back to article Today's get-rich-quick scheme: Build your own bank

Here's a great get-rich-quick idea: Go build a bank. No, really, it's an industry that's ripe for the plucking at present. One way to think about banking is to divide it into four different types: transaction, savings, commercial and investment. Investment banking is all that City-style markets 'n' stuff; commercial is trying …

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  1. Anonymous Coward
    Anonymous Coward

    Im in.

    I'll work for nearly nothing. I do now anyway.

    The bank of El Reg. Vulture logo strangely fitting.

    "The bank that likes to say, 'Beer time yet?'"

    1. Squander Two

      Me too.

      Tim, if you actually do this, I'll happily run your customer service.

    2. Anonymous Coward
      Anonymous Coward

      Re: Im in.

      I'm not in.

      The economy works on credit. 100% reserve banking means that Worstal Bank plc bank won't do overdrafts, credit cards, mortgages, personal loans. It won't support business through lending, won't do factoring or trade credit, won't run business overdrafts. And with no cross selling income it will struggle to break even without charging customers. All the money on deposit with the BoE is effectively sterilised in terms of wealth creation, which from a national perspective doesn't seem a markedly more responsible position than taking excessive risks.

      As this operates to the same level of sophistication as a piggy bank, people can do this today, simply by withdrawing their monthly salary in cash as soon as it is credited, sticking it in the teapot on the mantlepiece, and then paying all ongoing expenses in cash. Only a few hours of bank solvency risk per month, what more could you want? There's a few loons do this, most of us aren't that fussed.

      So I think the basic idea is flawed. People accept the FCS deposit guarantee scheme gives them the security most of them need, and the actual risks, costs and complications of legacy systems are probably overplayed (certainly against the non-trivial risks of building a complete new IT infrastructure from scratch). Obviously there's an attractive option of avoiding the casino banking operations that have caused so much grief, but there's a number of banks and building societies who don't engage in investment banking but who do offer retail banking services. And they do offer credit services that the economy relies on.

      1. Bronek Kozicki Silver badge

        Re: Im in.

        Ah, right. Overdrafts (and any other kind of lending for account owners). That's one thing such a bank wouldn't have.

        This is obviously competitive disadvantage, but would it scare customers away? Perhaps not. The difference between such a bank and teapot is that you actually cannot rob a bank which keeps all the money at the central bank. I guess that someone might like this extra security.

        1. Anonymous Coward
          Anonymous Coward

          Re: Im in.

          "This is obviously competitive disadvantage, but would it scare customers away? "

          Not for a quite exceptionally risk averse subset of customers. With no material income streams other than from base rate and charges, we're talking about a retail-only bank, and one that has to charge for everything. As a consequence bounced payments will have to be charged on top of normal account operation fees, and I don't think chronically risk averse customers will like being hit for bounced payment charges.

          If they don't go overdrawn that's not a problem, but the practical way this pans out is that Worstal Bank appeals to an increasingly sub-setted niche of customers: highly risk averse people, sufficiently educated to understand but object to systemic risks in conventional banking, sufficiently liquid to be certain that they will never go overdrawn, willing to pay for basic transactional services (plus bank overheads, marketing etc), but willing to forgo easy access to other retail banking services from their main bank account provider. To an extent Worstal Bank's target market is paranoid well-to-do middle class pensioners. The poor will be excluded because they won't like charges for operation, but often have greater need of credit services.

          I'm intrigued why Tim thinks Worstal Bank is a get-rich-quick scheme. I can't see the money myself, because I don't believe there's the customer volume, I don't believe operating costs will be particularly low, and I don't see the investment case as a business.

        2. TopOnePercent Silver badge

          Re: Im in.

          The difference between such a bank and teapot is that you actually cannot rob a bank which keeps all the money at the central bank.

          Sure you can.

          All I have to do is hack your web site and I've robbed you of the money I transfer away or withdraw.

          Shotguns and ski masks won't work, but lets face it, thats not been good business for a long time because its easier to use sledgehammers and steal watches or jewellery - more choice of targets, lesser security, and reduced punishments if caught.

      2. Chris Miller

        @Ledswinger

        I'd be happy to use such a bank. I haven't had a personal loan for 40 years, and I'd never consider getting a mortgage from a bank. You're right that there would have to be a fee - I'd suggest a small fixed charge (a few quid a month) and a few pence per transaction. Sounds a better deal than 'free' banking that bombards you with requests for loans you clearly don't need or want and charges you £25 for a snot-o-gram if you go overdrawn by a few pence.

        1. Anonymous Coward
          Anonymous Coward

          Re: @Chris Miller

          "I haven't had a personal loan for 40 years, and I'd never consider getting a mortgage from a bank"

          My point was less about the personal needs of individual customers, than the wider economic impact of not offering any kind of credit. One of mankind's finest inventions was credit, because this enabled society to get richer by using wealth that temporarily was not being used by its owner.

          I'd suggest a small fixed charge (a few quid a month) and a few pence per transaction. Sounds a better deal than 'free' banking that bombards you with requests for loans you clearly don't need or want and charges you £25 for a snot-o-gram if you go overdrawn by a few pence.

          If you're getting physical spam then presumably you ticked the wrong box, and you struggle to throw the stuff away. Personally I put unwanted financial services post in their own reply paid envelope and let the post office return it to them, but each to their own. As for complaining about £25 for an unauthorised overdraft, how on earth do you think Worstal Bank will cope with payment requests that can't be offered? They won't offer overdrafts, so you can't go overdrawn - but then you'll certainly be clobbered for a bounced cheque or refused debit, and if it's a mortgage or insurance debit then the provider will also probably nail you for late payment (so £50 ish). My banks have always provided large standing overdraft facilities that I rarely use, but means I am only exposed to the interest, and if you're being charged for piffling overdrafts then you need to move to one of the many banks that offer free standing overdrafts.

          1. Olius

            Re: @Chris Miller

            Whoever said a 100% reserve bank can't offer credit? A bank classically lends out money it has held in savings accounts on the hedge that not all its customers will want to withdraw their money together. The interest payments you receive on your savings balance represent payment from the bank to you for allowing your money to be used for this purpose.

