Fixing the Banking System.

Post Published on June 8, 2011.
Last Updated on April 24, 2016 by davemackey.

Today as I was driving home from work¹A very short five minute commute. I was listening to NPR²Does that make me a liberal? and heard a story about the congressional battle over capping fees banks charge for purchases. Such a cap would benefit retailers (anyone who accepts debit cards) and would theoretically result in lower prices for the consumer. Apparently, the battle has been pretty thick and furious.

I understand the retailers (and stereotypically liberal) perspective that the fees are unfair and unjustly inflate prices while rewarding banks. I have very little sympathy for our financial institutions which have received tremendous bailouts on the taxpayer’s dime. On the other hand, I understand the banks (and stereotypically conservative) perspective that free market forces should be allowed to reign in this situation…

That said, I’d like to suggest there is a better way to resolve the issues of our banking system – which does not require government intervention and which would result in forcing the industry to readjust. A non-profit bank. Traditionally, companies send their financial returns into the pockets of shareholders or owners/employees, in the case of a non-profit the financial returns are largely expended in accomplishing the company’s stated goals. Thus the shift of focus moves from individual prosperity to the accomplishment of a specific goal (in this case, the facilitation of exchange of goods and services).

The difficulty is who is willing to start such a non-profit? Sure, I could start a non-profit – but I can barely pay my own bills much less facilitate the exchange of finances. It would have to be someone with a significant amount of financial resources – or a group of individuals who worked together.

It might be possible to get such a bank off the ground by starting local and small – and building business over time to cover larger regions – but even then one would need a significant amount of capital…and one can’t expect other banks to play nice if they see such a non-profit bank that threatens the very core of their financial profits expanding.

Perhaps a few of our bigger tech giants would consider undertaking such an endeavor? A Bill Gates or Steve Jobs?

The easiest way to accomplish this on a nationwide or global scale almost instantaneously would be to buy out an existing business involved in the market – the most sensible option being PayPal. With its extensive customer base, existing systems, and so on – it would be a fairly simple process to lower fees and  increase features. Folks would be able to use their traditional banking means simultaneously with PayPal based non-profit banking, but the shift would be significant and instantaneous as one received significantly lower interest rates and fees on purchases and sales. Retailers (such as Amazon) might move to offer discounts to folks who used PayPal to make purchases instead of Amazon – perhaps half of the amount they would be saving from reduced or eliminated transactional fees.

Granted, there will always be interest and fees. I am not suggesting that banking should be free – bankers need their bread and butter as much as we do. Additionally, one must consider the losses which occur due to bad debts – in order to offset these losses it is necessary to charge interest and fees….but they could be cut drastically and the incentive for poor fiscal judgment would be significantly reduced without the pressure of shareholders demanding a return and the promises of personal wealth.

The credit unions appear to be a positive step in this direction – as they function on the concept that the members of the union are the owners of the union. However, I have never been part of a credit union (hmmm…maybe I should look into that…) and I haven’t heard of them having aspirations for this sort of national or global endeavor. Finally, the union, strictly speaking, exists for the benefit of its members and not for the goals or ends of the company – which in my mind can become somewhat confusing. Are my goals as an individual member or as a group of members for myself or for the method of accomplishing financial interactions as a whole? A non-profit would be committed to facilitating the exchange of services and commodities – the credit union, at least in theory, is primarily concerned with providing for its own membership and only tangentially with the facilitation of exchange of services and commodities as a method of serving its membership.

Other positive steps in this direction seem to be accruing through direct lending – such as that offered by Prosper. These services are not non-profit, but do take unnecessary middle-men out of the equation simplifying the process of facilitating lending.

There are also digital currencies like Bitcoin which might offer some promising alternatives – though they need to be significantly simplified to bring about real-world usage. Bitcoin uses the membership to manage (automatically) the financial transactions, eliminating significant amounts of middle managing.

What do you think? Is the banking system broken? How? Can we fix it? How? What downsides would exist from going with a non-profit bank? Why don’t credit unions expand more rapidly? Why has no one formed a non-profit bank yet?