The problem is that his proposals ignore the economics behind banking. If you take someone's money and put it in a vault, how can you provide interest on that money? You can't. You'd, in fact, have to levy fees to cover the costs of staffing, buildings, security, etc. Yes, even an internet bank has to have physical infrastructure somewhere.
Heck, why am I going to spend $3 for a SafeBank iPhone app when I can access my online banking from many banks for free?
He rails against ATM fees. How is he going to get rid of them for me?
I don't notice that any of the large banks require the use of Internet Explorer. BofA, Wells Fargo, Citi all work with non-IE browsers. I'm sure one can find a bank (out of the many thousands in this country) that has a site that doesn't work with Firefox, but it isn't an easy thing to find - which is why he hasn't specified any particular bank! He doesn't know of any!
While ad blocking might be cool, it has nothing to do with my bank. It would be like WalMart telling me that acupuncture was good - it has nothing to do with their business.
People might hate banks, but they hate people mining them for data potentially more. "We noticed that you spend a lot at pornoshop.com. Did you know cheapporn.com usually has better prices?"
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And he hasn't satisfied the most important question: how would this be better than a member-owned credit union? A corporation has to try for profits. A member-owned credit union gives those profits back to its members as dividends. Their rules are set up for the benefit of their owners - who are the people depositing money with them.
The problem is that people want a host of expensive things. They want tellers. They want ATMs everywhere - and that means cash physically everywhere or you refunding the ATM fees. They want free checks. They want online banking.
While one can argue that the banking industry got a little out of control, you can't just put money in a safe and expect to be able to offer people all that. You need to lend it out and that incurs risk and even more overhead - you have to deal with all the payments, the legal stuff when something bad happens, foreclosures (because, yes, some people won't end up paying you back). And if you want to be "safe" and only lend to the most credit-worthy people, your margins go down because they're the people who can get money anywhere at really good rates.
I mean, if you lend me money at 4.83% (the overnight average for a 15 year fixed mortgage at bankrate.com) and give your depositors 2% interest on their money, you have a 2.83% margin to operate on. But then you want to refund people's ATM fees of, let's say, $10/mo. On $5,000 (more than the average depositor has), that means you have an effective 3% rate on deposits. If the depositor only has $1,000 deposited, you've given them an effective over 10% rate and you're now way into the red. And that doesn't even take into consideration the around 30% reserve you want to hold earning nothing. And you'd want to give them free checks and not charge overage fees and do all sorts of nice things.
And if you're a "nice" bank, you'll want to provide lower mortgage rates than the average, right?
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The fact is that there are already "nice" banks. They're called credit unions. They're owned and controlled by their members (customers). How will you do better than a credit union that's a not-for-profit institution?
By being more efficient? That's the only way. And he's vastly over-estimated the money that rolls in when you play it "safe" and "nice". Banks make a lot of money. They make that money through a combination of managed risk and fees. If you get rid of both of those, you don't make money, you lose it.
His head is in the clouds. Although, the idea of starting a bank in the middle of a downturn is not bad. People are saving more money than usual right now (cheap capital), and many businesses are desperate for loans. The trick is to weed out the failing businesses, and loan to the ones strong enough to last the downturn. As always, easier said than done...
If anyone out there is looking for a "nice" bank, you're much better off with a credit union. Credit Unions are by definition customer focused.
Actually, I don't think he understands how banks work, period. They loan the money out. That is where the money comes from. How much money a bank makes is about what sort of loans it makes. Guy talks about "keeping the money in a vault" so he has, roughly speaking, no clue whatsoever how banking works.
"The problem is that his proposals ignore the economics behind banking. If you take someone's money and put it in a vault, how can you provide interest on that money?"
Except that he said this:
SafeBank would maintain a reserve level 2-3x higher than Fed requirements and any other bank.
What he's saying is this. SafeBank would be less risky and could spend a LOT less money. Revenue would be lower, but he's saying that spending at financial institutions is nigh ridiculous and could more than compensate for it.
"And he hasn't satisfied the most important question: how would this be better than a member-owned credit union?"
How is that the more important question? What if it was just as good as a credit union?
How much better is Starbucks? I think 80% of what he's talking about is a marketing opportunity.
>SafeBank would maintain a reserve level 2-3x higher than Fed requirements and any other bank.
Which, for the record, isn't full-reserve (the legal limit is 900% leveraging... i.e., if I deposit $10, the bank can loan $90 off of that). He'd still be loaning out money he doesn't have, and he'd still be able to generate revenue from that.
In the case of full-reserve banking, you can still make money. You may not be able to offer FREE CHECKING and free x x x x blah blah blah, but with the interest accumulated from your loans, a decent amount of working capital, and fees from accounts it's definitely conceivable.
You're referring to a simplified description of the effect of a 10% reserve requirement on the money supply. If you deposit $10 into a transaction account, the bank may lend $9 of that (not $90), and only if you assume each dollar lent is deposited into a transaction account with the same 10% reserve requirement do you get the net effect on the entire money supply (mostly through other banks) of +$100.
In practice this does not happen. And in any case, no one lends money they don't have, as you put it, unless you have strange ideas about what constitutes money.
Yes, that is correct, individual banks do not loan out money they do not have, but the collective system does.
And I gathered that he wants to be separate from that system and therefore not take part in fractional reserve banking.
If he were to explain in detail how he would have 2-3x more reserves than the banks and not take part in the fractional reserve banking system, he would clear up some of the confusion.
It wouldn't even cover your costs. Most bank current accounts are run at a loss for the bank, and just operate as a loss-leader for other products the banks sell. A current account costs in the region of a couple of hundred dollars a year to run (see countries which charge for current account services).
