The Future of Banking: Banking as a Public Service

Banking today is not the same as it was 100, 50, or even 20 years ago. The next 20 years will see even more changes to the banking system, perhaps a complete upheaval. At the turn of the 20th century, banknotes could still be redeemed for gold, and silver coins circulated in everyday commerce. Fifty years ago, silver had just disappeared from everyday use and credit cards were entering the mainstream. Twenty years ago the restrictions on interstate branch banking were being done away with, leading to a wave of bank mergers that created the large megabanks we know and love today. So what will the banking system of the future look like? The problem with making predictions is that no one can know the future with certainty, we all assume that the future will continue onwards from the present. Just as Europeans on the eve of World War I assumed that the Central European monarchies would continue to exist for centuries, just as they already had, let us assume that the banking system will not suffer any cataclysmic breakdown within the next couple of decades. What then will the banking model look like 10 or 20 years down the road?

The trend that will most upset the banking industry is that banking will be treated as a public utility that must serve all people, not as a private industry that can pick and choose its customers, or whose customers can choose not to engage with banks. The first inklings of this can be seen with recent actions of the Consumer Financial Protection Bureau (CFPB), which is cracking down on payday lenders at the same time as it is urging banks to get in the business of making small loans to consumers or to provide banking services to the unbanked. The CFPB has stated in a letter to bank CEOs that:

…having a checking account or a reloadable prepaid account enables consumers to receive wages and benefits, make payments, store funds, and manage their day-to-day lives. These functions are essential to both financial viability and economic mobility, and they represent the enormous value that your institution provides to a large number of Americans on a regular basis.

It may start with urging, but eventually banks will be mandated by regulators to provide services to unbanked individuals. As CFPB states in its letter, there is a “third way”:

…which is to offer all applicants a lower-risk account (whether a checking account or a prepaid account) whereby the applicant cannot pose the same level of risk to the institution. Accordingly, the same applicant need not be screened out of the banking system by applying the same risk thresholds that are used to determine eligibility for a standard checking account.

Perhaps future bailouts or access to the Federal Reserve’s discount window will be tied to providing bank accounts to the unbanked, a la the Community Reinvestment Act. Over time this will morph into mandatory bank accounts for everyone, perhaps along the lines of mandatory entry into Social Security. While banks undoubtedly don’t want to provide service to everyone, as much of that business will be unprofitable, the government will likely toss banks a few carrots to ease their discomfort. The back end of the accounts might be operated by a JPMorgan or Goldman Sachs, with a government subsidy for doing that work. The front end might be undertaken by the Post Office, rather than burdening banks with more business at their branches. Presidential candidate Bernie Sanders has even suggested as much. What better way to continue the existence of a failing government entity than by mandating that everyone in the country do their banking through that entity?

And lest you think that the government can’t mandate that everyone in the country have a bank account, that’s what people thought about Obamacare and health insurance. If the government can require everyone in the country to purchase health insurance, it can certainly require everyone to maintain a bank account. Tie it in to Social Security or require that all tax payments be made from that bank account and voila, you have the perfect nexus for Chief Justice Roberts or his successors to rule that mandate constitutional. The judiciary is already bought and paid for. If you think such proposals are far-fetched and would be opposed by the public, you obviously haven’t been paying attention to the massive populist anger at Wall Street. While large swaths of the population would hate being forced to have a bank account, couching it as an anti-Wall Street move would exploit the politics of envy and smooth over any public opposition to the plan.

With banking as a public utility and every citizen possessing a bank account, it becomes much easier for the government to require all-digital payment systems. The unbanked currently rely on payday lenders, check cashing services, and money transmitters for their financial services. The cost of those loans, or of wiring money or purchasing money orders, is costlier than operating outside the banking system. Some people, however, are either unwilling or unable to open bank accounts, and so they remain outside the system. While their costs of doing business are higher, their transactions are also largely immune from observation by the government. The only way to keep tabs on those transactions is to force them into the banking system. Forcing everyone into the banking system is absolutely necessary to the government’s war on cash. The war on cash can only succeed once everyone is roped into the banking system. If you attempt to ban cash while large numbers of people remain unbanked, they will still use cash, it will just move underground, even further from government observation. Governments don’t like not being able to observe and control everything their citizens do, hence the push for a move to digital currency and payments. That brings about other serious problems, which will be discussed in the next installment of this series.

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