New and Old Ideas For Fixing Banking

Kirsten_Gillibrand_postal_banking

 

Kirsten_Gillibrand_postal_bankingTraditional bankers won’t like this blog post. But you know what? Many people don’t like their own banks, and many people aren’t being served well by our banking system. I’m intrigued by recent proposals to fix a gap in the deposit-taking function of banking, specifically a US Postal Bank on the one hand, and an even more disruptive idea of a Federal Reserve bank account – known as a FedAccount – available to individuals and businesses.

Postal Banking

Senator Kirsten Gillibrand (D-NY) introduced a bill in April to revive US Postal Service banking, something that we used to have. It began in 1910 under President William Howard Taft until it was ended by Lyndon Johnson in 1966, according to banking scholar and University of George law professor Mehrsa Baradaran, in her Ted Talk on postal banking.

How_the_other_half_banksIn the Gillibrand proposal, the Post Office would offer free deposit accounts for amounts up to $20,000. For-profit banks tend to ignore small depositors as unprofitable, or they charge high checking account fees to make up for that unprofitability.

The Post Office already has branches everywhere, including in “banking deserts” that have been abandoned by community banks as unprofitable, and where check cashers and payday lenders have moved in. While the Post Office by charter must be financially self-sustaining, it has a history of subsidizing services for the public, as it does for example when it unprofitably delivers mail to remote rural areas.

In Gillibrand’s proposal, personal loans of $500 could also be offered. Her proposal came with an unreasonably low rate for this type of personal loan. But even at rates as high as 20 to 25 percent, it wouldn’t be hard to offer an interest rate that reflected the risk of these loans, while still undercutting payday lenders.

The people who would be most helped by postal banking are the estimated 10 million US households who are “unbanked.” Among the very poor, up to 10 percent of disposable income gets used for basic financial services, such as check-cashing and payday loans.

The FedAccount

But how about an even more intriguing and radical solution proposed last month, that would help not only the poor, but the wealthy and everyone in between from small businesses to you and me?

The proposal by three economists and former US Treasury officials is to offer a FedAccount – free checking accounts of any size at the Federal Reserve to individuals and business. The Federal Reserve currently only has deposit accounts for financial institutions.

Capital_One_KittyIn a fiat money system like ours, as you hopefully already know, money is a kind of collective fiction we all weirdly agree to. The beautiful thing about the Federal Reserve is that they are the dream weavers of this fiction. They invent money. An electronic ledger in a FedAccount with your money will always be there basically because the Federal Reserve says it’s there, and they perform magic.

When you can invent money there’s no problem whatsoever guaranteeing unlimited amounts of money both to the under-banked poor and the extremely wealthy. A $100 deposit by a poor person will always be there. A 100 million deposit by a wealthy person will always be there. 100 percent guaranteed.

The FedAccount could also handle merchant processing for free between FedAccounts, something that businesses currently pay extraordinary amounts of money to credit card and debit card companies to do. Small businesses in particular, with little negotiating power against credit card companies, could reap huge savings on processing fees. Eliminating those fees would ultimately lower costs for consumers. Also, a business using its FedAccount should be able to receive payment on the same day, which could be a life-saver to cash-strapped businesses.

Is a FedAccount a threat to traditional banking as currently provided by a combination of megabanks and smaller private community banks? I don’t think so. If the Fed Account stayed out of the lending business it should not threaten legacy banks.

FedAccountWhat about costs to create the program? The Federal Reserve already keeps deposit accounts for all banks, so adding that capability for individuals and businesses would be simply a matter of straight-forward software programming.

How could this all be free? The Federal Reserve earns profits on financial assets it owns, and sent $98 billion, $92 billion and $80 billion in excess profits to the US Treasury in 2015, 2016, and 2017.

Would it need an army of customer-service employees? Doubtful.

With an easy phone app I know it could attract most of my deposits. I don’t need to talk to banking employees about my account. When was the last time you had an important and helpful conversation with a bank employee regarding your checking account? I’m guessing for most of us, approximately, never?

I can anticipate a libertarian aversion to these expanded government-as-banker roles. Would government banking be competent? Would it protect privacy? As the proposers of FedAccount argue, the Treasury processes billions of payments per year, and disburses millions of Social Security checks per month, basically without a problem.

The Federal Reserve handles $3 trillion worth of Fedwire payments per day. They’re good at this stuff. Unlike the private banking sector, which has to be regulated and subsidized to keep it from periodically failing, the Federal Reserve doesn’t need a subsidy and implied public bailout. Remember, it can create money virtually whenever it needs to. It’s magic.

On the issue of privacy and government intrusion, the FedAccount would be an option, not a requirement. People who fear government intrusion could continue to only patronize private banks.

Look, I wouldn’t bet a single dollar of mine that the low-cost, needed, solution of FedAccounts will happen in our lifetime. We’re talking about something that would make every for-profit banker in the country nervous. And nervous bankers make for a powerful lobby. But I’d be up for it.