Assuming the bank is making an (adjusted) return of 2% on your money, the account has to have 10k in it even to break even. Very few current accounts do.
Everything you say is true for traditional full service banks. I believe however that we need to drop the idea of the one stop full service bank.
Where real innovation and safety comes is through the idea of narrow limited purpose banks. There is a lot of space to innovate if you as a bank can focus on one product only.
The simple way of doing this is to imagine every account type a bank has as a separate mutual fund.
The checking account would be replaced by a 100% reserve 0 interest cash mutual fund, which makes its money from float, membership fees, transaction fees etc. Most checking accounts now are paying an insignificant amount of interest anyway.
Savings accounts can be offered by various levels of money market and similar funds.
If all of these funds follow the same simple standards it is easy to transfer between them, even if they are run by different companies. We are working on creating these new standards on the Agile Banking list:
One of these standards we are working on is a dead simple OAuth/REST based transaction API that we're calling OpenTransact. It allows for very simple transfers, but allows more complicated financial transactions to be built on top of it.
What about ATM fees, credit cards etc. These should be run by independent companies. On the Agile Banking list we are talking about independent card issuers. These are independent companies that offer regular payment cards that in essence control OAuth Access Tokens to an OpenTransact based cash mutual fund as I described above.
As a card issuers only access to your account is via OAuth, you as a consumer can easily manage limits and even revoke the Access Token. You are in control.
Business model for these card issuers? Advertising on cards, transaction fees, membership fees etc.
There is plenty of money to be made in this business, we don't need to keep thinking about it in the frame of how it has been done until today.
They do have an existing, simple standard to transfer money. It's called ACH, and it's been around for decades. It works quite well.
ATM fees should not be run by separate companies -- then you'd have a company that would need to profit off ATM transactions, instead of using them as a loss leader, which means higher fees and more of them.
Credit cards can't be run by non-banks, b/c they are loans, and state and federal law limits the institutions that can issue variable-size loans.
Furthermore, the OAuth system would not work. Period. A customer being able to cut off the card issuer's access to their account? You would never get any card issuer to agree to use the system, because of the enormous potential for fraud (run up the bill, cancel the issuer's access before payment). BTW, you can already manage your card's limits -- just use the online portal, or call your company.
Finally, advertising is an overrated business model. Believe it or not, at some point, you need to make money off an actual valuable service or product. As mentioned above, transaction fees would need to be jacked up (for the institution to make money), eliminating any reduced costs benefit to consumers.
Interestingly, nearly all ATMs (with the exception of privately-owned ATMs in bars, etc.) in the UK don't charge for services (for about five years now). However, I wonder whether an ATM owned by bank A charges bank B itself when bank B's customers withdraw cash at bank A's ATMs.
He also failed to address fractional reserve banking. Many of the big banks, which are shareholders of the Federal Reserve, are able to loan out money they really don't have due to fractional reserve banking.
Also, the Federal Reserve is neither a federal agency nor does it have any reserves. It is owned and operated by the banks, which are able to game the system and this gives them an advantage over you and I.
Heck, why am I going to spend $3 for a SafeBank iPhone app when I can access my online banking from many banks for free?
He rails against ATM fees. How is he going to get rid of them for me?
I don't notice that any of the large banks require the use of Internet Explorer. BofA, Wells Fargo, Citi all work with non-IE browsers. I'm sure one can find a bank (out of the many thousands in this country) that has a site that doesn't work with Firefox, but it isn't an easy thing to find - which is why he hasn't specified any particular bank! He doesn't know of any!
While ad blocking might be cool, it has nothing to do with my bank. It would be like WalMart telling me that acupuncture was good - it has nothing to do with their business.
People might hate banks, but they hate people mining them for data potentially more. "We noticed that you spend a lot at pornoshop.com. Did you know cheapporn.com usually has better prices?"
--
And he hasn't satisfied the most important question: how would this be better than a member-owned credit union? A corporation has to try for profits. A member-owned credit union gives those profits back to its members as dividends. Their rules are set up for the benefit of their owners - who are the people depositing money with them.
The problem is that people want a host of expensive things. They want tellers. They want ATMs everywhere - and that means cash physically everywhere or you refunding the ATM fees. They want free checks. They want online banking.
While one can argue that the banking industry got a little out of control, you can't just put money in a safe and expect to be able to offer people all that. You need to lend it out and that incurs risk and even more overhead - you have to deal with all the payments, the legal stuff when something bad happens, foreclosures (because, yes, some people won't end up paying you back). And if you want to be "safe" and only lend to the most credit-worthy people, your margins go down because they're the people who can get money anywhere at really good rates.
I mean, if you lend me money at 4.83% (the overnight average for a 15 year fixed mortgage at bankrate.com) and give your depositors 2% interest on their money, you have a 2.83% margin to operate on. But then you want to refund people's ATM fees of, let's say, $10/mo. On $5,000 (more than the average depositor has), that means you have an effective 3% rate on deposits. If the depositor only has $1,000 deposited, you've given them an effective over 10% rate and you're now way into the red. And that doesn't even take into consideration the around 30% reserve you want to hold earning nothing. And you'd want to give them free checks and not charge overage fees and do all sorts of nice things.
And if you're a "nice" bank, you'll want to provide lower mortgage rates than the average, right?
--
The fact is that there are already "nice" banks. They're called credit unions. They're owned and controlled by their members (customers). How will you do better than a credit union that's a not-for-profit institution?
By being more efficient? That's the only way. And he's vastly over-estimated the money that rolls in when you play it "safe" and "nice". Banks make a lot of money. They make that money through a combination of managed risk and fees. If you get rid of both of those, you don't make money, you lose it.