This guy would be very happy to take good care of your money. The question is, do you trust him to give it back? Photo by Hunters Race on Unsplash.
I opened my first bank account when I was ten years old. My dad told me, “Son, you’re almost all grown up, it’s about time you learn how to manage money,” took me to the local branch, and before I knew it I had a new toy: a passbook. I still remember how exciting it felt, depositing my allowance, getting my passbook updated, watching the numbers slowly climb. It was a feeling of responsibility, control, and independence. For the first time, I could take matters into my own hands. Just another $100 (a nearly unimaginable sum of money at the time) and that new game console would be mine, birthday presents be darned!
Today, a few decades later, I feel quite differently about banks. I work full-time in blockchain and cryptocurrency, helping build a new and hopefully better financial system. I have a lot of friends and colleagues from places like Greece and Argentina that have experienced hardships like sovereign defaults and currency devaluations. To them, the importance of this line of work is self-evident, and they have deep personal motivations for feeling this way. They often wonder why someone from a country with relatively stable financial institutions is so motivated to build a better financial system. This is my answer.
I’ve had a bad experience with every bank I’ve ever used, and I tend to regard banks the same way I do the DMV: poorly designed, a relic of a forgotten era, but, sadly, still completely necessary from time to time. As far as I’m concerned, the best thing my bank can do for me is stay out of my way as much as possible. Unfortunately, things haven’t always worked out this way.
Let me acknowledge that, by global standards, I am extraordinarily privileged in terms of financial access and inclusion. I am financially literate. I have multiple bank accounts at multiple banks and I rarely have to pay any bank fees. I have multiple credit cards and they work everywhere. My paychecks are deposited directly to my bank account. I can buy stocks, bonds, and cryptocurrency very easily and with low fees. I’m cognizant of that fact that most people in the world do not have these things, and I try not to take that for granted.
In spite of this relative privilege, I’ve had terrible experiences with banks, which means that things are probably worse for a lot of other people. On the other hand, given how behind the times banks are, maybe something better will come along and the nearly two billion people who are “unbanked” today will be spared ever having to deal with them. This is, after all, what happened with other outmoded technology such as landline telephones and fax machines. The future probably looks less like “bank the unbanked” and more like “unbank the banked.”
Before talking about the future, let me share some past experiences.
Risk mitigation procedures
I still have a foreign bank account that I used previously when I lived abroad. I check it from time to time but I don’t use it very often.
A few months ago, I got an ominous letter from this bank informing me that due to “risk mitigation procedures,” and since I hadn’t transacted in some time, they’d be forced to restrict access to my account unless I took immediate action. I either had to show up in person, call the bank, or set up a new digital security token for my account. I followed the instructions to set up the security token, which only took a few minutes, and thought nothing more of it.
In spite of this, a few weeks later, I received another notice informing me that, since I had “ignored” the previous notice, the bank had been forced to restrict access to my account.
Due to the time difference, I had to make an expensive international call at an odd hour to sort things out. I was asked a long series of inane questions—not only to confirm my identity and contact information, but to explain the “source of funds” (nevermind that I hadn’t deposited money into this account in years), etc.—but, fortunately, after one half hour phone call, the bank restored access to the account.
We’ll remit if we want to
I had an old company bank account containing a relatively small amount of money that I hadn’t touched in a few years. I finally got around to closing the account, intending to withdraw the remaining funds and deposit them into another account. When I tried to login to the bank’s website with the credentials for the account, the login information didn’t work. When I called the bank, I was told to show up at the bank with two forms of ID.
A few days later I did as instructed and, when I gave a banker the account number, she looked perplexed. The account was in a strange state which she had never seen before. She had to call HQ to clarify exactly what this meant.
Apparently, because I hadn’t touched the account in a few years, the bank had unilaterally decided to close it and to send the funds to a state agency in charge of unclaimed funds. I double-checked, and I’m certain the bank hadn’t notified me about this—no warning, no notice that it had happened. There was no email and no paper letter, but I had been receiving regular statements, which means my contact information was accurate. Rather ominously in retrospect, I had stopped receiving the regular statements a few weeks prior.
In order to reclaim the funds, I had to prepare, notarize, and submit a pile of paperwork to the state. I heard nothing for several months, then eventually got a request for even more paperwork, some of which required contacting another state agency, which itself took weeks. I’m used to paperwork and to dealing with government agencies, so, while it was incredibly annoying and time-consuming, it wasn’t the end of the world.