The US Postal Bank as proposed by Gillibrand is more modest in scope and has a successful historical precedent. That one’s not impossible in the medium term, and it’s also worth trying.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

 

Please see related posts:

Book Review: The Color of Money by Mehrsa Baradaran

Interview with author Mehrsa Baradaran

Why You Hate Your Bank

Another Reason You Hate Your Bank

 

 

 

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Another Reason You Hate Your Bank

whats-in-your-wallet Cat
Grumpy Cat. That’s what’s in my wallet.

Capital One Bank, my business bank since 2004,[1] called me yesterday.

“Great News!” chirped the person who introduced herself as my business account manager, but who I’ve never met, and who has had no previous conversation with me before, ever.

“Ok,” I replied flatly, immediately wary, because banks are not generally in the Great News business, in my experience.

“We’re in the process of switching all of our business customers over to new checking accounts by January 2014, and I thought I’d give you a call to tell you about the two great options you can choose from!”

“Ok.”

“You have previously been in the Completely Free Checking account, but we’re transitioning all of our customers away from that account, and you can choose from either a Cash Back Account, or an Interest Checking Account!”

“Ok.  Tell me about the Cash Back Account.”

“Assuming you have a balance of at least $2,000, then for every transaction you make per month, whether a deposit or withdrawal or transfer, we’ll credit you with $0.10!”

“I don’t make many transactions per month, but it sounds nice, what’s the catch?”

“We limit the number of transactions in the Cash Bank Account to 100 per month.  If you go over that many, we charge $19.95!”

“Ok.  What about the other account?”

“With Interest Checking, if you keep an average balance of at least $10,000 we pay you interest, and you have an unlimited number of transactions.  If you have less than a $10,000 balance in the account, we charge $19.95!”

“What kind of interest?”

“Right now we pay 0.2%!”

“Ok.”

“So which one would you like to choose?”

“Well, let me see if I’ve got my math straight here:  With the first type of account you give me ‘cash back’ but that is capped at a total of $10 maximum, but above 100 transactions I’m paying $19.95 per month.  So I earn an increasing amount up to $10 the more activity I have, but then suddenly I pay $20 just after I qualify for the $10 ‘Cash Back.’   And then with the second type of account, let’s say I keep my $10,000 balance in your account, you will pay me $20 per month on that size balance, but again you get the right to ding me basically that same $20 anytime I dip below $10,000.”

“That’s right!  Which one would you like to choose?”

“Well, really, neither.”

Then, the cross sell

The conversation went on from there, and involved her trying to get me to take out a business credit card with Capital One (I don’t need another business credit card) because that could eliminate my fees if I had at least one transaction per month on the card.

Of course I actually do have a business credit card with Capital One, but with a different business entity, but that doesn’t count, because that would involve logic and human decision-making and taking into account a customer’s actual business relationship, which as I’ve written before has absolutely no place in modern banking.

What’s my problem here?

So why did this phone call remind me of why banks suck?

It’s not precisely the dehumanization, the elimination of judgment, that I complained about before.

And I swear it’s not because they want to change me from completely free to charging fees.

Well, it’s partly that, but in a really specific way.

I don’t mind paying some fees, and I do believe banks should charge for their services, one way or another.

No, what really gives me diaper rash in this situation is Capital One’s introduction of an essentially hidden, complicated, and disingenuous pricing scheme.

“Cash Back Checking?”

It’s called “Cash Back Checking” but your number-of-transactions algorithm means I either get a fraction of $10, or I pay $19.95?  And the way you charge me month-to-month could toggle back and forth, just like phone plans with a limited number of minutes that suddenly fall over the cliff and get expensive when I go over the limit?

All that means is that I can’t predict what I’m paying for the service on a monthly basis.  Meanwhile Capital One has all the information for determining fees.  In case I want to inquire, I’m facing long waits in voicemail and call-center hell.

“Interest Checking”

Also, your “Interest Checking” is a joke as well.  $20 on a $10K balance, but with the right to charge $20 when the average balance drops?  Obviously consistently larger business balances will go to higher interest-bearing accounts, and much more so, when rates actually rise to something meaningful.

It’s the toggling back and forth between “interest” and “fees,” when the interest is hardly significant in the first place, that shows the point here is not a straightforward fee structure, but rather the smoke-and-mirrors of a bait and switch.

So it’s not really the fees that scratches the rash, it’s the opacity.

Opacity is always a banker’s friend.  Opacity is also a reason to end a friendship.

 

Please also see related post:  Why You Hate Your Bank

and Maybe there’s hope, The kitty called me back



[1] Actually I signed up with North Fork Bank, a business-oriented bank built up on Long Island, then making an aggressive push into Manhattan at the time I started my business.  Their Free Business Checking was of course why I went with them in 2004.  But in an era of constant bank mergers, it makes no sense to expect a bank to maintain the same deal over the years, or to expect any personnel to stay in place.  North Fork fatefully bought Alt-A giant Greenpoint Mortgage in 2005 (seemed like a good idea at the time!), then got bought by Capital One in 2006.  Capital One announced the elimination of Alt-A lending in August 2007 and took a massive hit on that investment.  Ah, shareholder-wealth destruction via bank merger…good times!

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