
Starting a Bank - ionfish
http://ma.tt/2009/08/starting-a-bank/
======
Tichy
"We take your money and put it in a vault"

That's not actually the job of a bank, is it? The job is to mediate lending
and borrowing of money. By identifying the right people to lend money to,
banks can offer the people whose money the take an interest rate.

I still agree that there is a market for a better bank.

I remember an example from the book "Why not?" where a bank (or something like
that) offered to automatically adapt their customers to the best current
interest rate and making a killing with it. No more "if you open an account
now, you get 2%" and one month later "if you open an account now you get 4%"
and two months later "if you open an account now, you get only 1%".

~~~
steveplace
Well why not differentiate the product by allowing the bank customers choose
where the money is getting invested, kiva-style. And yes, there is a ton of
risk there but it's unique.

~~~
Tichy
That seems counterproductive. I give my money to the bank precisely because I
don't want to bother with estimating borrower credibility myself. Also, as an
individual I can not hedge my risk well enough, because I don't have enough
money to spread it out effectively.

------
steveplace
The 3-6-3 model of banking has been thrown off to the wayside in pursuit of
faster, quicker gains; but the original model still holds: savings at 3%,
loans at 6%, golf course by 3pm.

~~~
known
I got an idea. Take loan from a bank to buy a bank.

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knightinblue
_Goldman Sachs just paid out 16 billion dollars in bonuses to their employees.
If we had an extra 16 billion dollars lying around, we’d put it in the bank
for a rainy day. (If Goldman had never paid out bonuses they never would have
needed government intervention.)_

A flawed comparison. Goldman is an investment bank that needs to pull in
incredible returns percentage wise. Safebank is a watchman guarding a vault.
Basically, Goldman needs to pay out bonuses to attract _top-shelf_ talent,
while Safebank doesn't.

------
mdasen
The problem is that his proposals ignore the economics behind banking. If you
take someone's money and put it in a vault, how can you provide interest on
that money? You can't. You'd, in fact, have to levy fees to cover the costs of
staffing, buildings, security, etc. Yes, even an internet bank has to have
physical infrastructure somewhere.

Heck, why am I going to spend $3 for a SafeBank iPhone app when I can access
my online banking from many banks for free?

He rails against ATM fees. How is he going to get rid of them for me?

I don't notice that any of the large banks require the use of Internet
Explorer. BofA, Wells Fargo, Citi all work with non-IE browsers. I'm sure one
can find a bank (out of the many thousands in this country) that has a site
that doesn't work with Firefox, but it isn't an easy thing to find - which is
why he hasn't specified any particular bank! He doesn't know of any!

While ad blocking might be cool, it has nothing to do with my bank. It would
be like WalMart telling me that acupuncture was good - it has nothing to do
with their business.

People might hate banks, but they hate people mining them for data potentially
more. "We noticed that you spend a lot at pornoshop.com. Did you know
cheapporn.com usually has better prices?"

\--

 _And he hasn't satisfied the most important question: how would this be
better than a member-owned credit union?_ A corporation has to try for
profits. A member-owned credit union gives those profits back to its members
as dividends. Their rules are set up for the benefit of their owners - who are
the people depositing money with them.

The problem is that people want a host of expensive things. They want tellers.
They want ATMs everywhere - and that means cash physically everywhere or you
refunding the ATM fees. They want free checks. They want online banking.

While one can argue that the banking industry got a little out of control, you
can't just put money in a safe and expect to be able to offer people all that.
You need to lend it out and that incurs risk and even more overhead - you have
to deal with all the payments, the legal stuff when something bad happens,
foreclosures (because, yes, some people won't end up paying you back). And if
you want to be "safe" and only lend to the most credit-worthy people, your
margins go down because they're the people who can get money anywhere at
really good rates.

I mean, if you lend me money at 4.83% (the overnight _average_ for a 15 year
fixed mortgage at bankrate.com) and give your depositors 2% interest on their
money, you have a 2.83% margin to operate on. But then you want to refund
people's ATM fees of, let's say, $10/mo. On $5,000 (more than the average
depositor has), that means you have an effective 3% rate on deposits. If the
depositor only has $1,000 deposited, you've given them an effective over 10%
rate and you're now way into the red. And that doesn't even take into
consideration the around 30% reserve you want to hold earning nothing. And
you'd want to give them free checks and not charge overage fees and do all
sorts of nice things.

And if you're a "nice" bank, you'll want to provide lower mortgage rates than
the average, right?

\--

The fact is that there are already "nice" banks. They're called credit unions.
They're owned and controlled by their members (customers). How will you do
better than a credit union that's a not-for-profit institution?

By being more efficient? That's the only way. And he's vastly over-estimated
the money that rolls in when you play it "safe" and "nice". Banks make a lot
of money. They make that money through a combination of managed risk and fees.
If you get rid of both of those, you don't make money, you lose it.

~~~
webwright
"The problem is that his proposals ignore the economics behind banking. If you
take someone's money and put it in a vault, how can you provide interest on
that money?"

