Posts Tagged ‘banking’
“Two possibilities exist: Either we are alone in the Universe or we are not. Both are equally terrifying.”*…
Happy Charles Dodgson’s (Lewis Carroll’s) Birthday!
Just when we thought that there was nothing else about which to worry, a different kind of “alien” concern: Helen McCaw, and economist and former senior analyst at the Bank of England, has written to her former employer with a warning…
The UK must plan for a financial crisis that would be triggered if the US government announces that aliens exist, a former Bank of England expert has said.
Helen McCaw, who served as a senior analyst in financial security at the UK’s central bank, has written to Andrew Bailey, the Bank of England’s governor, urging him to set out contingencies in case the White House ever confirms the existence of alien life, according to The Times.
Ms McCaw, who worked for the Bank of England for 10 years until 2012, said politicians and bankers can no longer afford to dismiss talk of alien life, and warned a declaration of this nature could trigger bank collapses…
Read on: “Bank of England must plan for a financial crisis triggered by aliens, says former policy expert,” from @the-independent.com.
* often attributed to Arthur C. Clarke (but likely from Stanley Kubrick, quoting Carl Sagan [who was riffing on a Walt Kelly Pogo quote])
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As we acclimate to chaos, we might recall that it was on this date in 2021 that Resident Alien debuted (on Syfy).
Resident Alien is based on a comic book of the same name [by Peter Hogan and Steve Parkhouse]. Created by Chris Sheridan, Alan Tudyk plays an alien who crash-lands in Patience, Colorado and immediately goes on a killing spree including the town’s doctor, Harry Vanderspeigle.
Taking on the form of Harry, the alien continued killing thinking that by doing so, it would be good for planet Earth. But then, he was overcome with human emotions and started questioning the morality of it all…
– source
“But I don’t want to go among mad people,” Alice remarked.
“Oh, you can’t help that,” said the Cat: “we’re all mad here. I’m mad. You’re mad.”
“How do you know I’m mad?” said Alice.
“You must be,” said the Cat, “or you wouldn’t have come here.”
– Lewis Carroll
“Money is a servant to politicians and the country. But, if the politicians and the country become the servant of the money, the politicians have failed.”*…
Given all that’s going on in the current adminsitration, it’s hard to keep track of the havoc. Here, an update on a drama playing out in the legislature (with heavy White House involvement).
Crypto interests came after the local banker last week in a bitter Congressional fight. As Matt Stoller explains, they didn’t win, but it’s not over…
… [Last] Thursday, the Senate Banking Committee abruptly canceled its meeting, known as a mark-up, to write little-noticed legislation to deregulate the financial system. And the reason is that two of the more powerful forces in D.C. – the banking lobby and the new MAGA-powered crypto world – came into conflict. The result, so far, is a stalemate.
I haven’t written about crypto for a few years, because there’s not much to say beyond “they did a lot of bribes in a bribe-prone system.” But depending on what happens next, we could be looking at the end of an iconic American figure, the local banker, and his or her replacement with something very different. The context of the legislative fight is, as you see in lots of other areas, the decline of the productive institutional fabric of America.
Culturally speaking, banks have a weird place in America, as they are the institutions that control permission to use resources. The endless number of bank heist movies, often with plucky burglars as heroic figures telling bank customers they needn’t worry because it’s not their money at risk, suggests that there’s a lot of skepticism of financial power in general. But there are two types of bankers, the generous local elite and the extractive beancounter. These represent a traditional populist vs oligarch framework.
Take the holiday classic film It’s a Wonderful Life. It’s about a small town banker named George Bailey, played by Jimmy Stewart. Bailey’s help financing useful things in Bedford Falls, like houses and businesses, contrasts with the avaricious Harry Potter, who is a stand-in for Wall Street.
There’s a reason for these cultural totems. Americans have always understood that distant control of credit is dangerous, the theme of movies such as Wall Street, Margin Call, and The Big Short. They also see that local control of credit and payments is key to self-sufficiency. Local banks uses to be, and to some extent still are, the powerhouse of American cities and towns.
