd. Every individual travel hacker’s situation is different, and it takes only a little more experience to identify which parts of the game you’re interested in pursuing most intensively. Finding other people with complementary interests is a way to scale each of your efforts by getting the most value from the parts of the game you’re most interested in.

The most obvious candidates for teammates are family members, precisely because there’s usually not any need to “divide” effort or results at all: everyone gets to go on the family trip, regardless of whether they made a “fair” contribution to paying for it at all. Some bloggers have affected to call these teammates “Player 1,” “Player 2,” and so on.

Employees

One of the most common questions people ask when they find out about the existence of travel hacking is, “that sounds great, but I don’t want to do it, can I just pay you to do it for me?”

There are people and situations that make this possible, but fewer than people wish or expect. The main problem is that almost anything you can train people to do on your behalf, they can do on their own behalf. You are the middle man, and unless you have both knowledge and money that are impossible to steal, your employee will quickly get the drift and go to work for themself.

The Verge had a humorous story about this very phenomenon in my home state of Montana, where resellers would continuously set up drop-shipping warehouses only to find their employees, having mastered the skill of packing and unpacking Amazon shipments after a few months simply set up their own tax-free reselling businesses.

Readers as force-multipliers

Another way to scale a technique is simply to share it. This has all the advantages of the techniques above.

Brute force techniques will have more people applying more brute force and yielding more benefits.

If you know how to transform a technique from difficult to hard, then more people will save more time and effort.

If you know how to trade personal or regional advantages with other people, then telling them how will result in more benefits for everyone in those situations.

And if you tell people how to hire employees to solve their problems, then more people will have their problems solved and more people will be employed.

The problem, of course, is that you don’t get a cut. What’s up to you is how big of a problem that is.

The Tesla Protocol, Boeing, and the regression to the minimum viable product

One of the most striking stories I’ve heard about Tesla vehicles had nothing to do with exploding cars, drowning shipping magnates, or spontaneous highway shutdowns. It was a simple tweet from a Tesla enthusiast and Elon Musk fan praising the third vehicle they’d been sent from the factory for having the “fewest defects so far,” and deciding to keep the car.

The context is that when you order a Tesla (at least back then), it shows up at your door a few months later and you have to decide whether to accept it or not. If you don’t accept it, you go back on the list and have to wait another few months for them to send you another one, when the process is repeated.

What made the tweet so memorable is the inversion of what I grew up considering the “normal” American shopping experience, and the mirroring of typical descriptions of the Soviet shopping experience. I’m a bit too young to have experienced Soviet shopping for myself, but the potted story handed down to students today is that goods in the Soviet Union were stamped with the date they were produced. Goods made at the beginning of the month could be expected to more or less meet the product standards, since at the beginning of the month factories had all the necessary materials and workers. As those ran out over the course of the month, factories relied more and more on improvised and makeshift replacements, so by the end of the month goods hardly worked and had to be put into working order by the customers themselves.

The minimum viable product

What our financier overlords call the “minimum viable product" is the earliest stage of a product that some consumer, somewhere, is willing to buy. The original iPhone is a classic example, in that it didn’t work very well for anything, but it turned on, you could check your e-mail if you were patient, browse text on the internet if you were very patient, and even make phone calls. The fact people were willing to pay money for such a tenuously-useful product gave Apple the information they needed to invest in the product line and give us the slightly-better-functioning smartphones we enjoy today.

The early Tesla models seemed to share this pattern: they turned on, they charged, they got you to work most days, and people were willing to pay money for them, giving Tesla the information they needed to raise more money and invest in additional electric vehicle lines.

The immiseration of the consumertariat

Marxist economics describes a process under capitalism known as the “tendency of the rate of profit to fall.” This is often confused with an empirical claim that the rate of profit is falling, but this is just a misunderstanding. The rate of profit can stay steady or rise under capitalism, as long as the tendency to fall is counteracted in some way.

One standard Marxist explanation for how the tendency is counteracted is through the intensification of labor. By intensifying the labor performed by workers (longer hours, lower wages, more erratic scheduling), more surplus value (value added by workers above and beyond that required for their own maintenance and reproduction) can be extracted per worker, which can offset or more than offset the underlying tendency.

The tendency of the rate of profit to fall is experienced most viscerally by capitalists and workers, because it is their respective jobs to fight for and against the intensification of labor. But both capitalists and workers of course have another role in the economy, which is as consumers, and it is also experienced there in what I call the immiseration of the consumertariat.

The regression to the minimum viable product

Remember our story about the iPhone, where early adopters of an admittedly crappy product paved the way for the cheaper, slightly-less-crappy products that are in wide use today. But finance capital is indifferent to both product quality and popularity: instead of using early consumer interest to improve products and services over time, the consumer product or experience can just as easily be made worse, as long as the cost savings exceed the lost in revenue.

