Posts Tagged ‘banking’
“The only thing useful banks have invented in 20 years is the ATM”*…
ATM’s have been around in the U.S. since 1969; there were, as of 2018, 470,135 of them in operation, from which $5.1 Billion was withdrawn. The market for the machines and the technology that connects them was $20 Billion in 2020, projected to grow to $30 Billion in 2028. They were originally– and are still primarily used for cash disbursement; but over the years they’ve added a number of other functions: account deposits, bill payment, even lottery and movie ticket purchase– there are over 10 Billion ATM transactions in the U.S. alone. As cash plays a less central role in transactions, the the number of machines and transactions has slightly declined. Still they are a major factor in today’s financial infrastructure– and that few of us really understand. Patrick McKenzie is here to help– and to remind us that their history has lessons that are broader…
The first automated teller machines, which debuted in the late 1960s, were, as the name suggests, strictly cost-saving devices for bank branches. Branches exist as sales offices but have incidental cash-management functions. The denser depositors are around a branch, the more transactions happen during peak windows like e.g. the morning commute and lunchtime. The more transactions you need to support in a window, the more tellers you need to employ. Tellers are both surprisingly inexpensive relative to the degree of trust placed in them but surprisingly costly relative to occupations like e.g. cashiers which look outwardly similar. Banks have long wanted to control the costs of the teller base.
The original thesis behind the ATM was that you could move the most routine teller transactions, like cash withdrawals and balance inquiries, to a machine, and then reserve the teller for higher-complexity routine transactions like cashing checks. The machines gradually gained more features as they achieved ubiquity.
Interestingly, teller employment is actually up substantially since the introduction of ATMs. Secular demand for retail banking grew with the economy and the larger number of branches has compensated for reduced numbers of tellers per branch. See Bessen 2016…
ATMs are a fascinating example of a pattern we see a lot in finance: an internal operations improvement which was built into a business which eventually begat an infrastructure layer that may be a much bigger business. And for all their ubiquity, almost no one, even people professionally involved in finance, understand how they work…
See also: “Automated Teller Machines” (source of the image above)
The plumbing of finance: “The infrastructure behind ATMs,” from @patio11.
* Paul Volcker (2009)
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As we insert our cards, we might send carefully-denominated birthday greetings to Kaushik Basu; he was born on this date in 1952. An economist, he served as Chief Economist of the World Bank from 2012 to 2016. Having taught at MIT, Harvard University, the Institute for Advanced Study at Princeton, and the London School of Economics, he is currently a professor at Cornell. From 2009 to 2012, during the United Progressive Alliance‘s second term, Basu served as the Chief Economic Adviser to the Government of India. His recent work has been on collective moral responsibilities and the role that individuals play in fulfilling them. In 2021, he was awarded the Alexander von Humboldt Foundation Research Award.
“Prediction and explanation are exactly symmetrical”*…
From a December, 1969 episode of the BBC series Tomorrow’s World, an eerily-prescient look at the computerized future of banking…
The emergence of the debit card, the impact on back-office jobs, the receding importance of branch banks… they nailed it.
TotH to Benedict Evans (@benedictevans)
* “Prediction and explanation are exactly symmetrical. Explanations are, in effect, predictions about what has happened; predictions are explanations about what’s going to happen.” – John Searle
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As we find our ways into the future, we might recall that it was on this date in 1878 that the modern music business was effectively born: Thomas Edison was awarded U.S. Patent No. 200,521 for his invention, the phonograph.
“Symmetry is not the way of the world in all times and places”*…
What a difference a couple of decades make…
Asymmetries are back. Rising market power, the sudden ubiquity of global digital networks, hierarchical hub-and-spoke structures in international trade and finance and the enduring dominance of the US dollar, despite the transition to floating exchange rates, all point to their resurgence. The remarkable decay of economic multilateralism in the very fields – trade and development finance – where global rules and institutions were first tried and reigned supreme for decades, is paving the way to a redefinition of international relations on a bilateral or regional basis, with powerful countries setting their own rules of the game. This transformation is compounded by the strengthening of geopolitical rivalry between the US, China and a handful of second-tier powers.
Donald Trump’s attempt to leverage US centrality in the global economy to extract rents from economic partners was short-lived. But US policy has certainly changed permanently. For all its friendly intentions, the Biden administration leaves no doubt about its overriding priorities: a foreign policy for the (domestic) middle class – to quote the title of a recent report (Ahmed et al, 2020) – and the preservation of the US edge over China. China, for its part, has set itself the goal of becoming by 2049 a “fully developed, rich and power-ful” nation and does not show any intention to play by multi-lateral rules that were conceived by others. In this context, the rapid escalation of great power competition between Washington and Beijing is driving both rivals towards the building of competing systems of bilateral or regional arrangements.
What is emerging is not only an asymmetric hub-and-spoke landscape. It is a world in which hubs are controlled by major geopolitical powers – in other words, a multipolar, fragmented world. Nothing indicates that these asymmetries will fade away any time soon. On the contrary, economic, systemic and geopolitical factors all suggest they may prove persistent. We will have to learn to live with them.