It took the better part of a year, but I did eventually get a check for the funds. Of course, the check was in the company’s name, not my name—and the company no longer had a bank account. The bank wouldn’t let me deposit the check into my own account, nor would it let me, the sole officer of the company in question, sign the check over to myself. I was forced to go through the lengthy process of reopening the company account, depositing the check, waiting for the funds to clear, writing a new check to myself, then closing the account—in person, of course.
I have a credit card that offers fraud protection. In theory, this means that if someone else uses my card or charges me for something I didn’t agree to pay for, the bank should refund me (and initiate a chargeback against the vendor’s account). I used this card to reserve a rental car, including rental insurance, before a recent trip.
When I arrived at the rental counter to pick up the car, the rental agent insisted that I pay for additional insurance (which, incidentally, cost around 3x what the rental itself cost). Having been through this bait and switch game many times before, I refused, and he made me wait a long time while he tapped keys, until eventually he relented. He printed out a form for me to sign, but the form included the charge for the additional insurance that I had declined. When I asked about this, he told me, “Ignore this, you won’t be billed for it as it’s included in your prepaid rental.”
A week or two later, after I got home, I noticed that I had, in fact, been billed for it. I tried calling the rental agency but was told they only handled customer service requests via email. I sent a request and was promised a response within 48 hours. When I still hadn’t received one a week later, I submitted a fraud claim to my bank along with documentation supporting the claim.
About a week later I received a notice from my bank that my fraud claim had been denied and that the transaction “appeared legitimate.” There was no additional information. No details on what steps the bank had taken to validate the transaction, whom they had spoken to, or what information they had collected. No indication whatsoever that they had even read the documentation I had submitted, and no information on why they had denied the claim.
I called and spoke to a customer service representative who admitted that it was strange, told me that he had no additional information, and said that all he could do was to resubmit the claim for me, which he did. A week later I received exactly the same notice again saying that the claim had been denied—again, with no additional information.
I submitted the claim a third time. Before the bank could get back to me, I finally heard back from the rental agency, which apologized for the trouble and issued a refund.
As part of an investment, I once had to wire some money. I submitted the wire transfer on my bank’s website, something I had done dozens of times before. Easy peasy.
A week later, the intended recipient notified me that they had not received the funds. Not only had the bank chosen not to process my wire, they had also chosen not to notify me of this decision. (Weeks later, I realized that there was—what else?—a piece of paper sitting in my mailbox at home with this information.) I tried to submit the same wire order again online, but this time I got an error telling me to call the bank.
When I called, I had to answer a series of increasingly obscure “security questions” before they would even agree to talk to me. I was told that the wire had been blocked for reasons of “loss prevention,” which is a euphemism for, “We’re not allowed to tell you the real reason.” After three phone calls and six transfers (I counted), I was finally told that the problem was resolved and that I could resubmit the wire transfer online, which I did right away.
The next day, I tried to log on to my account to verify that the transfer had been sent, but my login information didn’t work. I called the bank, yet again, and was told that my account had been disabled for “security purposes.” They wouldn’t confirm or deny it, but I strongly suspect that it was because I was abroad at the time. I explained the situation, and this time, was asked even weirder, more obscure “security questions” which I actually could not answer. (One gem: “Please confirm your most recent previous address.” I’ve been quite nomadic for the past few years, have had dozens of addresses, and had no clue what information they were looking for.) This time I was told that there was nothing they could do via telephone and that I would have to visit a bank branch in person with two forms of ID to reactivate my account. Of course, this could only be done at home, not abroad. The transaction was now more than a week delayed and there was nothing I could do until I was home a couple of weeks later.
Fast-forward a couple of weeks. I begrudgingly visited the bank with the requested two forms of ID. As in the previous story, the banker I spoke to was unable to help me herself, so we had an awkward three-party chat with HQ to sort things out. They reactivated my account and told me, once again, that I could “try” resubmitting my transaction.
I asked the agent on the other end of the line, “I don’t want to ‘try.’ Can you please confirm that the transaction will actually be processed this time?” She told me, “No, we cannot confirm that, it’s up to the bank’s risk software.”