That said, there have always been a variety of financial institutions to serve different kinds of customers, including large corporations. There are three kinds of banks in America, the small bank, the regional bank spanning a few states, and a few dozen national mega-banks. Local banks, a la George Bailey, are more efficient with better service and more commercial lending. According to the Institute for Local Self-Reliance, roughly half of U.S. assets were held in small banks, which did most of the productive lending. In 2020, small and regionals held just 17% of industry assets, but offered 46% of bank lending to new and growing businesses.
In the post-war era, this mix of banking was relatively stable, with roughly fourteen thousand local banks and thrifts serving as mortgage and commercial lenders, and check clearing institutions. But in the early 1980s, policymakers sought to consolidate the sector, enacting a series of deregulatory laws to encourage bank failures and mergers. The result is that today we have fewer than four thousand banks, and by the end of the Trump administration, we may have fewer than a thousand.
Of course, the world isn’t the same as it was forty five years ago. Since the 1980s, finance has changed. We are a capital markets driven economy, not a bank-driven one, and we use credit cards not checks, apps and ATMs more than branches. Bailouts have replaced proactive regulation, and we now have four giant Too Big to Fail banks that span multiple lines of business from investment banking to brokerage services. But local economies still depend on local banks, and there are fewer and fewer of them…
… Banking is a great business, because mostly you pay customers a small amount for the use of their money, and get the government to guarantee you a profit. You can make more if you actually do the work to lend money, but you don’t have to.
In return for this easy profit via a government safety net, bankers accept regulation. As the brilliant scholar Saule Omarova notes, the best way to understand banks is as franchises from the government. Bankers safeguard the nation’s money and payments system, and are well-paid for it, but it’s fundamentally a public and not a private duty. That’s why there are banking charters from the state.
The rise of crypto parallels the consolidation and corruption of banking. From the 1980s onward, small town bankers, like everyone else during the neoliberal era, became heavily oriented around removing rules against speculation and froth. The low interest rate environment of the New Deal gave way to a high interest rate world, and that put enormous pressure on the balance sheets of bankers who had lent money more cheaply. That, plus the turn of the Democrats away from protecting small towns in favor of consumer rights, led to a sharp anti-government sentiment among local bankers…
[Stoller unpacks the history of banking the last few decades and then turns to crypto…]
… While anti-monopolists argued for a renewal of public institutions to tamp down on concentrations of wealth and power, the crypto world went the opposite way, arguing that it was the very existence and power of public institutions that led to the crisis in the first place.
Crypto was ideological, at first framed around utopian rhetoric and the blockchain. Unfortunately, there were no actual real use cases for productive ends, it was entirely a way of scamming or speculating without rules. During the 2010s, when the Federal Reserve kept interest rates at zero and engineered a set of bubbles, crypto was one of the more prominent ones. In 2021, I wrote an article titled “Cryptocurrencies: A Necessary Scam” describing the ideological goal of crypto.
Fortunately, regulators kept crypto hived off from the real economy, so as the bubble blew up, it didn’t much matter. In 2022, when Sam Bankman-Fried and a host of crypto institutions collapsed in an orgy of fraud and leverage and money laundering and sanctions evasions, crypto seemed to be over. But it wasn’t, because of the power of the banking lobby, the weakness of Joe Biden’s administration, and the general pro-deregulation consensus in Congress…
… After Biden, the crypto industry had immense political leverage over a supine Congress and a friendly administration. Concerns over things like consumer protection ended, of course, but even more “serious” things like worries over national security and sanctions evaporated. Trump pardoned the Binance CEO Changpeng Zhao, and no one cared any longer that crypto was used to funnel money to Hamas and Venezuela.
The narrative around crypto changed, as crypto proponents dropped their naive ideological arguments. Industry proponents no longer argued there’s anything innovative, or that crypto is important for payments or any other purpose. It’s purely a mechanism to speculate. And the industry ended its commitment to a stateless approach. The trading side of crypto attacked stock market regulations, while the banking side demanded access to the banking franchise, including bank charters, access to the Federal Reserve safety net, and so forth. They started claiming they are bank-like, only better, and that the current banking order is lazy and protected by regulation.
And that brings us to the legislative fight last week. A few months ago, Congress did its first set of favors for the crypto industry, passing the Genius Act, which allowed for companies to issue “stablecoins,” which is to say, they can take dollar deposits as long as they back those deposits with actual dollars. However, they were mostly barred from paying interest on stablecoins. And the payment of interest on deposits is really key, because that’s what would allow stablecoin issuers and crypto exchanges to compete with banks over those cheap customer deposits that enable profits. It is an existential problem, not for the JP Morgan’s of the world, as they are so big it doesn’t matter, but for the rest of the banking sector, the local and community guys.
