There are over $12 trillion held in checking and savings accounts in the US paying an average APY of ~0.06%. There is no reason for anyone to have any money in any account paying less than 1.5-1.7% at today’s Fed rates. The impact on consumers is staggering:
$170,000,000,000 in lost interest EVERY YEAR
That’s $670 per adult in the US that should be going into peoples pockets is instead, going towards this:
Wells Fargo, a bank that acted fraudulently for years and was fined $185m managed to make its shareholders happy. Great news for shareholders! How about their customers?
The actual benefit to banks is actually greater than the cost to consumers. The cost of a company borrowing money is on average between 6-7%. This means if banks had to borrow the money that they receive essentially for free from consumers it would cost them $700,000,000,000 – almost $3,000 per adult in the US.
To put this in plain English, we are giving our money to banks for free – they lend that money back to us at rates as high as 20%+ as loans, mortgages and credit card debt etc. The banks make fantastic profits on the back of this and yet the only benefit to us is they don’t charge us for holding our money? The “free banking” we all love so much. This is ridiculous, it’s exploitative and we should be bloody angry about it – but for some reason, we aren’t.
It’s a voluntary tax on our money that we can avoid – why is this not a thing.
Its also an example of market failure of epic proportions, this is the very definition of a market designed for disruption. Massive profits, underserved consumers, poor value for money, technology advancement driving new business models and changing the nature of competition.
What do we get for the $700 billion in value that we pay for banking services?
How banks spend their money?
- Headcount – the top 10 banks in the US employ over 1 million people between them
Technology – primarily keeping decades-old systems going
Buildings and other fixed assets – branches and corporate offices
In essence, all the things you needed to run a bank 50 years ago are what the incumbent banks spend their money on. If you were to build a bank from scratch today technology would negate the need for almost all these costs. This means in principle that the dollars that would have been spent on costs can be returned to consumers.
Why are we not seeing a groundswell of consumer activism to drive change? In part, it’s because we have been trained to accept the status quo and in part its because no one has stepped up to provide an alternative model. Money is a strange concept in that it is at the same time very high interest – we all want more of it and its fun to spend it, but also very low interest – managing money could not be more boring and hard.
We need to create a rebel alliance of personal finance blogs (there are over 600), journalists, government regulation and pressure and our personal actions to make the change to put this money back into peoples pockets and the economy.
We also need to find new ways to talk to people about personal finance to make them care enough to make the changes needed. Consumer inertia is costing us each individually and collectively a fortune in lost income.
Finally, we need companies to bring real choice in how we manage our money – better user experiences and better value for money. Reducing the effort it takes to manage our money to maximise the return on investment we get for less effort.
This could happen really quickly – the only way the industry will change is when there is an economic incentive to do so. Currently, the economic incentive is to continue with the status quo – incumbent banks do meaningless innovation theatre and talk about the threat of “FinTech”. But the easiest thing they could do – pay consumers and small businesses a fair interest rate on their deposits, they won’t, as it would directly and meaningfully harm their profits, share price and personal careers, affluence and retirement prospects.
It is in the individual and collective power of consumers to make this change if we choose to do so – we should not be impoverished by banks but enriched by them. That’s a revolution worth pursuing.