Tuesday, February 7, 2012

The boxes we live and think in...[thoughts on banking systems]

Have you ever heard of the phrase "think outside the box"? Well I'm here to tell you about how the box comes about.

In order to make sense of the world we start making assumptions about the way it works from a very young age. This generally serves us very well, but sometimes it serves us very poorly indeed. From this mechanism we figure out that when you let go of something it drops, when you hit something it makes a noise, and that if you yell you can get things to happen sometimes. We get more sophisticated when we figure out what counts as a dog and how milk can go bad. All these things help us learn how the world works. Through the process of time we start to accept limits on certain concepts, and these become the boxes we so often live in.

Today I wanted to talk about banking. In America there's been a lot of talk about capitalism, banks, and especially investment banking. Some people call some of the people who are upset anti-capitalist, and indeed a very small percentage of them are, but most are not. Most are saying they want something to change about the way investment banks work.

I'm not going to talk about investment banks, but retail banks, the banks that you and I use each day.

In America banks are set up a certain way, in the last 10-20 years US Banks have stopped charging monthly fees. This has been hailed as good for consumers. Often there is no minimum balance and many banks pay a (very low) interest rate on balances. Again these are changes from the era before where some banks required minimum balances and deposits or a minimum opening balance. The problem though is in all the other fees that the banks charge. If you manage to overdraw your account (which is really easy for most people to do, even when you have some savings) the fees start to kick in. Let's say you have a thing where the bank will transfer money from a savings account to your checking account if you overdraw: $12 fee. If the bank pays a check when overdrawn $30+ fee. A bounced check is about the same. Receiving a wire transfer from overseas $50 fee. Ordering checks often costs something, having a debit card costs something, using other bank's ATMs and there is a fee, and double that or more for ATMs outside of the country. Don't write too many checks or some banks will charge per check a $1 fee. Many fees can repeat again and again as more items come out of your account. The bank will charge you for bringing a lot of change to them, or a myriad of other things as well. That "Free checking account" you were offered can easily cost someone $200/year in fees if there is only one incident of being overdrawn, and even without such an incident it often costs $50 or more.

Here in Holland (or more properly The Netherlands) banks work a bit differently. They won't change foreign currency for you, and most branches don't have tellers (though the ATMs take deposits and other things in real time with the currency and coins properly counted and immediately credited) and their customer service is... well generally lacking (though that's a Dutch thing, not a bank thing) . They charge us a few Euro every quarter, totally less than €15 year in fees. If we overdraw? no fees! If our account is negative for a week before my next paycheck come in, no fees! When I wire money in the EU it's a couple euros to send (and the receiving party has to pay the same amount as a fee) and to the US it's €6. A debit card (they call it a PIN or MAESTRO card) will cost you €10 to get initially. Wire transfers from outside the EU don't cost anything. Never any fee for using an ATM from any bank anywhere in the world. Checks don't exist in this country and haven't really ever been used widely. Instead people send you a bill with a reference number. Before online banking you went to the post office and paid the amount into them along with the reference number and they would then get the money to the person with a postcard telling them to come and pick it up or via a deposit to their account. In the modern era one can transfer directly to another account in the country free of charge, and all banks can handle any transaction as long as you have a reference number for a bill or an account number you want to pay to. You can do all of this online. This means that paypal is MUCH less interesting here because anyone can pay to another person without any hassles or fees.

So let me tell you, banks here are profitable and they work just fine. They don't screw you over and they're still in business. They don't use checks and the world still keeps moving. What we need to realize in America is that our way is not the only way and that there are lots of capitalistic markets out there that function much different than ours and they still work and they are no heavily regulated neither are they socialists. We need to be humble and willing to learn from others. We need to reform and that won't be an easy process.