The most aggressive crypto firm, Coinbase, sort of offers interest on deposits, with what are called “rewards.” By calling them rewards instead of interest, Coinbase is trying to create a loophole in the Genius Act. But it’s a grey area, at best, and regulators could crack down.
The next piece of legislation pushed by the crypto world was called the Clarity Act, which has a number of elements, some of them involving rules around speculation. If it passes, we can expect very little regulation of the stock market, anti-money laundering, or insider trading going forward. But the fight that led to the cancelation of the markup of the Clarity Act is whether “rewards,” aka interest on deposits, are legal. Enter the banking lobby.
Community and regional bankers are not used to fighting with conservatives, because they haven’t had to. They did block liberal lawyer Omarova from becoming the bank regulator at the Office of Comptroller of the Currency. But they certainly aren’t used to dealing with feral and weird crypto MAGA online influencers with billions of dollars. That doesn’t make sense to them. And it should have been obvious that they were in the crosshairs of the crypto industry; the Federal Reserve just launched a rulemaking to give crypto a mini bank charter, which should scare the hell out of the local banks.
But they finally have started to get in gear, pointing to a Treasury report saying that $6.6 trillion of deposits might leave the banking system if crypto companies could pay interest on stablecoins. The Independent Community Bankers Association, the trade group for local bankers, mobilized its members against stablecoin rewards.
Much of the crypto world doesn’t care about stablecoins or banking; they are interested in removing the rules regulating speculation and gambling. For them, it’s a securities law matter. But for Coinbase, which makes roughly a billion dollars in revenue with stablecoins, that part of the bill does matter. And so Brian Armstrong pulled his support for the bill on the eve of the markup. There’s something a bit odd about Coinbase’s opposition, since they got 95% of what they wanted, and everyone else is fine with the legislation. But I don’t want to speculate too much on motivations, the point is Armstrong was unhappy with the final bill.
It’s not clear what happens now. The Senate Banking Committee has put enormous time and effort into this legislation, at the behest of crypto donors. But it really is an zero sum fight. If crypto exchanges can pay interest or rewards on stablecoins, then local banks lose their deposit base. If crypto exchanges can’t, then they won’t get access to cheap deposits. While Senators are desperate for some sort of compromise, it doesn’t look like there is one. Someone has to win and someone has to lose.
This battle is one where there is no good guy, but if there’s someone who is less bad, it would be the local bankers. They at least do lend into communities, and are subject to real regulation. Crypto is a disaster, and if we integrate crypto into the real economy, they will eventually demand their own bailout. But the critique that banks don’t pay much in interest on accounts is accurate. Furthermore, the credit card business is a bloated monopolistic mess. Still, those problems are largely about the Too Big to Fail banks, not the local guys, and the TBTF banks will be fine regardless.
Honestly, I’m exhausted by the question that we are forced to answer in this fight. Should credit allocation and payments be controlled by a set of lazy right-wing bankers who hate government, or a hungrier and deeply corrupt group of crypto scammers? It would be nice to have an alternative to those two interest groups. And eventually, we will, since it’s becoming clear that the state will have to take a much bigger role in credit allocation. But for now, the fact that crypto finally got stopped, at least temporarily, by the banking lobby, well at least it’s funny. And it does show how checks and balances are useful even when everyone involved is deeply flawed.
At this moment, I’ll take what I can get…
The end of an era? “The Slow Death of Banking in America,” from @mattstoller.skystack.xyz.
Pair with Molly White‘s “They’ve bought themselves a Congress” (“Coinbase calls the shots in the Senate…”) and from Matt Levine: “Stablecoin Narrow Banking” (“one solution here is to allow stablecoins to pay interest (like banks) but also impose capital requirements (like banks). I would not bet on that happening though…”) “Memecoin Venture Capital,” (“… today I want to talk about the fourth category, tokens promising no rights…”)
* Oliver Kemper
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As we hollow out our mattresses, we might send painless birthday greetings to Felix Hoffman; he was born on this date in 1868. A chemist for the German chemical and pharmaceutical company Bayer, he sythesized both acetylsalicylic acid (ASA), which Bayer marketed as “aspirin,” and diamorphine, which was popularized under the Bayer trade name “heroin.”
