Banks are still not your friends

Alex Mashinsky used to like to tell people that “banks are not your friends”. Banks stopped caring about their depositors, he said, and haven’t innovated since the automatic teller, a line he borrowed from former Federal Reserve chair Paul Volcker.

Mashinsky, chief executive of crypto lending platform Celsius, is now suffering from a rather banklike problem: after a big increase in withdrawals of crypto deposits, his company has had to suspend such redemptions. The move will “put Celsius in a better position to honour, over time, its withdrawal obligations”, according to a company statement. To honour over time: this, too, is a rather banklike way of phrasing a promise.

It’s always satisfying to watch the third act of a play about hubris. But banks, particularly American banks, are not your friends. They provide month-to-month liquidity to consumers through credit cards at rates that remain high no matter what the Fed does. They make transfers needlessly difficult and expensive. They charge by the month to manage small-dollar deposits, and can’t quit the destructive habit of imposing huge fees on minor overdrafts. Something does need to fix banks. It’s just that crypto assets, crypto liabilities and crypto culture don’t seem to have been up to the task.

Mashinsky, like other crypto believers, seems to be making a structural argument: banks are bad, so good thing we’re not a bank. But Celsius takes deposits and lends at interest. So Mashinsky is actually making a cultural argument; he’s promising to be a better banker than all those other bankers. The challenge with the cultural argument against bankers is that there’s a reason why they don’t provide better financial products for consumers: the returns are terrible. To be a better banker, unfortunately, you don’t need to be more innovative. You have to want to do good.

In May, just as cryptocurrencies were collapsing in value, the Fed released the results of its annual survey of economic wellbeing in American households. Overall, 19 per cent of families either used alternative financial services such as cheque-cashers, or did not have a bank account at all. These portions are dramatically higher for families without a high-school degree, or who earned less than $25,000 a year. They’re higher for Black and Hispanic families, as well.

The Fed’s report is consistent with 2019 survey data from the Federal Deposit Insurance Corporation, which offers a little more detail on why so many people seem genuinely to believe that banks are not their friends. Of those without bank accounts, half say that they don’t have enough cash to meet minimum balance requirements — almost a third give this as their main reason. This is not a question of financial education. Avoiding fees on small-dollar deposits, and in particular the punitive and unpredictable fees on small overdrafts, is a rational choice.

Banks don’t charge these fees because they lack the ability to innovate. They charge fees because fees are a good way to boost margins, particularly on low-balance accounts. A study this year by the US Government Accountability Office found that for banks with more than $1bn in assets, overdraft fees make up just over 1 per cent of operating revenue. The Cities for Financial Empowerment Fund, a non-profit, has developed standards for checking accounts with low balances, low monthly costs and no overdraft fees, but so far only 238 of 4,800 FDIC-insured banks and savings institutions have voluntarily adopted those standards. A bank can be your friend. But it’s not an innovation. It’s a choice.

That Fed survey offers an interesting picture of what kinds of services people are turning to instead. To start with, they’re just not that into crypto. Last year, 12 per cent of American adults did hold some kind of cryptocurrency. That’s not nothing. But almost all of them held crypto as an investment, not as a service. Only 2 per cent had used a cryptocurrency to buy something, and 1 per cent to send money to friends or family. Crypto doesn’t seem to be more appealing than the banks. It does seem to be more appealing than the stock market — sometimes, though obviously not right now.

A far higher portion of Americans, 10 per cent, used a buy now, pay later service last year. Borrowing a small amount on purpose from a BNPL service is a better experience than borrowing a small amount on accident from a bank through an overdraft on your cheque account. These services have their own challenges with consumer protection, and tend not be profitable over the long term, particularly if they’re regulated as thoroughly as the banks they so clearly resemble.

At the very least, however, buy now, pay later seems to be a banking innovation that people actually want to use — as intended, and not as a back door to higher investment returns. Mashinsky is right. Banks are a problem. But banks have always been a problem. That doesn’t mean that crypto is the solution.