There are several consequences. First, this new context calls for an analytical reassessment. Recent research has put the spotlight on a series of economic, financial or monetary asymmetries and has begun to uncover their determinants and effects. Analytical and empirical tools are available that make it possible to gather systematic evidence and to document the impact of asymmetries on the distribution of the gains from economic interdependence. We are on our way to learning more about the welfare and the policy implications of participating in an increasingly asymmetric global system.
Second, the relationship between economics and geopolitics must now be looked at in a more systematic way. For many years – even before the demise of the Soviet Union – international economic relations were considered in isolation, at least by economists. They were looked at as if they were (mostly) immune from geopolitical tensions. This stance is no longer tenable, at a time when great-power rivalry is reasserting itself as a key determinant of policy decisions. Whatever their wishes, economists have no choice but to respond to this new reality. They should document the potential for coercion by powers in control of crucial nodes or infrastructures and the risks involved in participating in the global economy from a vulnerable position.
Third, supporters of multilateralism need to wake up to the new context. They have too often championed a world made up of peaceful and balanced relations that bears limited resemblance to reality. Because power and asymmetry can only be forgotten at one’s own risk, neglecting them inevitably fuels mistrust of principles, rules and institutions that are perceived as biased. Multilateralism remains essential, but institutions are not immune to the risk of capture.
Asymmetry, however, does not imply a change of paradigm. Even if it affects the distribution of gains from trade, it does not abolish them. And in a world in which global public goods (and bads) have moved to the forefront of the policy agenda, there is no alternative to cooperation and institutionalised collective action. The prevention of climate-related disasters, maintenance of public health and preservation of biodiversity will remain vital tasks whatever the state of inter-national relations. What asymmetries call for is an adaptation of policy template. The multilateral project should not be ditched, but it must be rooted in reality.
Understanding the emerging new global economy: from the conclusion of Jean Pisani-Ferry‘s (@pisaniferry) paper, “Global Assymetries Strike Back,” eminently worth reading in full. [Via @adam_tooze]
* Charles Kindelberger, economic historian and architect of the Marshall Plan
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As we find our place, we might send tight birthday greetings to Paul Adolph Volcker Jr.; he was born on this date in 1927. An economist, he was appointed Federal Reserve Chair by President Carter in 1979, and reappointed by President Reagan. He took that office in a time of “stagflation” in the U.S.; his tight money policies, combined with Reagan’s expansive fiscal policy(large tax cuts and a major increase in military spending), tamed inflation, but led to much larger federal deficits (and thus, higher federal interest costs) and increased economic imbalances across the economy. In the end, Reagan let Volcker go; as Joseph Stiglitz observed, “Paul Volcker… known for keeping inflation under control, was fired because the Reagan administration didn’t believe he was an adequate de-regulator.”
Volcker returned to government service in 2009 as the chairman of President Obama’s Economic Recovery Advisory Board. In 2010, Obama proposed bank regulations which he dubbed “The Volcker Rule,” which would prevent commercial banks from owning and investing in hedge funds and private equity, and limit the trading they do for their own accounts (a reprise of a key element in the then-defunct Glass-Steagell Act). It was enacted; but in 2020, FDIC officials said the agency would loosen the restrictions of the Volcker Rule, allowing banks to more easily make large investments into venture capital and similar funds.
“Humanity’s 21st century challenge is to meet the needs of all within the means of the planet”*…
One evening in December, after a long day working from home, Jennifer Drouin, 30, headed out to buy groceries in central Amsterdam. Once inside, she noticed new price tags. The label by the zucchini said they cost a little more than normal: 6¢ extra per kilo for their carbon footprint, 5¢ for the toll the farming takes on the land, and 4¢ to fairly pay workers. “There are all these extra costs to our daily life that normally no one would pay for, or even be aware of,” she says.
The so-called true-price initiative, operating in the store since late 2020, is one of dozens of schemes that Amsterdammers have introduced in recent months as they reassess the impact of the existing economic system. By some accounts, that system, capitalism, has its origins just a mile from the grocery store. In 1602, in a house on a narrow alley, a merchant began selling shares in the nascent Dutch East India Company. In doing so, he paved the way for the creation of the first stock exchange—and the capitalist global economy that has transformed life on earth. “Now I think we’re one of the first cities in a while to start questioning this system,” Drouin says. “Is it actually making us healthy and happy? What do we want? Is it really just economic growth?”
In April 2020, during the first wave of COVID-19, Amsterdam’s city government announced it would recover from the crisis, and avoid future ones, by embracing the theory of “doughnut economics.” Laid out by British economist Kate Raworth in a 2017 book, the theory argues that 20th century economic thinking is not equipped to deal with the 21st century reality of a planet teetering on the edge of climate breakdown. Instead of equating a growing GDP with a successful society, our goal should be to fit all of human life into what Raworth calls the “sweet spot” between the “social foundation,” where everyone has what they need to live a good life, and the “environmental ceiling.” By and large, people in rich countries are living above the environmental ceiling. Those in poorer countries often fall below the social foundation. The space in between: that’s the doughnut.
