On Banking, Payments and Identity

By Maksim RokhlineBanking, Innovation, Payments

I can only suggest – and it is so easy to do! – that our established practice of free (of charge) deposit banking might be affecting the development of deposit products like payments and its integral – identity..

We get charged for storing our possessions in a warehouse.  The service rendered by a warehouse is justifiably priced at the level market clears – more or less.  However, when we store our money assets at a warehouse called Bank we pay nothing.  A bank renders a service of storing our monetary possessions.  As a part of this service, a bank offers an access to our stored wealth.  This access is provided in many ways – a banknote, a cheque, a PAN, a token, a BillPay web & mobile app,…  We pay nothing for it.  At least in the US, Demand Deposit (DDA) and Savings accounts are FREE.  Why?  Because banks perform another role of mapping savings to investments, allocate funds from savers to borrowers and make sufficient margins this way to cover the cost of deposit operations?

There was a time and place (or rather different times at different places) when deposit banking was separate from lending banking.  Evident enough that in the course of our banking evolution, the path to (and through) fractional reserve standard was uneven and marked by all sorts of investigations – theoretical and legal.  In 19th century, in England, people were seriously debating the legality of fractional reserve banking within DDA space.  1811 Carr v. Carr, 1816 Devaynes v. Noble, 1848 Foley v. Hill – these were the cases to decide whether placing money for safekeeping constitutes an investment, whether bank current deposit is a debt contract.  Can a bank lend money that depositors did not intend to invest/save but simply to keep – as a bailment – to facilitate their current operations?  Similarly, – can a warehouse lend my furniture that I did not intend to be leased to someone else..?

I might be frivolously connecting wrong dots here but I wonder whether fractional reserve practice so well established nowadays plays a role in the development of core deposit services like payments, beyond what it notoriously does to the ’shaky stability’ of our banking system.  What if, – just what if, – deposit banking would be separated from lending banking and thus offered for a fee that market clears – more or less?   

Would this incentivize deposit banks to focus solely on its core deposit offerings like payments?  Would this be THE ‘shift’ in a bank mentality to be that entity that spearheads innovation in the payments space?  Would it develop itself (sooner) into that trusted enterprise that guards and manages our Identities?  (May be in fractional reserve environment Trust is harder to earn?)

Would we have NON Banking players in that same space that don’t look to operate on fractional reserve standard, like Google wallet, as a random example…?  And how to understand a recent development of pre-paid businesses that do CHARGE a fee for loading funds into their issued general purpose visa/mc cards?  (Don’t they resemble pure deposit banking and may be children with a strange DNA string inherited from distant and long abandoned tribe of predecessors of decoupled Deposit Banking?)

Would it solve better for a social benefit of keeping money inside the banking system and reducing the amount of cash transactions?