How Protests Could Change Banking


Amidst the macro worries about European sovereign debt and the ignition of the next election cycle, a protest movement called Occupy Wall Street has garnered a great deal of attention for itself. The demands of this movement are vague, and it is an open question as to whether much of what they object to is a byproduct of corporate policy or public policy (or an admixture of the two). Nevertheless, it is clear that their anger is directed, in large part, at some of the biggest banks in this country. (For more on how banking has evolved, read The Evolution Of Banking.)
TUTORIAL: Banking

The question is whether these protesters can actually impact the banks they target and what options are available to those who share the protesters views and concerns.

The Source of the Problem
The Occupy Wall Street movement is a diverse group with no particular singular principles. Nevertheless, it is not hard to find a lot of potential sources of unhappiness from the conduct of America's large banks.

Even though the troubled asset relief program seems on pace to result in a net profit to the U.S. Treasury, there is, nevertheless, a great deal of resentment that so much public money was marshaled so quickly to help out powerful financial services firms - particularly galling in light of the near-constant wrangling over extended unemployment benefits and other aids to regular works. In addition, banks have won few friends with aggressive foreclosure activity, large bonuses and severance payouts, and the perception that they are unwilling to lend to any but the best borrowers.

What Are the Options and Alternatives?
Although they are a useful (and generally peaceful) outlet for anger, the protests are not likely to change the way large banks do business. That leaves protesters and their sympathizers with the responsibility to figure out new ways of conducting their business while avoiding the entities they claim to hate.

No Banking at All
Simply ignoring the banking infrastructure altogether is a radical move that, likely, only appeals to the most eccentric and adamant. In today's world, it's just not realistic. It is too inconvenient (not to mention risky) to hold everything in cash and conduct transactions solely with currency - and it is hardly even an option at all for businesses. What's more, fractional reserve banking is a major source of our money supply, and the deconstruction of banking would cripple the economy.

Credit Unions
Credit unions may be the most palatable option for most people. Credit unions operate on a not-for-profit basis, and generally offer higher rates on deposits and lower rates on loans than comparable banks. Although credit unions used to operate under fairly tight restrictions on their activities, those have loosened with time. Even still, credit unions typically only offer relatively basic services, though credit unions do reduce some of the agency problem of banking in that customers and owners are the same. (For more on credit union, read Tired Of Banks? Try A Credit Union.)

Community Banks
In the sense that they offer a smaller range of services (services more in line with most people's traditional views of banking) and typically offer better rates, community banks are in many respects similar to credit unions. While the depositors don't own the institution, the owner may well be local and known within the community. Community banks are open to anyone, but they do operate with a profit motive. What's more, anti-bank activists may be troubled not only by that profit motive but by the fact that successful community banks tend to consolidate other banks and grow larger with time (or sell out to still larger institutions).

Online Banking
With all of the anger over the service charges and greed of large money center banks, some have suggested that customers should move their money to online accounts. True, online banking now offers many of the same services as traditional banking - including checking accounts, online bill pay and debit cards. Unfortunately, they are generally not structured as well for consumer lending, and many of the most popular online banks are owned and operated by the very financial megaliths that are the target of the protests.

What Could This Mean for Large Banks?
At this point, it seems safe to assume that large bank CEOs are just biding their time and waiting for the protests to burn themselves out. This isn't the first time popular sentiment has risen up against banks, and they've survived so far. That said, what could be the ramifications if the protesters can gather enough support?

The most obvious risk is in losing deposits. Retail deposits are stable, cheap sources of funds and the lifeblood of almost every retail bank operation. A secondary, but still significant, risk is regulatory regression - moves on the part of Congress to force banks away from profitable lines of business like investment banking. Conversely, if the protesters are successful in encouraging people to move their money out of these banks, they will have to rely even more on operations like trading, i-banking, treasury services and private banking. While these can be lucrative lines of business, they are, often, more competitive, more volatile and more expensive to operate (and retaining and compensating skilled workers is a major issue). (For more on investment banks, read The Rise Of The Modern Investment Bank.)

There are also larger structural risks to the large banks. Banks have spent a huge amount of money on brand-building and public relations, and it looks like they'll have to spend even more to repair their images in the wake of the housing collapse. Along the way, they may also end up having to charge more of those hated fees. Credit unions and smaller banks access ATM and payment networks built by the large banks, and those networks require capital to maintain - capital that the banks will demand in higher fees from those other banks.

The Bottom Line
There is a long and celebrated tradition in America of angry citizens expressing that anger in organized public protests. At a minimum, then, Occupy Wall Street is the latest in a tradition that should actually make Americans feel a little pride (in many other countries, the protesters would be armed or the police would be merciless in suppressing the gatherings).

Whether or not the movement has a coherent list of demands, or the right target in mind, is secondary to the point. The fact is, there are alternatives and options for those fed-up with large banks, and if these banks aren't careful, they find that their future profits are marching right out of their doors. (For more on the cost of banking, see The Ins And Outs Of Bank Fees.)





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