“You cannot escape the responsibility of tomorrow by evading it today”*…
… But you might be able to make a buck on it.
We humans are prone to illusions– ideological enthusiasms, avoidance, et al.– that don’t just allow, but encourage us to avoid hard truths. If there’s one sector in which that’s less true, it’s likely finance– where the altogether unemotional logic of profit-making prevails. But as Corbin Hiar illustrates, that can accrue as finding ways to profit from, rather than avoid, the problems that are brewing…
Top Wall Street institutions are preparing for a severe future of global warming that blows past the temperature limits agreed to by more than 190 nations a decade ago, industry documents show.
The big banks’ acknowledgment that the world is likely to fail at preventing warming of more than 2 degrees Celsius above preindustrial levels is spelled out in obscure reports for clients, investors and trade association members. Most were published after the reelection of President Donald Trump, who is seeking to repeal federal policies that support clean energy while turbocharging the production of oil, gas and coal — the main sources of global warming.
The recent reports — from Morgan Stanley, JPMorgan Chase and the Institute of International Finance — show that Wall Street has determined the temperature goal is effectively dead and describe how top financial institutions plan to continue operating profitably as temperatures and damages soar.
“We now expect a 3°C world,” Morgan Stanley analysts wrote earlier this month, citing “recent setbacks to global decarbonization efforts.”
The stunning conclusion indicates that the bank believes the planet is hurtling toward a future in which severe droughts and harvest failures become widespread, sea-level rise is measured in feet rather than inches and tropical regions experience episodes of extreme heat and humidity for weeks at a time that would bring deadly risks to people who work outdoors.
The global Paris Agreement, from which the U.S. is withdrawing under Trump, aims to limit average temperature increases to well below 2 degrees Celsius. Scientists have warned that permanently exceeding 1.5 degrees — a threshold the world breached for the first time last year — could lead to increasingly severe climate impacts, such as the demise of coral reef ecosystems that hundreds of millions of people rely on for food and storm surge protection.
Morgan Stanley’s climate forecast was tucked into a mundane research report on the future of air conditioning stocks, which it provided to clients on March 17. A 3 degree warming scenario, the analysts determined, could more than double the growth rate of the $235 billion cooling market every year, from 3 percent to 7 percent until 2030.
“The political environment has changed, so some of them are conforming to that,” Gautam Jain, a former investment banker who is now a senior research scholar at Columbia University, said of Wall Street’s increasingly dire climate projections. “But mostly it is a rational business decision.”
The new warming estimates come as heat-trapping gases continue to rise globally and as international commitments to limit the burning of oil, gas and coal that’s responsible for the bulk of emissions have stalled. Meanwhile, megabanks like Wells Fargo are backsliding on their previous climate pledges and exiting from the Net-Zero Banking Alliance, a United Nations-backed group that encouraged members to slash their emissions in line with the Paris Agreement.
Morgan Stanley, which in October watered down its climate-related lending targets, declined to comment.
Betting on potentially catastrophic global warming is both an acknowledgment of the current emissions trajectory and a politically savvy move in the second Trump era, according to Jain.
“Nobody wants to be seen as going against” the administration’s pro-fossil-fuel energy policy, he said. “These banks are businesses, so they have to look at the risk that they have in their portfolio and the opportunities that they see in the most likely environment.”…
Making hay in the havoc: “Big Banks Quietly Prepare for Catastrophic Warming,” from @corbinhiar.bsky.social and @eenews.bsky.social via @sciam.bsky.social.
Related: “Reinsurers: placing an economic price on climate change.”
* Abraham Lincoln
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As we sweat it out, we might spare a thought for Hugh Robert Mill; he died on this date in 1950. A geographer (President of the Geographical Association) and meteorologist (President of the Royal Meteorological Society), he was influential in the maturation of geography and cartography– and relevantly to this post, in the development of meteorology as a science.
