Wednesday, November 10, 2010

Demon Bank

Indulge me for a post while I dream about a basic banking system. With the crap coming out of the Catfood Commission and the continued squeezing of lower income (and not so low income) consumers for their financial options, plus a nod towards the continual invasion of our privacy, I whiled away the evening pondering the possibility of the Demon Bank.

The Demon part of it refers to how it would be received by the Very Serious People and all of the monied elite. The premise of the bank is to introduce a baseline offering of banking services to the perpetually under- (and just plain un-) served portion of the citizenry who don't have tens of thousands of dollars just lying around to make them the desired customers of giving-you-the-business-as-usual banksters. The two markets this bank would compete against would be local payday loan outfits and regional and national mega banks with their massive ATM infrastructure. In both cases, the main objective is to reduce or remove charges for ordinary, low-risk transactions. The challenge is to not harm local banks and credit unions who are serving their communities well and who cannot leverage scale to distribute operating costs.

First off, this bank is as close to free for its customers as it is humanly possible to get. And, in this age of electronic transactions, that's pretty freaking low. Some basics:
  • Accounts can be started by any US citizen or legal resident, and for any small business owned by a citizen or legal resident, up to annual revenues of $1,000,000.
  • One type of account per customer at any one time.
  • Fully FDIC insured, of course.
  • $1.00 minimum to open a savings account and $10.00 for a checking account. Make it easy for kids to get started and for low-income families to keep cash in a safe place.
  • No fees to set up or maintain the account.
  • If your account balance hits $0.00, your account freezes until you put more money in it. No negative accounts with penalty fees.
  • No paper checks. They are expensive to produce. You get a bank card that doubles as a check/debit card.
  • No ability to spend more than is in your account. The charge is refused if greater than your available balance.
  • Interest rates will be low because the bank will be run in the most conservative way possible. That's a downside and where other banks can distinguish themselves.
  • The bank will engage in standard transactions with other financial institutions, e.g.,  direct deposit, automatic debits, etc.
OK, so much for the basics. Total minimal banking, most of it done via ATMs, but with local branches in grocery stores and store fronts in undeserved areas.
  • You can use your debit card at any ATM in any network for free. This one may be a socialist (heh) bridge too far, and a fee is charged that is the amount of the business cost of the transaction plus 1 cent. That should be about, oh, 5 cents per ATM transaction.
  • Paycheck cashing. If you have an account, even a $1.00 account, you can get your payroll check cashed for free. No fees. If you do not have an account, you can cash a payroll check for $10 or 1%, whichever is less. This is aimed right at rapacious check cashing services and the decline of check cashing at grocery stores.
  • You will be able to get three kinds of loans, directly from the US Government, in these banks: Vehicles (Cars, boats, horse wagons, bicycles); houses (strictly conforming, full doc, standard 30 and 15 year terms, with money down); student loans.
  • You can get business micro loans. Not sure about the terms for that - suggestions?
  • You can have an IRA or a Roth IRA at the bank. The investment mix is going to be very conservative, basically Treasury Bonds.
  • If you are receiving government funds, they can be automatically deposited here.
  • If you get laid off from a job, you can immediately roll-over any pitiful remnants of your 401(k) into a rollover IRA
  • Of course, you can buy US Savings Bonds!
  • My big dream is that you would be able to buy public option health insurance here, automatically paid out of one of your accounts.
  • You can have a revolving charge card - kind of like an old fashioned AMEX - and your credit balance is a percentage of your deposits. If you have $1,000, you may have $150 maximum credit line, or some other formula. This one is harder because your charges would be on a different network and those networks' fees may make this financially unfeasible. 
And here is the crown jewel:
  • Privacy. Your financial history will not be sold. You will not be solicited for business. You will be informed of every inquiry against your account and will be asked if you wish your information released. This lets you block financial spam, but allow something like a credit check for a loan, an apartment, or by an employer. Yes, the last two piss me off, but the rule here is you don't have to tell them.
The Demon Bank serves to discipline the market because it will take any depositor and provides utterly free baseline services that currently are used as fee-mills to fleece low-income users.On a broader scale, because this would be a national operation, there cannot be the kind of bullshit claims as we saw two years ago, where the banks extorted money by raising the specter of the system of payments seizing up. If the full-faith of the nation is behind the credit worthiness of these mundane transactions (paying for groceries, paying for loans, getting money from an ATM, and so forth), then the business of ordinary Americans is shielded from the shenanigans of the too-big-to-give-a-damn institutions.

It creates a no-frills system that will meet the very basic banking needs of the most poorly served segments of society, but with enough incentives to encourage some tight-wad, relatively affluent folks to join in and dump cash into the bin. Basic loan services for local areas, with rock bottom interest rates that will verge on no-interest, should help encourage development, but stringent loan requirements can keep speculators at bay.

Ah, well, we can but dream.


Update - I am late to the game. Please peruse this marvelous list of articles by Lambert and others on banking as a public utility.Good stuff.

1 comment:

Anonymous said...

This is really the kind of stuff that, if an ambitious and public-spirited legislator or regulator was interested in doing some good, would be right up his or her alley. Perhaps this is the sort of thing that Elizabeth Warren might push, either inside the new consumer protection agency (doubtful) or outside. Once again, as you've discussed recently, it's an actual dollars and cents issue that would tangibly help people rather than give one of the elites a funny feeling up and down his leg (Tweety from the primaries).