Except that he said this:

SafeBank would maintain a reserve level 2-3x higher than Fed requirements and
any other bank.

What he's saying is this. SafeBank would be less risky and could spend a LOT
less money. Revenue would be lower, but he's saying that spending at financial
institutions is nigh ridiculous and could more than compensate for it.

"And he hasn't satisfied the most important question: how would this be better
than a member-owned credit union?"

How is that the more important question? What if it was just as good as a
credit union?

How much better is Starbucks? I think 80% of what he's talking about is a
marketing opportunity.

~~~
cookiecaper
>SafeBank would maintain a reserve level 2-3x higher than Fed requirements and
any other bank.

Which, for the record, isn't full-reserve (the legal limit is 900%
leveraging... i.e., if I deposit $10, the bank can loan $90 off of that). He'd
still be loaning out money he doesn't have, and he'd still be able to generate
revenue from that.

In the case of full-reserve banking, you can still make money. You may not be
able to offer FREE CHECKING and free x x x x blah blah blah, but with the
interest accumulated from your loans, a decent amount of working capital, and
fees from accounts it's definitely conceivable.

~~~
dreish
You're referring to a simplified description of the effect of a 10% reserve
requirement on the money supply. If you deposit $10 into a transaction
account, the bank may lend $9 of _that_ (not $90), and only if you assume each
dollar lent is deposited into a transaction account with the same 10% reserve
requirement do you get the net effect on the entire money supply (mostly
through other banks) of +$100.

In practice this does not happen. And in any case, no one lends money they
don't have, as you put it, unless you have strange ideas about what
constitutes money.

~~~
va_coder
Yes, that is correct, individual banks do not loan out money they do not have,
but the collective system does.

And I gathered that he wants to be separate from that system and therefore not
take part in fractional reserve banking.

If he were to explain in detail how he would have 2-3x more reserves than the
banks and not take part in the fractional reserve banking system, he would
clear up some of the confusion.

------
gwern
Sounds like he wants to start a full-reserve bank:
[https://secure.wikimedia.org/wikipedia/en/wiki/Full-
reserve_...](https://secure.wikimedia.org/wikipedia/en/wiki/Full-
reserve_banking)

Not impossible - after all, banks were not always fractional-reserve, and it
admittedly _is_ a very secure form of banking.

~~~
tdoggette
Not full, just a higher fraction.

~~~
mseebach
Since he wants to keep accounts below the FDIC limit, there's really no
incentive for him not the hit the markets aggressively, trying to make a nice
interest for his customers.

------
jacoblyles
People don't care about the safety of their bank because of the FDIC, but they
do care about interest rates. Rival banks will be able to offer higher returns
because they will be earning higher, riskier investment returns.

Moreover, with a lower return on equity modeled in than every other bank in
the industry, nobody is going to give you money to start with.

Lastly, there are severe limits to how innovative you can be with a bank,
again because of the FDIC.

The only way I see this gaining any traction is as a niche bank for people
with deposits over the FDIC insured limit who might want a little more safety.
However, there are two problems with this. 1) He proposes to turn away
deposits of this size at first and 2) people with that much money usually have
better options.

------
randomtask
His idea is ridiculous. If I were to put money in a bank like this it would
cost me, because I'm not getting the interest another bank would pay me and
inflation would devalue my balance every day it sits there. That's not "safe"
for the customer at all.

------
kiba
This will probably not happen when there are too much regulatory barrier to
start and too many rules to comply with.

The more improtant something is, the more likely it will be highly regulated,
or monopolized.

~~~
m_eiman
That just means that there's less competition. And when you start getting
successful, your competitors will need to spend a few years implementing their
system before they can start actually competing with you. And I wouldn't worry
about the big banks catching on to the "do what you can to help your customer"
concept, it's not in their culture.

~~~
cookiecaper
It also means that unless you're starting out with at least $xx million
dollars, you have no hope. It can take _years_ to get a business started if
you're unlucky enough to choose a field under heavy regulation (something with
it's own Cabinent-level bureau, like the FCC, EPA, or Fed).

The paperwork takes a long, long time to process, the processes are laden with
significant fees, you have to pay staff (usually lawyers, not cheap)
independently to prepare all of the forms and offer guidance through the
process, and you have to be able to afford to wait for everything to go
through, and that assumes a completely clean process with no need to contest,
appeal, or resubmit anything.

The megacorps already initiated to the oligopolies hope that this is enough to
prevent any significant or innovative new competition, and it usually is.

Sadly, those with the most innovative ideas are usually not those with the
most $xx millions of dollars.

~~~
ig1
If only there was some sort of fund that would provide capital for ventures
for people with ideas and the experience to execute.

------
jdminhbg
The problem with the "Bank Safe" slogan is that the FDIC exists.

~~~
Dilpil
This. No one lost money by depositing their money with goldman sachs (they
were not a deposit accepting institution). People lost their money speculating
on stock and real estate. Having their money in a slightly safer bank would
not have helped.