“Follow the Money”*…
Chinese crime syndicates are operating underground banks to launder the proceeds of fentanyl sales. But, as Miles Kellerman explains, their practices, and the risks they pose, are far from new…
One way of thinking about finance is to imagine it as an endless web of information assembly lines. Every transaction starts as a signal: some person wants to buy some thing. This is the raw material of demand. That material must, in turn, eventually make its way to whomever is in a position to supply. Sometimes this is easy. When you buy mangos at a farmers market, for example, you have direct communication with the supplier, handing over cash with one hand while receiving mangos with the other. But such direct interaction is rare. For most transactions, buyer demand must first travel along informational conveyor belts, where intermediaries shape, mold, and redirect that raw material before it reaches suppliers.
Take residential real estate. If a couple wants to purchase a beachfront bungalow in Santa Barbara, they probably aren’t going to just show up at the front door with a duffle-bag full of cash. That would be weird. Rather, they are much more likely to express their demand through a realtor. This information then makes its way down the assembly line, where it passes through a series of intermediaries: the seller’s realtor, title company, mortgage advisor, attorney, and, finally, the bank.
But buyers and sellers are not the only ones interested in this process. There is also the inquisitive eye of the state. Every stage of the information assembly line contains clues — about unpaid taxes, money laundering, terrorist financing, and all sorts of other shenanigans. The state would love to patrol every assembly line looking for these clues, like a mustached inspector peering over the shoulder of nervous factory workers. But this is expensive. And many of us would prefer that our information is assembled by intermediaries in private.
The state’s solution to this problem has been to outsource surveillance. It requires that certain intermediaries on the information assembly line look for signs of suspicion and report those suspicions to regulators. These are what is referred to as Anti-Money Laundering, or AML, obligations. At the risk of abusing the analogy, intermediaries with AML obligations are like factory produce inspectors. They spend all day staring at fruit as it travels across the conveyor belt, sorting out the rotten apples and tossing them into separate bins.
But what if, somewhere along the production line, the informational conveyor belt just…disappears? The Financial Times has reported that Chinese crime syndicates are capable of performing such sorcery. These syndicates, the FT writes, are using a “new” network to launder the proceeds of fentanyl sales, one that “…minimizes the movement of funds across borders.” The money simply disappears in one place and reappears in another, as if governed by quantum physics. But this is not magic. Nor is it new. It is instead an alternative conveyor belt of information, one that has operated outside the confines of the state for over a thousand years. And it goes by a simple yet ominous name: underground banking.
Imagine, for a moment, that you are a textile merchant somewhere along the 6,000 kilometer stretch of the ancient Silk Road. Every business has risks. But your risks are a bit more extreme. Large stretches of your trade routes are located in harsh desert climates where water is sparse. Nor is there any guarantee of security. Nomadic raiders could strike your caravans at any moment. And, even if you survive the trip, you could arrive to your destination only to find that it has been sacked by Attila the Hun (or, later, the roaming armies of Genghis Khan).
The last thing you want to do, in such a dangerous environment, is carry cash on you. Credit cards would be a great alternative. “No!” you might explain to Chase customer service after having your card stolen by Hun raiders, “I definitely did not order horse archers.” But it’s about 600 – 1,900 years too early for that. In this pre-electricity era, you need an alternative system. Specifically, one that allows you to manage your payments, settle outstanding balances, and avoid the perils of carrying money across the Persian desert. Enter Hawala.
Hawala is an Arabic term roughly meaning “to change” or “to transfer.” It refers to a system in which networks of brokers (hawaladars) facilitate the movement of value from one geographic location to another. Nobody really knows when Hawala was first used. But there is evidence from the 6th century that Muhammed, the founder of Islam, was familiar with at least some version. Similar systems, with equally ancient roots, have existed in India (Hundi), Thailand (phoe kuan), and China, whose term Fei-Chien translates to flying money. And they have collectively come to be referred to as different varieties of “underground banking.”
Here’s how a Hawala transaction might have worked on the Silk Road. Say you are a merchant in Iran who wants to import Aleppo pepper from Syria. Rather than drag heavy coins across the desert, you provide the necessary money (in whatever form was used at the time) to your local broker. In return, the broker would issue what was, in effect, a bill of exchange — a written order to pay an equivalent amount of money to the supplier at a later date. Once you arrive to Aleppo, you present that document to a Syrian broker, who honors the bill of exchange by issuing the money to the supplier in local currency. Each broker charges a commission for their services and settles their balances through repeated business.
