The American banking system needs to get back to its roots as the hub of small-business growth.
Lending is down, penalty fees are up, and, as the economy falters, banks continue to find ways to reap profits — but those profits are not sustainable.
After a decade of massive consolidation, aggressive expansion into alternative markets and a government bailout of historic proportions, we were left with two grim statistics at the end of 2009. First, U.S. banks posted their sharpest decline in lending since 1942. Second, banks generated an estimated $20 billion from overdraft fees on debit transactions and another $12 billion in overdraft fees on checks.
I've gained a surprising amount of insight into the limitations of the current banking model over the last four years as I've tried to develop an "alternative" financial institution. Far from Wall Street or the halls of academia, my partners and I focused our attention on a decidedly in-the-trenches corner of the banking industry: commercial check cashing.
In 2006, I founded a firm called Bridge Capital Solutions, the first licensed commercial check-cashing business in New York State. For a 3% fee, we cash checks made payable to a business. No five-day processing period, no overdraft allowances, no securitization.
Just community business banking in its simplest form. Our revenues have grown 15% each year.
This experience has given us invaluable perspective on what's broken in the current banking system.
Foremost among these: In many cases, it has become more profitable for businesses to pay us a 3% fee for immediate access to their funds than to deposit checks in a bank and wait five to 10 business days for them to clear.
As payment cycles have gotten longer, small businesses are getting paid an average of 60 to 90 days after services are rendered. They still have payrolls to meet and suppliers to pay every month, but their payment cycles are not aligned with those obligations. When a bank tacks a five- to 10-day processing period on to the equation, it can mean the difference between paying employees and sending out IOUs.
By covering our risk exposure with an up-front fee instead of a long processing period or back-end penalty, our approach has become more economical than the traditional banking model for many small businesses.
We've seen trickle-down effects, too. By injecting more liquidity into the small-business microeconomy of our corner of New York, we've seen vendors start to offer discounts for early payment as well as steadier employment rates among firms that were losing talent to erratic cash flow.
Our business is no charity. We get paid to take risk and provide a service, just as traditional banks do.
But our experience stands out as an example of how a simple twist on convention can effect real change in an economy.
By contrast, traditional banks have resisted innovating solutions that address the problems in their communities. They have hired lobbyists to help them preserve the right to charge hefty overdraft fees; they've continued to push into exotic derivatives, and they've held up their customers' working capital in long processing periods that amount to a passive tax.
In its quest to conquer ever-larger frontiers, the industry has lost touch with the marketplace it serves and the huge revenue potential therein.
The first traditional bank to recognize this and develop a business model that addresses the needs of small businesses and their communities will position itself to become the leader of a revolution in banking.
