Why Does Everyone Suddenly Want to Be a Bank?

First came prosper.com, “the online marketplace for people-to-people lending” — think eBay meets Craig’s List meets (potentially) Shylock. Then comes word that WalMart wants to get into the banking business. In tomorrow’s papers, look for news that Robert L. Johnson, founder of Black Entertainment Television and majority owner of the NBA’s Charlotte Bobcats, is buying Metro Bank in Orlando, renaming it Urban Trust Bank, and will try to parley it into a network of banks to serve the currently underserved urban populations across the U.S. Although I haven’t read anything about it lately, I recall that Russell Simmons was trying to start a debit-card network in urban areas as well.


Consumption Rules

Perhaps it's because banks have been recording record income numbers through the past several years now that the restrictions on what they can and can't do have been eased. Wells Fargo, for example, has had several billion dollars in income in each of the last few years, and they have continued to do well even when the rest of the economy isn't. Everyone just wants a slice of that pie. If that's not the reason, then I don't know what is, because banking in general is the most highly regulated industry in the world, to a ridiculous point almost.

Robert Schwartz

"Why Does Everyone Suddenly Want to Be a Bank?"

"Because that's where the money is."

-- Willie "the Actor" Sutton, famous bank robber.

Kevin Scully

A big reason for the increased interest in serving lower income areas over the last few months would be the enaction of the new bankruptcy laws in October. Lending to the poor has traditionally been high-risk (bankruptcy), high-reward (high interest rates), and now that it is so much harder to declare bankruptcy, there is much less risk for the lenders.

Also, when the mainstream banks fled urban areas in the 60s and 70s, payday lenders, check-cashers, pawnshops, and other businesses filled the void. These businesses have exploded over the last decade, and mainstream banks are looking to re-enter this market. It will be interesting to see whether these banks offer traditional services or focus mainly on replicating the fringe economy. For a good read on this, check out Howard Karger's Shortchanged: Life and Debt in the Fringe Economy.

Aaron_B

A few reasons:

1. Less need for brick and mortar, which implies an ability to lower costs in less densely populated areas.

2. Profits. They always attract new entrants.

3. Middleman effect. Relates to point 1, but banks have the ability to leverage loans against deposits. P2P lending likely has a reserve ratio of 100%.

Anyway, FYI, my buddy in Philly said he saw a mobile cheque-cashing van in a run-down area. Never seen one of those before.

Also, I'd like to see if you can figure out how the Jak zero interest bank from Sweden operates. Google it sometime.

Jeremy Cherfas

Robert Schwartz: Let-'s get the facts straight. Or rather, as straight as they can be. To whit:

"SIR—Your otherwise informative Schools brief on banking (“The business of banking”, October 30th) attributes to Willie Sutton, a famous American bank robber, the line, when asked why he robbed banks, “That's where the money was.” The quote is fictional. Mr Sutton always denied saying it though he admitted admiring the truth of it, and even used it as the title of his autobiography.

I ask that you clear this matter up once and for all. I can understand Mr Sutton's situation being a bank robber myself, and having had many a false statement attributed to me.

BRAD GROCEMAN
08376-085, Federal Correctional Institution
Seagoville, Texas"

From a letter to The Economist, http://www.economist.com/displaystory.cfm?story_id=261513, and I like to believe it.

Princess Leia

Hmmm... I thought it was that everyone now wants to be a hedge fund!

Brad Groceman

Yes, Mr Sutton did say that. It was attributed to him by a "journalist" and was repeated by prosecutors later on hence becoming "reality."

Consumption Rules

Perhaps it's because banks have been recording record income numbers through the past several years now that the restrictions on what they can and can't do have been eased. Wells Fargo, for example, has had several billion dollars in income in each of the last few years, and they have continued to do well even when the rest of the economy isn't. Everyone just wants a slice of that pie. If that's not the reason, then I don't know what is, because banking in general is the most highly regulated industry in the world, to a ridiculous point almost.

Robert Schwartz

"Why Does Everyone Suddenly Want to Be a Bank?"

"Because that's where the money is."

-- Willie "the Actor" Sutton, famous bank robber.

Kevin Scully

A big reason for the increased interest in serving lower income areas over the last few months would be the enaction of the new bankruptcy laws in October. Lending to the poor has traditionally been high-risk (bankruptcy), high-reward (high interest rates), and now that it is so much harder to declare bankruptcy, there is much less risk for the lenders.

Also, when the mainstream banks fled urban areas in the 60s and 70s, payday lenders, check-cashers, pawnshops, and other businesses filled the void. These businesses have exploded over the last decade, and mainstream banks are looking to re-enter this market. It will be interesting to see whether these banks offer traditional services or focus mainly on replicating the fringe economy. For a good read on this, check out Howard Karger's Shortchanged: Life and Debt in the Fringe Economy.

Aaron_B

A few reasons:

1. Less need for brick and mortar, which implies an ability to lower costs in less densely populated areas.

2. Profits. They always attract new entrants.

3. Middleman effect. Relates to point 1, but banks have the ability to leverage loans against deposits. P2P lending likely has a reserve ratio of 100%.

Anyway, FYI, my buddy in Philly said he saw a mobile cheque-cashing van in a run-down area. Never seen one of those before.

Also, I'd like to see if you can figure out how the Jak zero interest bank from Sweden operates. Google it sometime.

Jeremy Cherfas

Robert Schwartz: Let-'s get the facts straight. Or rather, as straight as they can be. To whit:

"SIR-Your otherwise informative Schools brief on banking ("The business of banking", October 30th) attributes to Willie Sutton, a famous American bank robber, the line, when asked why he robbed banks, "That's where the money was." The quote is fictional. Mr Sutton always denied saying it though he admitted admiring the truth of it, and even used it as the title of his autobiography.

I ask that you clear this matter up once and for all. I can understand Mr Sutton's situation being a bank robber myself, and having had many a false statement attributed to me.

BRAD GROCEMAN
08376-085, Federal Correctional Institution
Seagoville, Texas"

From a letter to The Economist, http://www.economist.com/displaystory.cfm?story_id=261513, and I like to believe it.

Princess Leia

Hmmm... I thought it was that everyone now wants to be a hedge fund!

Brad Groceman

Yes, Mr Sutton did say that. It was attributed to him by a "journalist" and was repeated by prosecutors later on hence becoming "reality."