With this simple maneuver, currency has been exchanged across borders. But rather than physically moving money from one place to the next, the brokers have received and distributed local currency from their respective pots. The only true transfer is one of information…
… Trust is also essential to contemporary Hawala systems. But today’s networks are more focused on facilitating cross-border payments and currency conversions rather than international trade. Remittances are one important example. If a worker in Belgium wants to send money to their family in Pakistan, they can do so through their local Hawala broker. But unlike their ancient predecessors, there is no need for these brokers to issue a bill of exchange. They can simply pick up the phone or text their foreign counterparts that the money has been deposited.
But how can the worker be sure that the person picking up the money is actually their family member? One common solution: secret codes. Hawala brokers will often require each party to express these pre-agreed codes, which could be as simple as reciting the same verse from the Quran. Another option, observed in a Chinese context, is to present a sugar cube with a specially imprinted symbol — and swallow it once the transaction is complete.
You might be thinking that, aside from the secret sugar cubes, this all sounds pretty familiar. And you would be correct. Hawala is, in essence, the earliest known form of trade finance. It is also a predecessor to “modern” payment institutions and foreign exchange providers…
… Wise [an “above-ground payment system] implies that Hawala is informal because it is not regulated by the state. This is the same logic often applied to characterize such networks as “underground” banking systems. There is a historical irony here. Hawala, Hundi, and similar networks operated for hundreds of years before ‘states’ were a thing. And in some situations, such as the British Raj, sovereigns endorsed their use as indigenous forms of payment. Thus ‘formality’ is probably better thought of as a spectrum here, one which depends on both the state’s desire to regulate and the market’s desire to be regulated.
Nevertheless, Wise is correct that hawaladars are largely unregulated. In fact, they are outlawed in many countries, something Wise — a competing service — is keen to emphasize. And the reason is simple: Hawaladars often maintain fewer records of the transactions they facilitate for their clients. They disrupt, in other words, the informational assembly lines of the ‘formal’ financial system, undermining the capacity of the state or its intermediaries to perform surveillance. And this is music to the ears of a particular clientele. Namely: human traffickers, terrorists, and other actors with nefarious motives to move their money in the dark…
[Kellerman describes how Hawala works and gives examples from the Underground Silk Road…]
Here we see both the benefits and limitations of Hawala as a mechanism for financial crime. Like their ancient predecessors, Chinese brokers can move money from one place to another without a trace, sidestepping the informational assembly line of the state-controlled financial system. But additional steps are needed to actually launder the cash. And these steps often involve re-entering the assembly line by interacting with regulated intermediaries. The Chinese businesses buying Mexican products for the cartel, for instance, would have done so through banks with standard obligations to perform AML checks. Thus Hawala can obscure the movement of cash but cannot protect that cash once it enters the ‘formal’ economy.
And there is another caveat: a big one. Chinese underground banks move money through alternative conveyor belts of information which rely on the use of ‘encrypted’ WeChat texts. But are these really so secure? It is commonly understood that the Chinese state surveils WeChat and other messaging services. This has led some to speculate that certain Chinese government officials must be participating in these underground networks. Perhaps we will never know.
What we can say for certain is that the use of app-based communication is a deep security vulnerability for underground banking. These networks are attractive to drug cartels and other bad actors because they disrupt transactional audit trails. Phrased differently: they disassemble information. But communication can undermine these benefits by creating another type of paper trail, one that reassembles how cash moves from one pot to another. Criminals should take note. And so too should any public officials that may be assisting them. To paraphrase the great Lester Freeman, if you follow the cash, you’ll find the money brokers. But if you start to follow the texts, you don’t know where it might take you…
The advantages– and risks– to criminals of underground banking: “The (Dis)assembly of Information,” from @Miles_Kellerman. Eminently worth reading in full.
* “Deep Throat” in All the President’s Men (though it’s not clear that the real deep throat ever actually said that…)
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As we think about transnational transactions, we might recall that it was on this date in 1790 that an act of Congress, passed at the urging of Treasury Secretary Alexander Hamilton, created the United States Revenue Cutter Service– an armed maritime customs enforcement agency aimed at enforcing tariffs by reducing smuggling… which later became the U.S. Coast Guard.
“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.
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