I can’t believe it’s been almost 8 years since my last blog post! Sometimes life takes over and you have other priorities which leave you with not enough energy to do random stuff, like writing about things that most people don’t care about. Well, I’m back! In the current world where generating content is next to effortless, due to AI GPTs, I’m going to go old-school and write and edit everything manually, with no help from AI. I don’t know if you’ve noticed, but since everyone is using GPTs to write, everyone has lost their voice, and everyone sounds the same when they write. Now, there’s only one style of writing, the one decided by AI. Being the non-conformist that I am, this renewed endeavour is also a resistance to that. Yes, new tools are cool and make our lives easier, but we mustn’t take it too far.
On the topics of my blog posts, I’ve decided to follow the old writers’ adage of write what you know. Since I’ve been in banking for more than 13 years, I’m going to write a series of blog posts to explain how banks work, and all the various aspects of banking. I’m going to try to put out a couple of blog posts every month. With that, I’m hoping that readers (whether they are bankers or non-bankers) can better understand this very important aspect of our society, and then they can either appreciate it more, work better with banks, become better bank employees, or have a fresh and renewed (albeit informed) hatred of banks. I’m planning to use my wife (a cardiologist) to gauge whether a blog post is too complicated to understand, or too long, or too boring, so when reading these, please appreciate her sacrifice.
So, let’s start: Banks! What are they and why do they exist?! The relevant definition in Oxford’s English Dictionary is: “An institution that invests money deposited by customers…” (other dictionaries define it the similarly as well). In order to better understand what that means, then we must quickly define what is ‘money’. Money is generally the way that societies around the world have agreed to use as the medium by which they store and transfer ‘value’. Now what people consider valuable or not is relative and depends on many factors. There is one common denominator though: time. What people usually find valuable is the result of the work of other people, and it is impossible to do work without the passage of time. Hence the old saying: time is money. In mathematical terms, we can say that the equation is: work + time = value.1Thinking about it like this makes that cheesy Justin Timberlake movie much more enjoyable. People are social beings, because they figured out early on that they are much more capable when they work together instead of alone. The most efficient way to quantify the amount that they work together is by assigning a (relative) value to it and then exchanging it. Before the concept of ‘money’ existed, people used to barter with physical and useful things such as grain or cattle, then for purposes of efficiency, shiny coins were created, and then paper currency was created, and now we only have numbers in servers in datacentres. Those servers are usually administered by banks.
So, with technological advancements we have reached a point where we are assigning value to our work and registering that value (for safekeeping) with an institution with the possibility of transferring it to our liking. In turn, banks can use that ‘value’ and lend it out to other people and expect it to be paid back with interest. Therefore, fundamentally, banks are institutions that have only two types of registers (books/ledgers): ‘who they owe money to‘ and ‘who owes money to them‘. Naturally, things have become absurdly more complicated, but the concept remains the same. Since time is something that we can never recover, and banks are keepers of the result of time spent working, they are one of the most heavily regulated institutions in our societies. So, just keep in mind, that a lot of the stuff you may hate about banks is due to regulation. At the same time, avoiding banks is currently impossible. Many countries now legally require that payments over a certain amount be made via bank/card payments, or that salaries be exclusively be paid to bank accounts, thus making their existence absolutely mandatory. They are aiming to reduce the use of cash as much as possible in an effort to avoid money laundering or financing terrorism (that’s for another blog post). Therefore, one of the reasons why banks exist, and why they have the current form is because of social and technological advancement (efficiency), and regulation.
All of the platitudes you just read are a façade of the main reason why banks exist. I know that most people don’t read this much, so if you’ve made it this far, then you deserve to understand the real reason why banks exist: to generate profit! Opening a bank costs a lot of money! Just to be able to apply for a licence to open a bank you need to have at least 5-10m EUR (depending on the jurisdiction). 2That needs to be cash, not debt. Do you think that rich people that have that kind of money are going to undergo the scrutiny and the headache which is licencing and operating such a heavily regulated institution just to make your life better? To make it easier for you to sleep better knowing that they are keeping your money safe? Whenever I’m done explaining all the different aspects of banking, you will understand why this incentive of profit is absolutely necessary, otherwise no one would be willing to do it. And yes, owning a bank can be a highly profitable business. Even if publicly owned banks generate profit, since governments usually use that profit to invest in other aspects of their country. Even in those cases, do you think the politicians care about making your life better, e.g. by giving you a more user friendly banking app? No, they care about getting votes. When have you ever heard a minister of finance of a country stating that they will instruct a publicly owned bank to lower the interest on their loans, or to reduce fees on their services? Most countries of the world are capitalist societies where incentives are structured to reward entrepreneurs and investors to create profit generating companies. Banks are not any different. They are companies set up by rich people with the goal of making money. The Boards of Directors and CEOs of banks have a legal responsibility to figure out how to make more money. Every employee of a bank, including myself, works toward that purpose. Some people have tasks to figure out how to generate income, some have to figure out how to spend less (decrease operational expenses), and some have tasks to lower the risks of losing money. Whenever a bank does something that you like, they’re not doing it because they think you’re a good person and deserve it. They’re doing it so that you can continue to be a satisfied client, so that they can convince you to deposit your income, so that they can use that income to make money. But that’s the topic for the next post: deposits and loans.
Hopefully, you now understand that banks have always been profit generating enterprises, that have evolved to being an essential part of societies around the world. In today’s world, it is impossible to have a functioning country without banks. “That’s not true” would be the collective shout of all my crypto fanatics! But it is, since I’m talking about today’s world, not tomorrow’s world. Changing how a society functions takes a lot of effort and time. Until then, just be glad that we’ve come to a point where we can use the internet to check our account balances and we don’t have to waste time waiting in line in a branch.
Leave a Reply