Visualize: I am sitting in the bank, in person, sheepishly carrying two forms of ID. I’ve proven my identity beyond any shadow of a doubt. I’ve jumped through all of the bank’s stupid hoops, and I am asking for access to my own funds, and the bank’s response is, “We can’t guarantee it. We’ll give you access to your funds if we feel like it.”
I walked out of the bank feeling impotent, furious, and determined to have as little interaction with banks as I possibly can.
I resubmitted the transaction later that day and, finally, it went through.
The moral of the story
What’s the moral of these stories?
One possible takeaway is that I have a really awful bank. That much is true. But these stories involve multiple accounts and services at multiple banks in multiple countries. I vaguely remember way back when I lived in a small town that I was on a first name basis with all of the staff at the local bank, and that wasn’t so bad, but small banks are disappearing quickly due to the burden of new regulation. And since then, I’ve always had terrible experiences with banks. I don’t think it would make any difference which bank I use, since they’re all terrible for the same reasons.
Another possible takeaway is that you’ll be just fine if you play by the rules. By “rules” I mean things like having only a single bank account that you use every day, not moving often, not traveling a lot, etc. It’s not that these rules are explicit: your account agreement with the bank doesn’t say, “if you’re abroad, we may not give you access to your money.” Rather, they’re implicit because of the way the financial system is designed. It’s designed by, and for, people who tend to be quite similar—and who don’t move or travel a lot.
Perhaps the most important point is that, as bad as things may be, it’s not actually the banks’ fault. Banks don’t want to have to do these things, and if it were up to them, they’d offer a much better user experience. In fact, competition would force them to. But the fact is, they have no choice but to act ultra-conservatively for at least two reasons: fraud and regulation.
I have very little sympathy for banks and their terrible fraud detection systems. While bank fraud is real and very expensive, it’s largely the result of payment systems that are poorly designed in the first place. When you hand someone your credit card to pay for a meal or a bottle of Coke, you are, in essence, handing them a private key that they can use again later without your permission. This is supposedly okay because of “fraud protection,” but as the above story shows, fraud protection is a joke. And it’s not really your money that the bank is trying to protect, it’s theirs. It’s no wonder they optimize for lots of false positives. Unfortunately, we all pay the price for this “protection” every time our credit card gets blocked needlessly.
If they chose, banks could offer much more innovative solutions. The fact that they haven’t—by, for instance, offering customers more control over their accounts in exchange for turning off the algorithms—speaks to a failure of imagination, innovation, and competition. Retail banking is a complete disaster because regulation chokes small banks while big banks receive government bailouts rewarding bad behavior.
Banking is one of the most regulated of all industries. I’ll be generous and assume that these rules, however expensive and frustrating, are well-intended and probably do protect most people most of the time. KYC/AML rules, and limiting the amount of money you can transfer, for instance, are intended to prevent money laundering and financing of terrorism. Lots of other annoying rules, such as not allowing those who aren’t already wealthy to invest in startups, are intended to protect consumers from scams and risky investments that they may not understand.
The problem with regulation is that by definition it’s one-size-fits-all: a sledgehammer to crack a nut. Policymakers have only very blunt tools at their disposal. In the ideal case, by contrast, the free market would be allowed to do its job, policymakers would get out of the way, and innovative banks would design and offer different products tailored to the needs of different groups of consumers.
If the guardrails were removed, some consumers would doubtless make mistakes and lose money. Then again, in such a world banks, financial advisors, and the like would step in and fill the gap by offering products with protections that would be appropriate for most consumers. Whether consumers would be wise enough to opt into these products is a separate matter, although good choice architecture could help a lot here, just as it does with, e.g., retirement savings.
Of course, this is precisely one of the most fundamental questions in governance and political philosophy: the role of government vis-a-vis personal freedom and the question of big vs. small state. I don’t want to delve deeper into this topic now, but I’ll add one final thought. I’m not suggesting that there’s no role for government. I’m not that extreme. When it comes to things like national defense and public health, a competent government can add value and fix certain coordination failures. But the government has no more business in my bank account than it does in my bedroom.
Overbearing, blunt, all-or-nothing policy may have been the only option 50 or 100 years ago, but I refuse to believe that we can’t do better today. One reason is technology which, it should be self-evident, can be far more responsive to the needs of individual consumers than government can: a scalpel to the sledgehammer of government, if you will.
