Mar 18Liked by Nathan Newman 🧭

I worked in a regional in the late 90s when I first went in-house. As I became tuned in what struck home was the bedrock model--the payment franchise. People need banks to get money in and send it out. As a bank, you took it in as cheaply as possible by paying teeny interest on deposits and trying to offset those with a swarm of tiny fees. And you worked hard to make your part in sending it out in the form of currency disbursal and check clearing as efficient as possible.

As a result, you can leverage the float, the average balance that your customers maintain, to lend out for various purposes. Home loans come to mind, but that's a misdirect. Even then very few banks were "portfolio lenders." They originated loans and sold into Fannie/Freddie and maybe Ginnie and the jumbos they sold into mortgage backed securities. Through perfectly legal accounting smoke and mirrors they money that they would receive for administering the loans on behalf of the new owners could be taken into income immediately as a capital asset.

Middle market commercial loans of heft were syndicated with the lead bank maintaining the lead and a group of participating banks funding the loans and receiving proportionate payments of interest and principal.

Big customers cut custom deals across Wall Street.

We all know how credit card lending works. Hook 'em in with zero-interest transfers and then bleed dry with 29% APR for life.

Otherwise whether in the form of signature loans, auto loans or the host of bank lending services that the vast majority of people draw on, banks primary operate at the wholesale level.

The picture of community banks as pillars of the community is broadly overdrawn. Leading to my question: do we need to keep encouraging reliance on free deposit funding of banks who are primarily operating as capital market middlemen?


We can argue about that separately, while I help kick the leg out of the other rationale for retail banking--paychecks and bills.

The marginal cost of processing ordinary transfers of credits and debits is so close to zero that it is not worth measuring. For the Boomers and the drug dealers and other criminals who still rely on currency they can be served by ATMs--you don't have to be a bank to operate one. Everyone else can use an app.

There are a lot of platforms available to run a transaction clearing table. My candidate is an ACH bulked up to handle the volume. Let its costs be recouped by a penny tax (or a nickel or whatever) on transfers below $10,000 (that's the current threshold for tracking nefarious money transfers) Let a thousand re-sellers bloom to provide value-added services such as custom ringtones when you get money in. Let the Treasury use the float for reducing the amount of receivables financing debt it has to issue. In theory, taxes could be lower.

So, where's the money going to come from for lending if there's no free float?

That's the best part--from capitalists. From the tiny fraction of the population who lack the elan to blow out tens of billions of dollars on vanity project but who hoard assets against the day that there bragging rights might take a hit.

I propose a tax on inert capital frozen into non-circulating assets coupled with a reasonably favorable tax treatment on income from retail lending.

Let the games begin.

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