The result of this process is a tendency to regress to the minimum viable product. That minimum product is different in different industries, of course, and is highest not where consumers are pickiest but where regulation is strictest. Gasoline, for example, is a consumer product that is so strictly regulated no one thinks twice about buying it from an unfamiliar station in a location far from home, and consequently the measures taken to combat the tendency are primarily taken out against workers in the trucking and retail sides of the industry rather than against consumers themselves.

Boeing’s past decade of aviation disasters illustrates the horrifying consequence of misjudging where the minimum viable product is. The developed world had allowed itself to be convinced that aircraft were as tightly regulated as gasoline, when they turned out to be as tightly regulated as electric cars.

Workers have an obvious role to play in countering this tendency through labor militancy. A good illustration comes from right here in Washington, DC: the housekeepers union at the Washington Hilton fought to bring back a daily housekeeping policy. Note that the housekeepers do not claim to be “protecting consumers” or anything like that. They’re protecting their members’ income by ensuring that as many housekeepers are scheduled to work as necessary to clean every occupied room every day. But as a mechanical consequence of that, customers experience more frequent and more thorough cleanings.

Making housekeeping a dignified job is not and should not be free. The higher quality customer experience will come from some combination of lower profits for finance capital and shareholders and higher prices for customers.

The duty to complain

Customers also have a role to play here that I call the duty to complain. Customers have a lot of power not because they’re the source of businesses’ income, but because they can make it expensive to cut costs.

The cliche people joke about online is the self-checkout machines where all your produce can be turned into iceberg lettuce with the push of a button, but you don’t need to steal from grocery stores to fight the regression to the minimum.

There was an affiliate blogger who got a bad reputation for finding everything wrong with every plane he got on in order to get miles in compensation for his inconvenience, but for all I dislike about them, I find no fault in this behavior. By making it expensive (or at least not cost-free) to shirk routine maintenance, they were unwittingly doing their part to counter the tendency to employ as few mechanics as possible and let the state of the fleet deteriorate back to the minimum viable product.

The duty to complain should be distinguished from mere nostalgia. I’ve heard the story about the olives in the airline salad countless times, but if you like olives in your salad that much I’d suggest bringing some from home rather than complaining to your flight attendant. If your seat doesn’t recline, on the other hand, then alerting the flight attendant and having it recorded for repair is a duty: one-off maintenance is expensive, and the more of it airlines are forced to do, the less cost savings they’ll realize by cutting routine maintenance.

Conclusion

I also want to be careful to distinguish what I’m describing from the consumerist, neoliberal exhortation to “vote with your dollar.”

Most people do not have the luxury of choosing between multiple internet providers or going without internet, but the more people complain to Comcast the more expensive it is to offer unacceptable service.

Most people don’t have more than one or two airlines to choose from on most of their trips, but by insisting on the maximum compensation for delays, lost bags, and faulty equipment, they can make it as expensive as possible to badly run the airline they’re forced to fly.

And, obviously, there’s a difference between complaining and being rude. The point of complaining is to impose costs on the owners and managers of businesses for mismanagement, not to make miserable the workers doing trying to implement those policies.

Manufacturing transactions is harder than you think

There are countless methods of manufacturing credit card spend, but the basic principles are simple: generate a credit card purchase (usually at some cost), liquidate the purchase back to cash (usually at some cost), and use the cash (plus any costs paid) to pay off the credit card balance. If you generate more in credit card rewards than you pay in costs, the technique is profitable.

In some cases these techniques are still profitable to the banks and merchants, and in others they’re unprofitable but travel hackers are too small a share of customers to be worth completely rooting out, so only half-hearted and incomplete efforts are made to remove the very hardest hitters.

A central feature of credit card manufactured spend is that it relies on spending as much as possible: more spend equals more profit. Debit card manufactured spend is often just the opposite: the goal is to generate transactions, not spend, and this creates surprising difficulties.

Why manufacture transactions?

There are a few main reasons you might want to manufacture debit card transactions. Some accounts charge fees for inactivity, and a $0.01 debit card transaction is enough to avoid the fee.

Other accounts, like the Consumers Credit Union Rewards Checking account that I use as my petty cash account, require a certain number of debit transactions to trigger their higher interest rates. Note that there are other, higher-interest-rate options available; I find DepositAccounts.com quite reliable for tracking them.

A product that, as far as I know, never took off in the travel hacking or personal finance community is the round-up savings account. These accounts have high interest rates but can only be funded by “rounding up” your change on debit card purchases. To achieve a meaningful balance in the account, it’s necessary to make an arbitrary number of debit card transactions with a cent value as close to 1 as possible, resulting in a 99-cent deposit.