            Fractional Reserve Banking was invented on the sly when banks realised they could get away with issuing more "IOU"s than they had reserve for. This was later made law. So now the bank isn't lending out your money, it is lending out money it has created - which means that if the loan is defaulted on, the bank has no capital loss, only loss of profit. This is reflected by the staggeringly low interest payments you get on your savings these days.

            1. jonathanb Silver badge

              Re: @Chris Miller

              No, fractional reserve means that your reserves are a fraction of your deposits. So for example if the fractional reserve percentage is a typical 6%, you could lend out about 94% of your deposits. The exact reserve percentage depends on the type of deposits you receive and the type of loans you make. The credit multiplier effect comes from people depositing borrowed money back into the banking system, possibly in the same bank.

              What this article describes is essentially what Paypal does already. Paypal doesn't lend out money, all of their customer funds are deposited in a bank account, though it isn't necessarily at the Luxembourg Central Bank. They have some advantages for transactions involving small amounts of money, but nobody deposits their entire salary in there, and businesses that receive all their money from customers via Paypal tend to transfer the bulk of it out to a bank account elsewhere.

              1. This post has been deleted by its author

            2. tfb Silver badge
              Boffin

              Re: @Chris Miller

              A 100% reserve bank can't offer credit. If it does so then it is just an ordinary bank.

              To be more precise: the deal with a 100% reserve bank is that if all its depositors turn up and ask for their money at once, it must be able to satisfy that request. So it can't lend any of the money deposited in it since if it does it's not a 100% reserve bank. It could lend other money, such as, for instance, any profit it makes.

              1. Spleen

                Re: @Chris Miller

                "It could lend other money, such as, for instance, any profit it makes."

                I think we've established pretty conclusively that it would be extremely hard to make a profit out of this enterprise, though. After you've paid dividends to the people that have risked their shirt to build this giant mattress, I doubt there'd be enough left to make it worthwhile loaning out the profits. Especially given that setting up a loan arm requires extra accounting, risk assessment, regulation, etc.

                1. Mark 65

                  Re: @Chris Miller

                  Not to also add that it is possible for central banks to actually have a negative interest rate for money on deposit in order to incentivise the depositing bank to lend it out. Thus not only would you struggle to make any money in this venture but in the current climate you may be at risk of pissing away a fortune. I believe the ECB has mooted the idea before of a negative deposit rate and I'd hate to take the view that "it couldn't happen here" when you may have billions on deposit.

          2. Gordon 11

            Re: @Chris Miller

            One of mankind's finest inventions was credit, because this enabled society to get richer by using wealth that temporarily was not being used by its owner.

            As I understand it, it enables some of society to get richer by using wealth which has not yet been created! And the problems occur when the future arrives at the present and is not what was expected by the past.

    3. Anonymous Coward
      Anonymous Coward

      Re: Im in.

      I think you need some credit facility to make this work, but that's obviously where the misery hides - unless you make this (a) operating on better reserves than "traditional" banks and (b) - and I consider this the killer preference - make that position constantly visible. One of the key risks to banks is their exposure, and it's really time that gets brought out into the open - it would make a sea change from the current "we're stacked to the hilt but we're still paying bonuses until we die" hiding of a bank's exposure. Doing that would also enable comparisons of banks.

      Until then, I'll store my money in gold in some vault once I manage to not have month left at the end of my money :)

      1. scrubber
        Pint

        Re: Im in.

        Absolute doddle. People have two accounts, one safer than houses deposits, the other available to be used for credit for other account holders.

        People wishing to use short term, small credit facilities, can do so under similar conditions to Wonga (better because they've built up a history with us) and only the funds depositors wish to put at risk are ever used to give credit.

        This is much easier than people realise. Have a beer.

      2. Tom 13

        Re: once I manage to not have month left at the end of my money

        While I appreciate the humor, that's the real root of the problem. Too many of us have too much month/half-month/2-week/week left over at the end of our money. So we're all living off rolling short term credit. If you want to rebuild our economy, for a while most of us have to cut back on expenses so we have money left over at the end of the period. And while that is happening the economy WILL contract because we're paying off all those debts we owe. Only once we get back in a position where credit is extended mainly for capital type investments will the economy recover.

    4. Zot

      Re: Im in.

      "The bank that likes to say, 'Beer time yet?'"

      I prefer to call it 'Beer-o'clock!' It's getting there now... .. .

      I will then be 'Half past sloshed.'

    5. thomaskwscott

      Re: Im in.

      Hurry up and take my money!

  2. Anonymous Coward
    Anonymous Coward

    Set the wayback machine to Girobank

    "a purely transactional one based on a new and cleanly written platform"

    Right. No problem. The Girobank folks did it in the UK, together with the Post Office for branches (today, something else would be needed too, e.g PayPoint). Anybody got the archived backup tapes?

    Of course the real problem is everybody else in the retail banking business wants the new boy OUT of the business, because you make it really obvious that the legacy players are largely overpriced underperforming offshoring jokers who wouldn't know customer service if it hit them on the head.

    1. Mark 65

      Re: Set the wayback machine to Girobank

      To be honest I'm not such a great fan of the "wouldn't it just be fantastic to start fresh" approach. Given the wanky old COBOL code has been running for the odd decade or so do you really want the current crop of CV++ coders using their latest fad technology on something so important? Sure, RBS has had some issues but then DO'C here on the Reg has documented all about how that clusterfuck came about and it certainly wasn't the fault of a language, save perhaps for a couple of spoken ones.

  3. fandom

    No, it would not work, a crisis would come and suddenly the central bank is charging you to keep the money and the bank would go broke.

    1. IDoNotThinkSo
      Mushroom

      Special circumstances

      A crisis caused by your competitors would come and suddenly etc

      FTFY

      In such circumstances you'd have to find somewhere else for the money, whence you end up down the investment or commercial bank road, or charge customers.

