Do You Want Your Bank Run Like a Utility?

Do people have a right to a bank account? That's the contention of a number of self-styled consumer advocates and their allies in Congress and state legislatures. Figuring that a bank account has become a necessity of everyday life, they want government to force banks to offer "lifeline" accounts, set rules for check-clearing, and otherwise control and regulate what are, after all, voluntary transactions between banks and customers.

The litany of complaints is becoming familiar. During the past few years most banks have significantly increased what they charge for checking accounts and have begun charging for many other services that used to be offered free. Banks have also been closing low-volume, low-profit branches—often substituting much lower-cost automatic teller machines. And many people complain about the length of time banks hold deposited checks before clearing.

Behind the critics' case for "banking for the people" is an unstated premise: that the modest amount of banking deregulation since 1980—basically, the removal of price controls on interest rates—has made bankers more venal. In fact, bankers are no more (nor less) profit-minded than they ever were. What has changed is that for the first time since the Depression, banks are having to compete—on prices, not amenities—to attract depositors. This has led to much better deals for savers (remember the old 5¼ percent passbook accounts, the only savings option?). But of course, the money to pay higher rates on savings has to come from somewhere.

Like the newly deregulated airlines and telephone companies, therefore, banks have been shifting to cost-based pricing, attempting to make each category of account pay for itself. They have also, in the newly competitive environment, had to take a harder look at costs. Hence the shift from labor-intensive branch banks to a dispersed network of teller machines.

The problem of checks clearing, however, is nothing new. It is caused not by deregulation, as much recent rhetoric would lead one to believe, but by the archaic payments system operated by our central bank, the Federal Reserve. This $500-million-a-year payments system has built-in incentives for participants to stretch out the "float"; in effect, the Fed subsidizes long clearing times.

As J.W. Henry Watson pointed out recently in the Wall Street Journal, though, the Fed's way of running a check-clearing system is not the only way. In Canada, the equivalent system is unregulated and privately operated. And its privately devised clearing rules require retroactive debiting, so a bank that receives a check for payment debits the customer's account as of the date the check was originally deposited. Voila—no float! And no opportunity for E.F. Hutton–style finagling, either. Checks in Canada clear overnight, nationwide. Britain and Japan enjoy similar float-less systems.

So the populists have it all wrong. Banks are not exploiting consumers under deregulation. A more-competitive environment is simply making costs more explicit. As a group, consumers may be paying more in service charges, but they're making up for it in interest-bearing checking accounts and money-market rates on savings. And it's the Fed, not the banks, that is the villain when it comes to check-clearing times.

In their zeal to impose new regulations, the populists ignore the significance of the competitive forces already at work in the marketplace, as well as those that could be unleashed if Congress would truly deregulate banking in this country. The Ralph Nader organization Public Citizen, when it surveyed financial institutions in Washington, D.C., found that savings and loan associations were giving the banks a run for their money: while nearly all of the 25 banks in the survey required a $1,000 minimum balance for free checking, all eight S&Ls had minimums under $500, and two imposed no monthly service fees at all. Similarly, in California 21 S&Ls surveyed by San Francisco Consumer Action offered lower minimum balances, smaller service fees, or better terms on loans than the 39 banks surveyed.

Meanwhile, Sears, Roebuck, the giant retailer that is fast becoming a nationwide financial supermarket, is lobbying hard for government permission to set up "consumer banks" in its stores, not allowed under current regulations that supposedly protect consumers! The banks envisioned by Sears would be free to take deposits from anyone and to make loans to individuals and small businesses. A key ingredient of Sears' formula is to offer free checking accounts with no minimum balance, a lifeline account (similar to what is already offered at all of Sears' California S&Ls), and interest on deposited checks from the day they clear for payment. To its credit, Consumers Union has endorsed the Sears endeavor—but the other leading consumer organizations (Consumer Federation of America, to name one) have remained silent.

Nader's Public Citizen group is actively opposing the consumer bank idea, even though it offers the features the banking populists are crying out for. Rather than rely on competition from an expanded marketplace, Public Citizen is working hard to impose "new and improved" consumer-protection regulations on existing banks and S&Ls. The ultimate goal, in the words of Rep. Fernand J. St Germain (D–R.I.), the high priest of banking regulation, is to make financial institutions into a kind of regulated public utility.

What's ironic about this latest populist cause is that it comes at the very time when the intellectual basis for public utility regulation is crumbling. In field after field—airlines, trucking, taxicabs, telephones, cable TV, even electric power—the old assumptions of "natural monopolies" and the need for regulation are being challenged, both by new technology and by a more sophisticated understanding of the political-economic process. More and more thoughtful economists are concluding that public utility regulation has not protected consumers. Instead, it has tended to create and maintain monopolies.

What's needed in banking is more competition, not public utility regulation. Retail chains should be allowed into the field. The archaic prejudices against statewide and nationwide banking should be swept away. And the Fed's creaky check-clearing system should be privatized—or this function simply left to the marketplace. Let competition rip. On the evidence we have already, consumers would be served far better by all-out competition among Sears, Penney's, K-Mart, American Express, Merrill Lynch, Chase Manhattan, Citicorp, Bank of America, and the local banks and S&Ls—better served than by any conceivable regulatory straightjacket.