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Patrick McKenzie
+ Your AuthorsArchive @patio11 I work for the Internet, at @stripe, mostly on accelerating startups. Opinions here are my own. Sep. 05, 2020 3 min read

I should really write about banking some time, as I have weird hobbies which are not as well-known among tech people.

Here's a weird hobby bit of information: why the US doesn't have "basic bank accounts" like many countries, which are fee-free accounts meant to increase access.

The answer is complicated, but this is a multi-constituency game:

1) The check payment method inevitably exposes banks to credit risk and this makes free a tough anchor *but it is doable* and banks do do it in certain markets where it is de rigeur.

2) Community banks.

Community banks are your friendly beloved local financial institution which treats you like a human rather than a database entry. They're *much* smaller than banks whose names everyone knows.

The continued existence of community banks is a policy goal of the United States.

*A lot* of financial regulation in the US is based around "We can't kneecap the community banking industry", and that industry is extraordinarily widely distributed, tied up directly with commercial real estate (and landlords/etc) nationwide, and very very vocal about needs.

There are good reasons to want community banking to continue to be a broadly supported institution in the US (where it's much bigger than many peer nations, both in absolute size and in relative significance to the financial system).

One is that it has a broad footprint.

The First National Bank of Normal Oklahoma (not as far as I know an actual bank) will put a branch in places that Bank of America will not.

FNBONO has structurally worse economics than BoA due to cost of capital, worse IT, and BoA's scale. So they need to charge more.

And when regulators say "You know maybe we should make it an obligation to offer fee-free banking. Come on, it's a *tiny* portion of your customer base." FNBONO says "Look it's a tiny portion of BoA's but that would plausibly cover almost all our retail deposits and bankrupt us."

And so the US has a theoretical diseconomy because it needs a banking regulatory environment which covers many local economies with disparate needs from their banking ecosystems.

Theoretical because state bank charters are a thing and the market solves a bit for this.

For example, if you go into large regional banks, they might have differential product availability. Fifth and Third, which is a regional in the midwest, will offer basic ~free banking with ~no conditions in Chicago, but does not make that offering available throughout footprint.

A big, big question in the US, which abuts the tech industry but is underdiscussed in it, is "To what extent should nationwide institutions and nation/worldwide applications take share from community financial institutions... and what parts of their customer base can they lose?"

Banking is intrinsically very different than e.g. Netflix, in that there is huge dispersion in contribution margin among different accounts even within a single product. Financial institutions might survive losing 20% of accounts randomly, but they generally can't lose top 20%.

And so if your hypothesis is "Well Chime and Cash App and other looks-like-a-bank-alright apps eat all the 20 year olds and millennials and such that's fine, 65+ control most of the deposits" maybe you're not too worried.

But there are ~40 year old millennials now, so...

And it is very possible that the coronavirus environment and branch closures have assisted people throughout the age/assets spectrum into trying mobile banking for the first time, and maybe they find that the convenience is even better than chatting up their favorite teller.

Another wrinkle: a lot of the economics of community banks is driven by "the traditional business of banking": take deposits, make sensible loans (mostly backed by commercial real estate) at a higher cost then deposits, go to golf course at 3 PM.

Especially in a low-interest environment they structurally offer *very little* for deposits, but you're ~20 taps away from a much better deal from CapitalOne/etc which transfers money to your main account *almost* as quickly (if you want to keep it!).

And those CRE loans were largely underwritten in an environment which says "I mean some landlords might have some collection problems but come on it's not like every restauraunt in Oklahoma could close doors simultaneously what kind of apocalypse would that require."

You can follow @patio11.


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