      Alternatively, some of your shareholders might get a bit greedy and decide they want to do something else with the depositors money, so that they can get better returns.

      Nice idea in theory though.

    2. Google

      As recently adopted by the ECB http://www.bbc.com/news/business-27717594

      Yes, you get to pay them to store your money. In return you get access to your money without any funny business - as a bank should work. Unlike Northern Rock where you turn up and they're free to go "we dont have it". http://www.youtube.com/watch?v=-N_mb1AfeOY

      1. Grikath

        charging customers..

        And "normal" banks don't do so? Over here in the Lowlands, private accounts pay a small amount quarterly for the bank to Process Your Stuff and supply you with a bank card. Commercial accounts pay a handling fee on top of each transaction. Pretty minute individually, racking up quite a bit with a couple of million accounts...

        Any profit from that income could easily be the base for the Other Types of Banking while still not touching/endangering your customers' money, at all..

        Starting it all up is a biatch though.

  4. dogged

    Priced out

    The issue I see is that unless you've got billions deposited with the BoE, the interest is (as you mentioned) negligible. Therefore, your only way to pay operating costs is via transaction charges.

    Now, private punters don't like transaction charges and can get an account without them from one of the big rip-off artists (who make their money back on selling debt and outrageous "whoops" charges) so they can get a deal which, on the surface, looks better by staying right where they are.

    Commercial interests are totally used to transaction charges, of course, but they're not going to deal with you either because... they operate in overdraft because of liquidity measures and tax mitigation. And you can't offer overdrafts if you're operating on a 100% reserve.

    The only potential buyer would be the long-term savings market except you can't pay interest because what you earn is effectively nothing.

    Shame, but there it is.

    1. James Micallef Silver badge

      Re: Priced out

      "you can't offer overdrafts if you're operating on a 100% reserve."

      As has already been pointed out by another commenter above, "100% reserve" does NOT mean that the bank doesn't lend money out, it means that if the bank has £1mln in deposits, it can only lend out a maximum of £1mln. So unless half your customers are overdrawn to the amount of the deposits of the other half of your customers, no problem.

      1. Anonymous Coward
        Anonymous Coward

        Re: Priced out

        "As has already been pointed out by another commenter above, "100% reserve" does NOT mean that the bank doesn't lend money out, it means that if the bank has £1mln in deposits, it can only lend out a maximum of £1mln. "

        I believe you're wrong, because you've assumed that the "lending" is the only liabilities of the bank. In fact the bank starts off with liabilities to its account holders who are in effect creditors - they give the bank the money, the bank doesn't own the money, it therefore owes it to the creditors. In the case of 100% reserve banking 100% of the cash deposits are held with the BoE to cover liabilities to those creditors. There is nothing left to lend, unless you cease to hold 100% reserves against those creditor liabilities, and then you're into a fractional; reserve banking model.

        1. Anonymous Coward
          Anonymous Coward

          Re: fractional reserve banking

          "There is nothing left to lend, unless you cease to hold 100% reserves against those creditor liabilities, and then you're into a fractional; reserve banking model."

          Erm, surely they've been into a fractional reserve banking model at least for the last few decades?

          1. Anonymous Coward
            Anonymous Coward

            Re: fractional reserve banking

            "Erm, surely they've been into a fractional reserve banking model at least for the last few decades?"

            Of course the whole banking system has been doing fractional reserve banking for hundreds of years, but this article was about a hypothetical bank that doesn't do that. My response to James M was that such a bank cannot lend any money to additional creditors (over existing despositors) because then it ceases to have 100% reserves for liabilities to despositors.

            Fractional reserve banking works well when banks make good lending decisions. It operates really badly when they make bad lending decisions. So 100% reserving dramatically reduces the risk of banking, simply because the bank is unable to make any lending decisions, good or bad.

            1. jonathanb Silver badge

              Re: fractional reserve banking

              Fractional reserve banking works because I only actually withdraw about 5% of the money I receive. The rest is paid to people in the form of bank transfers or card payments (another form of bank transfer), so while it may move from one bank to another, it never actually leaves the system, and for an individual bank, my transfers out will be matched by customers of other banks transferring money in.

              1. Anonymous Coward
                Anonymous Coward

                Re: fractional reserve banking

                "[account holders money] may move from one bank to another, it never actually leaves the system"

                Till word gets out that a particular bank, maybe Southern Sock, has what they refer to as liquidity problems.

                Joe Public rightly gets nervous, and wants their money out, now, as cash.

                And the other banks also stop lending to Southern Sock.

                And the rest, as they say, is history.

                It'd be nice if they'd teach this stuff proper in skool.

        2. James Micallef Silver badge

          Re: Priced out

          @Ledswinger - You're right, I hadn't considered that cash deposits are effectively a liability for the bank. But by the same reasoning, wouldn't any overdraft / loan to clients be an asset to the bank?

          In any case, my point was not so much to argue on the exact semantics of what "100% reserve" means, it was more to point out that a bank run on the lines I was describing (you can only lend out exactly as much as the deposits you have) should still be a sustainable and solvent model, and definitely more secure long-term than lending out large multiples of whatever deposits you have.

          1. Anonymous Coward
            Anonymous Coward

            Re: Priced out

            "In any case, my point was not so much to argue on the exact semantics of what "100% reserve" means, it was more to point out that a bank run on the lines I was describing (you can only lend out exactly as much as the deposits you have) should still be a sustainable and solvent model, and definitely more secure long-term than lending out large multiples of whatever deposits you have."

            If you can only lend out as much cash as you have in deposits then you could, for example, have no balance whatsoever - $100 on deposit, all lent out. In which case how do you issue cash to the depositors when they come calling? You also have the added issue that your deposits may be short term (think salary input to cover monthly expenses) and yet your loans may be 1yr, 2yr, 5yr, 25yr mortgage etc. A classic duration mismatch meaning you then need to go to the money markets to source cash to cover the shortfall, paid for by what? Interest payments you haven't yet and may not necessarily receive? You also have counterparty risk in that not all borrowers repay their debts and not all debts are recoverable.