~~~
randallsquared
It's marketing. That's all.

------
trader
Obviously "matt" has not worked in the finance industry and clearly does not
understand how banking works. Sounds decent in theory but in reality the bank
would have no investors and would lose any talent when they didnt pay them.
They would probably be the cause of the financial crisis by only employing
stupid people who gave poor, risky loans.

~~~
jonknee
"Stupid" people couldn't have done any worse than the "smart" "talent" that
got us into our current mess.

------
sharpn
There are a whole bunch of reasons why this would be nearly impossible, but
it's an interesting thought experiment nonetheless.

~~~
stse
I don't like this comment. At least give me a hint why it would be "nearly
impossible". You won't be able to do it with three guys in a basement, but I
can't see how it would be "more impossible" than any other large corporation.
If there hasn't been some recent change in regulation, it is probably a lot
easier now then 10 years ago.

~~~
sharpn
It's harder than many other large corporations because banking laws vary from
state to state, _and_ there are federal laws restricting banks operating
universally across several states. Also, as a 'startup bank' you are initially
reliant on your incumbent rivals for clearing and interbank transactions
(unless you do literally leave cash in a vault at 0%). I agree technology has
made it much easier recently though.

~~~
stse
Fair enough. That PayPal isn't a bank in the US supports your point.

------
biohacker42
_SafeBank couldn’t raise VC or anything like that..._

It also couldn't be a public corporation because share holders could make a
very good case that management is failing its fiduciary duty by being hyper
conservative.

And that's what I find most interesting about that article. It opens the
discussion about public vs privately owned enterprise.

Privately owned business can forgo addition revenue by as much as the
ownership feels like. The reasons for that don't have to be altruistic, it
could be about longevity, not 20 or 50 years longevity but hundreds of years
of longevity.

But we only live once, and our lives are short, so most of us like to maximize
profits. Thus most often the risk vs. reward calculation doesn't look at time
spans much longer then one human life time.

~~~
eru
Interestingly public companies should be able to deal with long-term horizons
much better than private companies. In theory a share's worth is equal to all
future dividends discounted to the present day.

------
bonsaitree
This reminds me of the wonderful theoretical country discussions we had in my
economics classes at college.

Forget a new kind of bank. Go total bluesky. What IF, we could design our own
set of sovereign laws and principles.

What would the "modern" country look like?

~~~
Perceval
It would separate two forms of money: the common form of money used as means
of exchange and a store of value; and, the debt/credit money created out of
thin air through a contract and collateral. The two currencies would float
against one another. People would be paid in common currency, but could borrow
in the debt currency.

------
rgr23
The problem with his reasoning is that the big banks are evidently quite safe.
No matter how bad their investments are, the government will bail them out
with taxpayer's money to prevent them from collapsing. I doubt the same would
apply to a bank ran out of somebody's basement.

------
losvedir
The part that's interesting to me is his idea that it will be essentially a
"vault" and super safe. The problem is he'd be targeting people under the FDIC
limit, so that safety wouldn't be desirable.

But what if he targeted people OVER 100k. (For that matter, let's say he
didn't offer loans at all so he really was a "vault") Sure you couldn't offer
interest, and maybe you'd even have to charge a very tiny fee, but are there
places that do that? What do people do if they have a lot of money -- put in
Treasurys? If I had millions of dollars, I'd pay someone to just deposit it
with the Fed. I think the Fed even pays interest now.

------
nathanwdavis
This just would not work. The reality of banking is that people want a
relationship with their bank that they don't have to maintain - meaning they
would only go to their bank or bank website when they absolutely have to. Not
to go check out the latest blog post.

Invite only? With the much larger startup cost of a bank this is ridiculous.

What is really amazing is that this guy is actually ... "one of PC World’s Top
50 People on the Web, Inc.com’s 30 under 30, and Business Week’s 25 Most
Influential People on the Web"

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djahng
"'Bank of America spent $40,000,000 dollars on airplanes last year. We spent
$40,000 to develop an iPhone application so you can check your balance from
anywhere.' (Hmm, the iPhone app should cost like $2.99.)"

I think he's misunderstanding something...the iPhone app may cost $2.99, but
it doesn't cost $2.99 to develop.

~~~
alaskamiller
He's saying he wants to charge the bank app at $2.99 as a way of generating
revenue.

------
lamby
Pretty much all of the points I was going to raise have been covered - I just
wanted to add my facepalm at the people in the comments who clearly don't
understand a hypothetical scenario.

------
hamidp
The whole point of Safebank seems to be to have it be safe. How safe a is a
week-old bank started by some guy with a blog who doesn't know the difference
between retail and investment banking?

People don't love their banks? I do. Bank of America gives me ATMs everywhere
and pretty awesome online banking, and the credit union gives me unbelievable
customer service and great interest rates.

On a sidenote, do compare the HN comments with those on the site.

