One can easily understand why the overwhelming majority of community bankers surveyed recently by Grant Thornton LLP favored limiting nonbanks' access to the payments system.

But, as the old adage goes, "Be careful what you wish for. You might get it." It's prudent to question whether maintaining the status quo in payments is really in community banks' best interests.

There are several reasons.

First and foremost, history shows us that protections from competition, whatever their form, just don't work. In fact, they often end up backfiring on the little guy in that they preclude community banks from profiting from change.

A few examples:

Smaller banks and thrifts fought for Regulation Q deposit interest rate ceilings to keep larger banks from competing effectively against them for the savers' deposit dollars.

The result: Money market mutual funds developed to gather these dollars by paying market rates when the deposit institutions couldn't. And once in, the money funds never stopped pushing to increase their share of the public's savings.

Banks objected to credit unions gaining the payments function through their "share drafts," and many also objected to Chase Manhattan's developing a solid business clearing such drafts.

Chase's rationale:

"All it takes is one bank to handle their share drafts and that bank will make good money on it. Since the trend can't be stopped anyway, why not be the bank that gets the benefit?"

Similarly, when Merrill Lynch & Co. wanted to get into the payments system through its cash management accounts and Sears, Roebuck and Co. wanted to do so with its Discover Card, they found simple solutions to the exclusivity of the banks in handling payments: Merrill used Banc One and Sears bought a bank.

So, community banks may wish for industry exclusivity in payments, but it just is not going to happen. And what bothers friends of community banking is that many may not take the necessary steps to ensure that people will want to remain with their banks instead of relying on government regulation to ensure they have to.

There is also the broader issue of government regulation of who can handle payments transactions and who cannot. Again, it's the same old story: Once the government begins to dictate what banks can and can't do, it opens the door to more dicates-some of which banks may not like.

We have seen protectionist laws backfire before.

In Pennsylvania, to protect smaller banks, the law that allowed branching initially limited each bank to four bank acquistions a year. What did this do to the smaller banks? It made those rival banks that were bought out stronger by concentrating the acquirers' attention. Meanwhile, since most acquirers wouldn't waste one of their four slots on the smallest banks, such institutions were in effect left out of the merger game even if they wanted to be in on it.

It was like the farmers who got laws passed in some states barring outside corporations from buying farms, only to find that when crop prices fell and they wanted to sell, the law kept the potential buyers away.

The bankers supporting governmental limitation of access might well consider this line in Robert Frost's poem, "Mending Wall": "Before I built a wall, I'd ask to know what I was walling in or walling out."

Interestingly the same Grant Thornton survey shows that by a margin of three to one, community banks favor unifying thrift and bank charters.

The enmity between the groups was once so strong that banks wouldn't even let savings institutions use the term "savings account;" such products, by law, had to be called "thrift accounts." Maybe community bankers who are so opposed to broadening access to payment services will realize that they can survive such a broadening much as they did the transformation of S&Ls into institutions so banklike that most paid the banking industry the ultimate complement of including "bank" in their names.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.