            Personally I think it would be better in some way to resort to the old system where the local bank manager was responsible for their own loan book and used their knowledge of their customers and the local market (as well as credit checks etc) when making loans. Computer says yes on 105% home loan just doesn't make sense.

          2. Anonymous Coward
            Anonymous Coward

            Re: Priced out

            "by the same reasoning, wouldn't any overdraft / loan to clients be an asset to the bank?"

            Yes. And this is the core of the dark wizardry that banks use to balance their books, because loans the bank makes are an asset on their balance sheet. The problem is that this only works if the bank is prudent in its lending decisions, and the asset is worth its face value. As has been shown time and again, banks behave cyclically, and often the herd stampedes after all and any borrowing, regardless of the risks, resulting in balance sheets stuffed with "assets" that are nothing of the sort. There's one other point, and that is that "assets" are not "reserves" - reserves are any form of ready cash or cash equivalents that are available near instantaneously to honour requests for withdrawals.

            If you had a bank that loaned out only the value of depositors cash, then it wouldn't have reserves to cover all of the depositors' money, and you are expecting those customers to trust that the lending is prudent and safe, and the much lower reserves are adequate against expected withdrawals. That's what banks do at the moment, and it is completely at odds with the Worstal Bank model.

            I think from your comments that what you're looking for is some halfway house between the reckless casino banking of the majors, and the near-Amish concept of a 100% reserve bank that can't lend. The nearest you'd get to that is probably a prudently run building society that offers retail current account facilities under the more restrictive terms of an FCA desposit taking licence rather than a banking licence, and ideally eschews all forms of commercial lending, but that still exposes creditors to the organisation's decisions on retail lending quality. If that's what you want, then Coventry Building Society will meet your needs, along with a few others.

            Note that the Dunfermline Building Society managed to screw it up and had to be acquired by Nationwide (who incidentally have a full banking licence, and are just a big bank unanswerable to shareholders) so the idea that all building societies are low risk is not correct. And that's part of the case for Worstal Bank - if the management can't make loans, they can't make bad loans. And if they can't offer credit, they'd likewise neither need nor be able to trade derivatives, so there's another red hot risk that management can't take with other people's money (incidentally a building society deposit taking licence doesn't permit wholesale involvement in derivatives, commodities or currencies).

    2. John Smith 19 Gold badge
      Boffin

      Re: Priced out

      "he issue I see is that unless you've got billions deposited with the BoE, the interest is (as you mentioned) negligible. Therefore, your only way to pay operating costs is via transaction charges."

      Isn't that the point?

      All the money depositors put in their account (at the BoE) stays in their account.

      In a regular bank 3% of that money stays in that account (or at least it should, CDO's were a trick round that).

      So is BoE bank rate on £1Bn enough to cover costs? That's £5m

      1. dogged

        Re: Priced out

        So is BoE bank rate on £1Bn enough to cover costs? That's £5m

        Costs are pretty low (except for access to the ATM network and I don't know what that goes at) so let's say it is.

        Is it enough to generate a profit?

        My guess is not.

    3. GBE

      Re: Priced out

      "Now, private punters don't like transaction charges and can get an account without them from one of the big rip-off artists (who make their money back on selling debt and outrageous "whoops" charges) so they can get a deal which, on the surface, looks better by staying right where they are."

      I don't ever get charged the "whoops" charges, so not only does it look like a better deal on the surface, it _is_ a better deal. There are no transaction charges, I have a no fee credit card which rebates 1.5 percent of transactions, no ATM fees, free cashiers checks, and they pay a small but non-zero interest on deposits As long as I keep the total balance below $100,000 there is absolutely no risk.

      I do have to pay to have check blanks printed, but since I only write a dozen or so checks a year, that cost is pretty negligible.

      1. jonathanb Silver badge

        Re: Priced out

        Living in the UK, I don't have to pay for cheque blanks to be printed, but then, I can't actually remember when I last wrote a cheque. Very few people accept them as a form of payment these days.

  5. Richard 23

    Sounds like Paypal....

    ..with ATM access.

    However two issues with this:

    - From time to time central banks have had negative interest rates (you have to pay to deposit money with them!)

    - No overdraft facility

    1. Roger Greenwood

      Re: Sounds like Paypal....

      and they already have 99% of the infrastructure, links to existing banks and customer awareness (n.b. I didn't say "trust").

    2. Anonymous C0ward

      Re: Sounds like Paypal....

      PayPal even do debit cards.

      https://www.paypal.com/uk/webapps/mpp/accesscard

  6. Frankee Llonnygog

    Sounds a bit like

    National Savings and Investments

    1. Anonymous Coward
      Anonymous Coward

      Re: Sounds a bit like

      "Sounds a bit like National Savings and Investments"

      Not quite.

      I get a paltry interest rate for savings with NS&I. Given that Worstal Bank will get BoE overnight rates, there will be little or money to offer credit balance interest after bank operating costs, and systems and organisational investment returns to the equity investors. This also has an implication for Worstal Bank, that customers will use it only for transactional activity, and keep their savings elsewhere. Because corporate costs (directors, legal, compliance, and a tiny marketing budget) would swallow up the BoE interest (I just did some fag packet maths to establish that), that in turn means all operating costs need to be recovered from account charges. I'd guess that the costs of operations would be around £15 a month, which over the year is equivalent to 14% of the average balance.

      Will there be a long queue for this product?

      No risk!

      No credit interest!

      No overdraft!

      And 14% charges for doing a few measily payments!

  7. Caff

    license

    Well geting the license would be the first hurdle

    http://www.compliancy-services.co.uk/uk-banking-licence-applications

  8. Simon Rockman

    Being a retail bank is the easiest business in the world

    It's a billing system. Every business has one of those. It's also a confidence trick. Banks are mandated to have a set of accounts which would get any other business shut down as trading while insolvent.

    Stock is other people's money. It's not subject to fashion, doesn't come in sizes or perish.

    All the complication in running a business isn't present in being a bank all they need is decent customer service and yet they can't even stay open when customers want to visit.