Amsterdam’s ambition is to bring all 872,000 residents inside the doughnut, ensuring everyone has access to a good quality of life, but without putting more pressure on the planet than is sustainable. Guided by Raworth’s organization, the Doughnut Economics Action Lab (DEAL), the city is introducing massive infrastructure projects, employment schemes and new policies for government contracts to that end. Meanwhile, some 400 local people and organizations have set up a network called the Amsterdam Doughnut Coalition—managed by Drouin— to run their own programs at a grassroots level…
You’ve heard about “doughnut economics,” a framework for sustainable development; now one city, spurred by the pandemic, is putting it to the test: “Amsterdam Is Embracing a Radical New Economic Theory to Help Save the Environment. Could It Also Replace Capitalism?“
* Kate Raworth, originator of the Doughnut Economics framework
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As we envisage equipoise, we might recall that it was on this date in 1791 that President George Washington signed the Congressional legislation creating the “The President, Directors and Company, or the Bank of the United States,” commonly known as the First Bank of the United States. While it effectively replaced the Bank of North America, the nation’s first de facto central bank, it was First Bank of the United States was the nation’s first official central bank.
The Bank was the cornerstone of a three-part expansion of federal fiscal and monetary power (along with a federal mint and excise taxes) championed by Alexander Hamilton, first Secretary of the Treasury– and strongly opposed by Thomas Jefferson and James Madison, who believed that the bank was unconstitutional, and that it would benefit merchants and investors at the expense of the majority of the population. Hamilton argued that a national bank was necessary to stabilize and improve the nation’s credit, and to improve handling of the financial business of the United States government under the newly enacted Constitution.
History might suggest that both sides were correct.
“Results aside, the ability to have complete faith in another human being is one of the finest qualities a person can possess”*…
Downtown San Francisco ablaze after the 1906 earthquake, from the slope of Nob Hill
Amadeo Peter Giannini was born in San Jose, California in 1870. The son of Italian immigrants had an outsized personality and unlimited faith in the American dream.
Giannini began by selling fruits and vegetables from a horse-drawn wagon. But he was made for bigger things. At age 34, he launched a small bank in the Italian neighborhood of North Beach, San Francisco. At the time, big banks lent only to large businesses, handled deposits of the wealthy, and frowned on aggressive advertising.
The novice financier knocked on doors and buttonholed people on the street. He persuaded “unbanked” immigrants that gold and silver coins were safer in vaults than under mattresses. Moreover, the money would earn interest at his “Bank of Italy.”
On the morning of April 18, 1906, a massive earthquake hit San Francisco. The ensuing fires burned down the large banks. Their superheated metal vaults could not be opened for weeks—lest the cash and paper records catch fire when oxygen rushed in.
As flames threatened his one-room bank, Giannini spirited $80,000 in coins out of town. He hid the precious metal under crates of oranges and steered his wagons past gangs of thugs and looters in the streets.
As other banks struggled to recover, Giannini made headlines by setting up a makeshift bank on a North Beach wharf. He extended loans to beleaguered residents “on a handshake” and helped revive the city.
The innovative bank welcomed small borrowers who might otherwise have to use high-cost loan sharks. Most banks at the time regarded people with modest incomes as credit risks not worth the paperwork. But experience had taught Giannini otherwise: that working class people were no less likely to pay their debts than the wealthy.
Seeking more customers, the former produce salesman returned to his old haunts—the fertile valleys of California. He “walked in rows beside farmers engaged in plowing” to explain how bank branches make credit cheaper and more reliable. Town by town, he built the first statewide branching system in the nation.
On November 1, 1930, the Bank of Italy in San Francisco changed its name to Bank of America. The bank today has the same national bank charter number as Giannini’s old bank— #13044.
When A.P. Giannini died in 1949, the former single-teller office in North Beach claimed more than 500 branches and $6 billion in assets. It was then the largest bank in the world…
How a humane response to a community tragedy launched what became the biggest bank in the world: “Bank of America: The Humble Beginnings of a Large Bank.”
* The Wind-Up Bird Chronicle
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As we learn from our elders, we might recall that it was on this date in 2006 that the first news stories based on the Panama Papers were published. A cache of 11.5 million leaked documents that detailed financial and attorney–client information for more than 214,488 offshore entities, all from Panamanian law firm and corporate service provider Mossack Fonseca, the Panama Papers chronicled tax evasion, money laundering and fraud involving 12 current or former world leaders; 128 other public officials and politicians; and hundreds of celebrities, businessmen, and other wealthy individuals from over 200 countries.
An online chat between Süddeutsche Zeitung reporter Bastian Obermayer and anonymous source John Doe
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