There’s a very simple, elegant solution to the fraud problem: if my “bank” were an app, I could authorize every single transaction, with no possibility of chargeback and no recourse. In other words, I could trade security for convenience. This is indeed how cryptocurrency works. And while cryptocurrency is immature and has its own usability problems, unlike credit cards and bank accounts, no one can spend your funds without your explicit authorization. It simply can’t happen with cryptocurrency for the simple reason that you have to individually authorize every transaction. Which, if you ask me, is how a bank account should work.
The “guardrails” question is, I admit, a little bit trickier for the reason I describe above: that increasing freedom is by definition setting some people up for failure. One possible response, common in the libertarian cryptocurrency community, is social darwinism: if people are too dumb to manage their money, that’s their problem. While tempting and undeniably true on one level, this response totally misses the point, which is that most people are risk averse, and will happily pay a price in terms of convenience for being protected from themselves (especially if the system is designed in such a way that that’s the default). For most people, this is probably a good trade, so it might make sense from a policy perspective.
A more thoughtful response to stifling regulation at the local and national level is to lift innovation to the international level. Those who want to live in a social welfare state, guardrails, high taxes and all, are free to do so. There will always be other states with laxer policies, and people and companies will engage in regulatory arbitrage and take advantage of those regimes.
Today, there is also a third option: civil disobedience, in the form of Bitcoin. Rather than picking sides, one may choose to exit the system entirely. Those who believe that the state simply cannot be trusted to enact reasonable regulation may feel that there’s no point in trying to reform a broken system by playing by the rules of that system. As Nic Carter points out in A most peaceful revolution,
Bitcoiners reject this: they understand that the only winning move in politics is not to play.
Of course, Bitcoin comes with an entirely different set of risks and downsides, and it’s not for everybody. Bitcoin, and cryptocurrency more generally, has a long way to go before it’ll be ready to replace the bank account for most humans, but it is making steady progress in that direction.
Banks, at least banks as we know them today, will never be able to act as responsible, trusted stewards of our assets. That’s because they’re run by fallible humans, and they inevitably put other people’s interests—the interests of their directors, shareholders, the government, and your fellow citizens—before yours.
At the end of the day, you face a choice. You can choose to keep your assets at a bank (ideally, several banks, in different legal jurisdictions). That’s perfectly fine as long as you understand the risks. As the stories above demonstrate, funds you choose to deposit with a bank are not yours in a practical sense as “possession is nine-tenths of the law.” Or, as the cryptocurrency community likes to put it, “Not your keys, not your coins.”
Alternatively, you can choose to take matters into your own hands, either by using an existing cryptocurrency such as Bitcoin, or by helping build a better one. I work every day to build a better financial system. I’m doing this for people everywhere, but I’m also doing it for myself and my children. I don’t want my kids to ever have to touch a bank account if they don’t want to. The scenarios I described above are literally impossible with cryptocurrencies like Bitcoin. It’s not that Bitcoin is “better” in every way, but it is more free, and freedom and choice matter.
I’m convinced that it’s not zero sum, not an “either or.” We can and will have financial institutions that preserve freedom and choice, and also provide insurance against mistakes and fraud for those who need it. In a free society, if I want to take full responsibility over my assets, with full knowledge of the potential consequences, I must be free to do that. And if I want to buy insurance, I should be free to do that too. Cryptocurrency gives us an opportunity to build such a system.
If I could wave a magic wand and design the perfect bank account, I’d want a bank that is, basically, just an app. When I get paid, the money just shows up, and I can spend just as easily, by “texting” money to someone, or by scanning a QR code at point of sale. That’s basically it. I don’t need paper checks, or tellers, or ATMs, or credit cards, or any other nonsense. As far as I’m concerned, all of that only exists because it always has and it serves no purpose. It’s all a waste of time and money. Basically, I want Bitcoin with lower fees and better UX. ↩
Except China, where they work about half the time. Which is interesting. For some reason, foreign credit cards can feel almost useless in China. ↩
Hospitals, airlines, and governments make the worst customers because they’re the most conservative industries, and thus the most resistant to change. Banks are close behind. ↩
This is doubtless one of those barbaric practices that future generations will look back on, shake their heads, and wonder how we could ever have been so daft—like paying tolls on both sides of a bridge. ↩
One cannot talk about financial regulation without mentioning New York’s BitLicense, which most certainly is not well-intended. It’s one of the most toxic, pernicious, overbearing pieces of legislation ever passed, and its only purpose is to protect bankers from competition. ↩