    Simon

  9. Anonymous Coward
    Anonymous Coward

    I have a better idea, just give it all to me and ill keep it safe. When I have enough I will build a money castle so people have true transparency on how much money I hold*.

    *The value of money castles can go up and down depending how moist the money gets. Australian dollars can be invested without a conversion charge, as they are good waterproofing material for the roof. For full terms and conditions please see the little plaque next to the drawbridge. Black Knight Banking accepts no responsibility for losses due to civil war or an attempted coup on the monarchy.

  10. Ben Liddicott

    Sealing wax hasn't been used for computer systems since the late 70's.

    Chewing gum is what is used now - usually Nicorette these days due to the smoking ban.

  11. JimP
    Megaphone

    How do we get from here to there?

    I think I see a problem. Where is the money which is going to be deposited going to come from? The answer is existing banks - who, as you point out, only have a fraction of it to give out. In other words, if this becomes popular, all the Mrs. Migginses of the world have to finish paying off their mortgages or there is an almighty run on the fractional banks.

    Also, what does the Bank of England do with all this money in order to finance paying the interest?

    I think the above would lead to a refusal to award the licences needed for this new bank, on the basis that it might be stable, but it would destabilise everything else, because everything is already in a bubble caused by fractional banking. Just think what the situation would be like if second hand houses reduced in value to somewhere around what it would actually cost to build one. It's like the Emperors new clothes - and people manage to draw different conclusions from that, even though it usually gets taught in junior school.

    The bottom line is that, because of fractional banking, our money is not really worth what we think it is, and an institution designed to correct that would cause massive deflation if people used it en masse. One country/currency on its own could not pull it off - it would have to be all or nothing, and athough I'm for it on the basis of it being more honest, the people with the bigger numbers in their bank accounts would no doubt find ways of making sure it was the less well-off who suffered most through the changes.

    The other point about needing banks with better computer systems is a no brainer. Sadly, in order to get that done, it would require legislation approved by the house of people with no brains when it comes to technology. I can't see the banks doing it off their own bat, as it would look like an admission that what they have now is not fit for purpose, and if they admit that, they would most likely lose their banking licences.

    No matter how many layers of the Emperors clothes I put on, I never get any warmer.

    1. Anonymous Coward
      Anonymous Coward

      Re: How do we get from here to there?

      "an admission that what they have now is not fit for purpose, and if they admit that, they would most likely lose their banking licences."

      Historical evidence from 2008 and before shows that the odds of a bank being punished by having its licence withdrawn are negligible, in almost any circumstances. Same as the odds of an upstart outsider being blessed with a moneyprinting/banking licence are also negligible. (Negligible = very very small but maybe not actually zero).

  12. Pete 2 Silver badge

    A better mousetrap

    > someone coming in with a completely blank sheet, able to write a clean and efficient system from the ground up,

    All very fine, in theory. However a lot of the baggage that banking systems have are the fixes, workarounds, tweaks and efficiency hacks that had to be added to the original clean sheet bank system in order to get it to work securely, according to all the regulations, without stiffing customers' 0.0001 pennies from rounding and able to "talk" to all the other banking systems: which don't quite work in practice the way their paper specifications say they should.

    How long would it take to get from a brand new, clean system to one that is able to operate in the same environment as all the mature (albeit rat's-nest coded) systems we have today.

    And on another note: how would you persuade customers to deposit all their "hard earned" with you. Customers need to have confidence in their banks and all the annoying little glitches that would be found during (say) the first few years of operation wouldn't add to the customers' feeling that their cash was safe. And when you add to that the sinking feeling that a customer would get when receiving their introductory letter:

    Dear Mr. Worstall,

    Thank you for opening a current account with us.

    Your account number is 00000001.

    Please tell all your friends about us

    Doesn't really work, does it?

    1. Peter2 Silver badge

      Re: A better mousetrap

      1) Saying how hard it is to do banking because of all of the old code is FUD bollocks. All you've got to do is hold a number in a database and have;-

      1a) An inbound/outbound chaps interface to transfer money to anywhere you want (via a documented standard)

      1b) a connection to the LINK network for ATM transactions (documented standard...)

      1c) connections to SWIFT or similar. (Just another module following another documented standard)

      You don't NEED to interconnect with any of the rat's nests of code run by Lloyds etc. Frankly, I have more complex code than this running on my website. Conceptually it's absurdly simple and I can't see the actual coding to be likely to take more than a few weeks. Getting the bank license would be the hardest bit since in most industries regulators are largely there to build barriers of entry to protect the existing incumbents from new entrants.

      2) re current account numbers; you just do what most new businesses do and start your database reference numbers sequentially from a randomly mashed number like 826915.

    2. John Smith 19 Gold badge

      Re: A better mousetrap

      "How long would it take to get from a brand new, clean system to one that is able to operate in the same environment as all the mature (albeit rat's-nest coded) systems we have today."

      IBM iSeries run what's basically a "bank in a box" application which is run by a number of UK London sited foreign banks.

      Simply add cash and licenses.

    3. Intractable Potsherd Silver badge

      Re: A better mousetrap @ Pete 2

      "Your account number is 00000001 ... Doesn't really work, does it?"

      I may be in a minority (again), but I'd be really chuffed to have a bank account in the low digits!

      1. Mark 65

        Re: A better mousetrap @ Pete 2

        Hmm, might work if the bank were Coutt's but Worstal Bank?

  13. abedarts

    Sounds good

    Any business that can get people to lend them money without expecting interest is onto a winner. The 'negligible' base rate paid by the BoE, even at 0.5% is still a good turn and set to rise any day soon. So buy some EC2 space and get coding.

    There are loads of Ad opportunities too - credit cards, insurances, loans and so on; in fact it may be more of an Ad vehicle that a bank - perhaps Amazon should just bolt it on?

  14. Truth4u

    Why not make a quasi-legal bank that charges fees but never pays interest?

    Could call it LapYap...

  15. TeeCee Gold badge

    Slight snag.

    1) World + Dog goes: "That sounds safe, I'll put my money there."

