I’ve wondered lately why we keep our money on bank accounts. Why would anyone in their right mind risk their hard earned cash for bankers to invest in loans for their profit, without any return to the deposit holder.
So I set up my own little alternative to a bank. I store any small amounts left over from my monthly salary into one of the two places:
- German government bunds – through an exchange traded fund
- Peer to peer loans to businesses – through FundingCircle and Zopa
The return on government bonds is equivalent to a current account at mainstream banks – 0%. I’d be okay even if it pays negative interest after broker fees. The peer-to-peer loans have paid 6.2% net interest over last 6 months.
Months when I’m bullish I put more into loans, when it feels like the nuclear winter is around the corner I go for the bunds.
It is a tiny bit of hassle to move money between the broker and the loan managers, but once the first payments are set up then on a monthly basis it is just a couple of taps on the phone.
I still have a bit of float in the traditional bank, just to make sure that when the debit card goes into the wall then paper is coming out and British Gas can take money from me. This is not paranoia – the likelihood that my bank will fail is tiny and then there is the government, who is going to bail them out and almost certainly guarantee my small savings.
The feelgood factor comes from knowing exactly where I am taking risk and who are the real businesses, whose loans I have funded.
Surely, in the future it will only become more convenient to store your spare value in government bonds, peer to peer loans, gold, oil, bitcoin, you name it. It will also become much easier to move value between those things and your debit card.
Then what will the future hold for our traditional universal banks? I would love to think they will be splitting into two.
Bank 1: the money highway operator
They are the non-risk-taking ones, the money routing agencies. They would be ferrying money at the speed of light between your employer, your debit card, the sofa shop, your selection of central banks, utility companies, amazon prime etc. There would be no credit risk and no fraud risk involved. The remaining balance will be stored in the central bank overnight. These banks will not be giving credit or handing out loans, their balance sheets are small.
It would be a paid service, for example a monthly subscription. We currently pay an estimated $500 per year in well hidden fees to our banks for making payments and they aren’t doing a fantastic job. Surely a $20 monthly subscription could be enough to operate decent infrastructure.
A similar function is carried out by the miners in the blockchain world. All they do is record transactions, and get paid for it.
Bank 2: the loan agency
These banks would borrow money from the general public and the central banks. Then they lend it. They would assess applications for credit, like mortgages, working capital for businesses, car loans, pay day loans, credit cards. They deal with pricing, collateral, loan schedules, payment collection, defaulting debtors, foreclosures, restructuring and so on.
They will find that extending and processing each type of credit is very different from the next. Many will focus on a single use case. We will have mortgage specialists, business lenders, consumer credit companies.
Some of them will figure out that their biggest value add is processing and managing these loans, rather than taking the risk. So, following the peer to peer example, they would be charging their fees on management and structuring, while the credit decision would remain with the owner of the funds. Some of those vehicles will default, but that’s fine. People, who don’t like it can happily keep their money with central banks.
What is keeping the future?
In history the postal banks in Europe were created to bring money infrastructure close to consumers, steering clear of lending and investment banking. In modern times, the online brokerages that sprung up in the late 90s, such as ETrade and Charles Schwab were driven by the need to move money in and out of various assets efficiently. Soon they added debit cards, chequebooks and everything that enabled people to use them as normal banks.
Today our risk, cost and reward are obscured in the cross-pricing and intermingled relationships between the universal bank and the deposit-guaranteeing money-printing central bank. We can be sure that the upside is collected by the bank, while the downside is protected by the collective domestic produce of taxpayers. Until bailouts and deposit guarantees are the expected norm, there is no way for consumers to distinguish between a good bank and a bad bank. There won’t be competition to drive innovation or better products. One can only hope there will be something to learn from Greece.
After the Greek tragedy we will have more people keen to keep their funds in the money-printing central banks, rather than the local commercial institutions that will inevitably be failing time to time.