Why is manufacturing transactions so hard?

I found it a bit counter-intuitive at first that manufacturing transactions profitably is as complicated in its own way as manufacturing spend. In both cases, the issues come from the fact that we’re using tools we don’t control for purposes they aren’t designed for. Here are some of the main problems I’ve encountered.

• Per-transaction costs. While many financial services have lower fees for using debit cards than credit cards, that’s primarily by charging flat fees rather than lower percentage fees, and flat fees make manufacturing transactions more expensive.

• Transaction minimums. A lot of options require transactions of at least $1. This is an obstacle to scaling, since even if you’re recuperating 100% of your transaction value, the larger each transaction must be, the more money you need to have tied up in the system at any one time.

• Processing rules. If a service processes your transaction as "PINless debit,” instead of as a credit card, then it may not count towards monthly transaction requirements. For round-up transactions, there may be rules about how far apart transactions have to be spaced.

• Closed loops. A lot of obvious options do work, but the money goes into a closed ecosystem where it has to be spent. Your Amazon gift balance can only be spent at Amazon, payments to your electric company have to be spent on electricity, etc.

• Automation. Arbitrage opportunities are so persistent not because they’re particularly complicated. Most of them could be learned by a person of average intelligence over the course of a light lunch. The reason they last so long is that most people already have a job and don’t want another one. Automation is a solution, but researching ways to safely automate large numbers of financial transactions is yet another job.

These constraints can interact with each other as well. Your cable provider might allow you to automate payments with a minimum of $1, which looks like a tidy solution until you realize that your cable bill can only be spend on cable, which puts a soft ceiling on the number of transactions you can generate with that method each month.

Here’s a roundup of the options I’ve looked into and some thoughts on each.

Plastiq (grandfathered)

I’ve used the Plastiq bill payment service on and off for years now. It’s changed so much that instead of using it overwhelmingly to manufacture spend, I now use it primarily to manufacture transactions. Under their old pricing model, using debit cards had a low fixed fee, so I scheduled twelve $1 payments per month until sometime in mid-2026. If I fall into a coma, at least my money will still be earning 3% APY.

As far as I can tell it’s no longer possible to get access to the old pricing, but this highlights the kinds of feature you want to look for as these services continue to pop up: low per-transaction price (I pay $0.01 per transaction, so $0.12 per month), easy liquidation (the $1 “payment” gets deposited into another account a week or so later), and long-term automation.

Peer-to-peer payments

I’ve had great success manufacturing round-up savings transactions with Venmo. They have a $0.01 minimum transaction and no fees for debit cards. The $0.01 has to go somewhere, and I’m not comfortable running multiple accounts and risking losing access to the tool entirely, so I send it to another person. This does generate a lot of annoying e-mails, so you probably want to set up some filters so those e-mails don’t drove you or your teammate crazy.

Cash App works as well, but has a $1 minimum transaction, which makes it a cumbersome way to generate round-up transactions. It works well for manually generating monthly transactions, so I do use it to meet the 15-monthly-transactions requirement on my Andrews FCU Kasasa Cash Checking account to earn 6% APY on up to $25,000.

Neither option has built-in automation. There used to be a way to interact with the Cash App ecosystem by text message, which would be a convenient way to automate transactions, but I couldn’t easily find any current documentation of that feature so my guess is they retired it at some point.

Store credit

I reload my Amazon gift card balance $1 at a time to meet some of my monthly transaction requirements, and I was pleased to discover that my $7 monthly Prime membership is charged first against my gift card balance, so I don’t need to worry about storing up too much unused Amazon credit.

I say store credit instead of Amazon credit because a lot of people have several services that have this feature. If you can load your transit pass, Starbucks balance, or cell phone balance $1 or $0.01 at a time then you can meet transaction requirements without the risk of locking up money you’ll never end up spending.

Conclusion

I understand that people feel themselves at a constant shortage of time and attention, even for the things that give them great joy and satisfaction. They are not only uninterested, but often almost offended by the suggestion they’d waste those precious resources on the essentially meaningless task of pushing buttons on their phone for a few minutes a day.

Believe it or not, I don’t find it especially fun or meaningful to push buttons on my phone for a few minutes a day either. But that’s a pretty high bar to hold every minute of your day too. I don’t find it especially fun or meaningful to brush my teeth either, but I’d like to still be chewing with a few originals by the time I’m 80 so I do it anyway.

Whether it’s earning the highest interest rate possible on my liquid cash in high-yield checking accounts, or dumping as much money as possible into my best savings accounts, I just don’t mentally categorize it as something that’s supposed to be fun. You fill out your timesheet in order to get paid, not because it’s going to bring about world peace.