    2) The rest of the banking system has no money to lend out.

    3) Economy collapses.

    1. Truth4u

      Re: Slight snag.

      Banks do not lend out deposits, that is a common misconception.

      Private banks control the money supply and the issuance of new currency.

      When you take out a £1,000 loan, the bank creates a corresponding £1,000 credit in your account, out of thin air, using a computer.

      Therefore, private banks control the issuance of currency.

      1. Truth4u

        Re: Slight snag.

        huh any economist will tell you that but go ahead and thumb it down. keep popping those blue pills.

      2. Gordon 10 Silver badge

        Re: Slight snag.

        Your terminology is wrong and your point poorly explained. Private banks are something different to high street banks. The word you were looking for was leverage.

        And high street banks DO lend out deposits - albeit with a significant leverage ratio attached. ie if you can reasonably predict the rate of default you can actually afford to lend out more money than you actually have.

        example. If you have an average amount owed at default is £100 on a £1000 loan, and you have £1000 worth of deposits, you can actually afford to leverage those £1000 deposits by lending 10 x £1000 out = £10,000 - which is how banks use debt to grease the wheels of the economy.

        In reality the maths gets more complex when you add in the ratio of defaulters to non-defaults so the ratio can go sky high.

        1. James Micallef Silver badge

          Re: Slight snag.

          OK, banks do lend out deposits but his main point is still correct, banks operating with fractional reserve (ie all of them) DO create money out of thin air. In your example, the bank has £1000 in deposits, it is lending out that £1000 deposited, and then also lending out £9000 that it created from thin air.

      3. jonathanb Silver badge

        Re: Slight snag.

        No they don't. A lot of people don't understand fractional reserve, and make this mistake.

        To make the numbers easy, lets assume the fractional reserve percentage is 10%. In reality it is more like 6%. Lets also assume for simplicity that I am the only person that deposits money in the bank, there is only one borrower, and that borrower uses all the money to buy stuff from me.

        I deposit £1000 in a bank. The bank retains £100 of that as a reserve and lends out £900.

        The borrower comes into the bank for the £900 loan. The debit is the £900 loan. The credit is the £900 of my cash that is handed to the borrower over the counter.

        The borrower then buys some stuff from me for £900. I deposit that £900 in my bank account. My account now has a balance of £1900. The bank retains £90 of that as a reserve, total reserve £190. They lend out £810.

        Repeat this process many times over. I now have £10,000 in my bank account. The bank has £1000 in reserve, all of my original cash. The borrower owes the bank £9000.

        Lets now add a small complication and assume the borrower doesn't withdraw the money as cash. Instead he opens an account with the bank and has the borrowed money transferred into it.

        For the initial £900 loan, the debit is still the loan. Now the credit is to put the money into the borrower's bank account, instead of handing over the cash. The borrower pays for my stuff by bank transfer so the credit is transferred from the borrower's bank account to mine. The end result is the same as for a cash transaction.

  16. JennyL
    Joke

    Banco El Reg...

    ...where your bank manager really *is* a vulture!

  17. Tim Worstal

    Perhaps I should also mention

    That I know Matt Ridley. He's had a banking licence in the past so.....ah, no, that won't work, will it?

    1. Anonymous Coward
      Anonymous Coward

      Re: Perhaps I should also mention

      "That I know Matt Ridley. He's had a banking licence in the past so.....ah, no, that won't work, will it?"

      Actually, if he's learned anything from the sinking of Northern Rock he would be an ideal person to run Worstal Bank. He's got a wide range of experience (including the better part of twenty years as board member of Northern Rock), he's bright, well educated, and he of all people understands why 100% reserve banking would be robust. Unlike RBS or Lehman, Northern Rock went down because of management error, not wilful recklessness.

      1. Mark 65

        Re: Perhaps I should also mention

        Northern Rock used to lend over 100% of a home's market value, I remember the LTVs in the section at the back of The Times - you can call that a management error but I prefer to call it willful recklessness.

        NR: "Secured loan for 125% is it sir?"

        Punter: "Yes please"

        NR: "What's it secured on"

        Punter: "Effectively fuck all as far as the liquidator will be concerned"

  18. Mage Silver badge

    Tesco

    Are they really making a bank or reselling someone else?

    1. Anonymous Coward
      Anonymous Coward

      Re: Tesco

      See also Marks and Spencer Bank.

      Are these real banks, or is it like the retail insurance industry where afaict loads of retail brands all resell the products of UK Insurance plc?

      1. dogged

        Re: Tesco

        Marks & Sparks banking is a wholly owned subsidiary of HSBC(UK) Plc.

        Terms & conditions apply, your home is at risk if you do not bend over and take it from the bank manager, may contain nuts

      2. dogged

        Re: Tesco

        Also, on Tesco, Wikipedia claims -

        Tesco Bank is a retail bank in the United Kingdom which was formed in 1997, and which has been wholly owned by Tesco PLC since 2008. The Bank was originally formed as part of a 50:50 joint venture between The Royal Bank of Scotland and Tesco

        So I guess they're actually running an actual bank. Unlike M&S.

        1. Mark 65

          Re: Tesco

          From watching the Bank of Dave the licenses are a pain in the arse to come by so most will either be a joint venture or a simple fascade/rebranding exercise.

  19. PyLETS

    Been there, done that. - well more or less depending how you view it

    If the people providing the goods and services being sold decide the credit rating of people doing the buying, within a group of people who trade with each other and keep score , you don't entirely need the BofE issued stuff, you can create, circulate and destruct some of your own as part of the process. I've even coded a webapp to keep score , it's all just double entry accounting.

    1. Gordon 10 Silver badge

      Re: Been there, done that. - well more or less depending how you view it

      The user id doesn't work on your demo app.

      1. PyLETS

        Re: Been there, done that. - well more or less depending how you view it

        "The user id doesn't work on your demo app."

        Fixed it for now.

  20. codejunky Silver badge

    Not convinced

    Why do we put money in the bank? It is to protect it, otherwise we would hold on to the cash. For anyone slightly savvy it is also to protect it from inflation as well which is an easy way to drain your money from you. The eurozone had to offer negative interest due to the current economic situation and with a minor hiccup from them or the US we too will have more 'solutions' being proposed and possibly negative interest.

    The money wouldnt be safe. The money would be bleeding away. That is without figuring out how you would make any money to pay any staff which you would undoubtedly need. You can have certainty of your money by holding it in physical currency. But when you go to spend it the prices will have left you behind.

    1. Tom 13

      Re: Not convinced

      Back when I was a young 'un and could legally have a demand account, you put money into the bank to protect it and maybe make a bit of money off it. You kept a decent pile of cash for daily things, including the weekly groceries. You wrote a check for your mortgage, your insurance, and maybe a credit card or two. Even if you were going to the after Christmas sales at Sears and JC Penny's to buy clothing you just made a bigger withdrawl from the bank before you went.

      These days you put money in the bank for the convenience of payment. Maybe you carry 40 bucks/quid around. Groceries go on the ATM card. Same thing for dinner out, even if it's just lunch at Mickey D's. Maybe you write a mortgage or rent check. More likely it's automatically withdrawn from your account. Same for your utility bills and your 4 or 5 credit cards. And it usually comes with overdraft protection so that when you run out of money at the end of the period you don't get hit with those nasty fees twice over on each bounced check.

  21. Dramoth

    Overdrafts

    The way to handle the overdrafts and loans is to use credit insurance. You would need to talk to a credit insurance broker (like one of my prior employers) and get a quote off them. That way, if the person obtaining the overdraft defaulted, you can claim the insurance and get your money back.

    However, there is a premium to pay on the insurance policy and you would need to have credit insurance yourself (until such times as you had enough money in the "bank" to cover the amounts you are allowing for the overdrafts). Usually, you would pass the premium money onto the customer in the way of fees and charges on a monthly basis... plus a couple of quid extra for your time and effort in doing the paperwork.

  22. Brangdon

    Or you could just use Bitcoin

    Bitcoin lets you send money where-ever, and stores the balance in the block-chain, and does it all cheap, transparently and trust-free. If the bank isn't doing any of the clever stuff, why do we need it at all?

    1. Mark 65

      Re: Or you could just use Bitcoin

      Bit volatile though. Especially when the FBI flog their hoard off - I'd imagine that will suppress pricing for quite a while. They could even manipulate the price for quite some time if they wanted to be shitty about it.

  23. TopOnePercent Silver badge
    Pint

    Lots of comments from people who don't understand banking...

    You've got 3 main problems with your plan Tim.

    1) To build, run, and maintain the web site you need IT staff. They'll need somewhere to work, so now you need an HQ. You've got an HQ, so now you need facilities staff. You'll also need HR to keep your company safe from legal action by your shinny new employees. Now you need an bigger HQ. Oh, you'll also need a sh*t lot of KYC staff to enforce global financial regulations regarding to whom you offer financial services. And you'll need a compliance & legal department to prove that to your regulators. A still bigger HQ beckons. You're going to need a finance team to pay all those people, and security for your physical books and records. And so it goes..... Pretty soon, you've got most of the cost of running a real bank, but only one profit making opportunity - whatever margin you can chissel from the base rate.

    2) Banking licences. You're going to need to get them, and as anyone that watched Bank Of Dave will know, they're not given out like candy or public sector diversity roles....

    3) Competition. If you could actually make it work inspite of all the above, I could make it work more profitably by offering mortgages to those requiring say 60% loan to value, where I can pretty well guarantee I won't lose a bean, and anything else I charge those borrowers over the fraction of base rate you're giving to your depositors can be turned into higher interest rates for my depositors meaning you'd lose all your punters.

    All of the above assumes you've set aside money for when your website is hacked (you'll need to have cash set aside to cover your losses or you'll go bust) which in your model can only come from chisselling away still more of the base rate that you offer your customers.

    1. Tom 7 Silver badge

      Re: Lots of comments from people who don't understand banking...

      You missed point 4)

      The other banks would have your hide and do all they can to prevent any effective competition.

      The last thing they want is a bank that doesn’t collapse when their unsustainable methods inevitably lead to a crash. Even if you ran a bank like this the others would offer even more unsustainable rates and offers to drag your customers to them - toponepercent may think he can make money on 60% mortgages but the others would offer terms that meant those making a killing on them would be loosing out to those on 80% loan to value.

      Having said that I'm in.

      1. TopOnePercent Silver badge

        Re: Lots of comments from people who don't understand banking...

        Completely agree with your point Tim, but its really just an expansion of the 3rd issue I highlighted, allbeit one enacted by the existing Masters of The Universe, rather than another new player in the game.

  24. M7S

    Where's the cash again?

    If deposits are taken each night to the Bank of England, given a time for the close of business there (5pm?), then allow for the the travelling time of all the security lorries leaving all the branches to get there by then, during rush hour, then you can figure out when the branches will have to close each day. Not exactly going to be handy for small businesses to go there with their end of day takings.

    - Do they keep them in the shop overnight and deposit them the next morning or does the bank create some sort of overnight credit account, of the sort they said they wouldnt?

    It could also make operating beyond London very challenging.

    Those cash lorries gong back and forth every single day aren't going to be cheap either, especialy as every "laaaagg wiv a shoo.er" will know the times and routes within a couple of days and in the event that there is some sort of national fiscal crisis resulting in the BoE deciding it can't release 100% of the cash overnight, or a strike by fuel tanker drivers (think about it) then people might be put out, to put it mildly. Still it would make life easier for HMRC to deduct interest or tax they believe you owe.

    And the cash in the ATMs, that will need to belong to the bank, until such time as it is withdrawn (when the bank then reimburses itself from the customers account, presumably placing the account as overdrawn until the cash comes back from the Bank of England the next morning) so that will need to be bank's assets, as of course it cannot borrow from other customers by crediting their account whilst putting the cash into the machine....

    Of course you could solve all this by not physically taking the cash to the Bank of England, but then all of a sudden like every other bank, you've got an account with them, involving credit and debit entries. Now what was that thing that made you so different from all the others?.....

    And where's the profit in all this for the quick rich scheme?

    1. TopOnePercent Silver badge

      Re: Where's the cash again?

      There are no lorries because there is no cash - I believe thats Worstalls central idea. The bank exists online only, so all deposits are dematerialised (not cash) when they reach your bank. Its a bit like what ING Direct used to be - no cash, no branches, online transfers from current accounts only, with the additional bolt on of allowing withdrawls direct from cash machines.

      In essence, it'd be retail only, no corporate banking. Unless your company doesn't handle cash either, in which case it'd work.

      1. M7S

        Re: Where's the cash again?

        I advanced my arguement as the author of the article frequently referred to cash (as in taking people's deposits of wage packets*), defined elsewhere (dictionary.com) in the first place as "money in the form of coins or banknotes, especially that issued by a government" and something I use regularly in local shops, parking meters etc.

        If there is no cash in the traditional sense, and all you've got is the "internet banking" part of a relatively normal current account, then I agree my argument falls. In this case the terminology used in the article/proposition needs to be clearer, and somehow I think "place your corresponding bank's accounting entries with us" might make it seem less attractive, even though this is the truth of how much retail banking actually works.

        *yes, some people still get these in cash, every week, in a little envelope. Not everyone passes KYC or is credit worthy enough for an account, even the "basic bank account" offered by the main retail banks that is a backstop for those on the breadline.

    2. Anonymous Coward
      Anonymous Coward

      Re: Where's the cash again?

      " Not exactly going to be handy for small businesses to go there with their end of day takings."

      This would be a strictly retail proposition, because business is based on credit. Nobody buys goods for cash, so suppliers need credit from their banks. They need to pay regular bills when income is variable. They need to borrow to finance new assets. They need complex products like credit guarantee insurance that a simple bank wouldn't offer.

      The other thing is that to run a bank like this, I can't see that they'd have any physical presence. The only way a normal bank can operate retail branches is by selling products through them, Worstal Bank can't do much of that. A bit of insurance agency maybe, that's about it. Counter services and cash transactions are loss making, so Worstal Bank can't afford those, never mind the buildings, staff and upkeep. Everything therefore needs to be done by electronic transaction and call centre, plus paying other banks for cash services and ATM access, in which case you're paying whatever the banks choose to charge for those.

  25. Whiznot

    But how do you pilfer the deposits if you can't surreptitiously lend to yourself through straw men nominees?

  26. captain veg

    inflation

    > Why wouldn't such a plan work?

    Bank of England pays you 0.5%. Inflation is 1.8%. You lose money.

    -A.

  27. jzlondon

    Sounds like a really good pub idea to solve a problem that doesn't exist.

    1. From a risk perspective, current account balances are already held with the Bank of England, in that they're directly guaranteed by HM Government.

    2. Fractional reserve banking is one of the greatest financial ideas of the modern era. Our economy couldn't function at the pace it does without it - there simply isn't the capital. Why on Earth would you want to get rid of it?

    1. Clive Galway

      Get rid of it? No.

      Provide an alternative? Yes.

  28. Clive Galway

    I don't see the problem with Fractional Banking

    The problem is surely with the fraction used?

    What fraction would it have to go to in order to remain profitable and be able to provide loans etc?

    If you wrote the code, you could surely set up multiple banks (or just multiple account types) where the customer chooses the fraction, and thus balanced the risk / reward levels themselves?

    Want a 100% account? You may have to pay some monthly charges, you would have to pay for all card issues, no overdraft facility, etc etc.

    90% account? No fees, free card issues, does overdrafts.

    Simples.

  29. John Smith 19 Gold badge
    Meh

    So it's an "execute only" bank like "Charles Schwab" was an execute only stockbroker

    Made a ton of money too.

    But the UK high street banks bitched to the relevant committees about relaxing membership restrictions on credit unions fearing they might take more business.

  30. Primus Secundus Tertius

    Why the middle man

    Why do we need the intermediate bank here? Why can't we each deposit directly with the Bank of England? Rather like the old Post Office savings account thet my mother opened for me when I was ten days old.

  31. Tom 13

    Is there something Warner and I don't know about how hard it is to code a transactions system?

    Probably. But since I've never done it either I can't tell you what it is.

    I can however spot the flaw in your proposal. A flaw that you sir, should have spotted well before you put pen to paper electrons to phosphor as YOU are more the economic expert than I am.

    Your transactional bank doesn't solve the problem of the commercial bank, it merely hides it at the Bank of England and pretends to have solved it. The interest payments are still dependent on exactly the things you've eliminated from your transactional bank. You've merely offshore/outsourced them.

  32. Anonymous Coward
    Anonymous Coward

    Money creation in the modern economy

    Banks don't work like your economics text books told you.

    'One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them.'

    'rather than banks lending out deposits that are placed with them, the act of lending creates deposits'

    'In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available'

    http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

    Soveriegn Government finances don't work like household accounts either.

  33. david 12

    I've done this

    -- for a couple of clients, who ran investment banks for their dealer network.

    Operationally, not very difficult. My clients did not require banking licences or building society licence or anything: whatever the requirement is for a banking licence, they were able to do this without it. Perhaps banking licences are tied to lending money? Or accepting money from the public? Or depositing with the Reserve Bank?

    My clients were just borrowing money from their dealer network, as a service to the dealers, as a kind of loyalty scheme. The money was just invested in the parent company.

    The reporting requirements were not very rigorous, for a few hundred clients and a few million dollars.

    Within the reach of a small coding team for those numbers, but the product I had would have scaled badly.

  34. Coltek

    Central Bunk...

    The Central Bank...

    The bank that likes to say "Bail In" - Warner wants his bumps read!

  35. Herby

    Why not??

    Call this "The Bank of England" and eliminate further middlemen.

    Pretty simple to me.

    I don't know what we would do here in the USA. Maybe the federal reserve will issue credit cards? Who knows.

  36. HKmk23

    And you would

    really trust the Bank of England.......................?

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