What can banks do? This may sound like a simple question, but it’s an important one – and it’s a powerful one. Answer: Banks can take deposits and they can make loans. Sounds obvious, but if we dig a little further, we can see that there’s a lot of power in what a bank can do that can be very useful to their clients. Are you utilizing this edge in your communications with your clients? What types of services can you offer your clients that capitalize on this power?
TAKING DEPOSITS
Banks can take deposits, and while all depository institutions can – no one else can, at least not in the United States. You don’t go to the gas station, deposit funds, and have the gas station hold them for you. That doesn’t work. You don’t go to the grocery store. You don’t do that with your university. You don’t do that with a local high school. You do it with a bank. You do it with an insured depository institution.
Are you utilizing this edge in your communications with your clients? What types of services can you offer your clients that capitalize on this power?
What does depositing funds in a bank do for your clients? One, because the deposit is insured, the bank can pay a return. This is a sort of government-guaranteed return for depositors, and it makes business very flexible. A client can go in and get the funds practically whenever they want – they’re available nearly immediately. It’s also easy for clients to make payments, take withdrawals, and make more deposits. This is a very useful way for a customer to get a return, to have it insured, and guaranteed. No other institutions can offer that. What that does for the bank is give the bank a really great source of funds to make loans. Yes, this power to offer insured deposits comes with regulatory costs – banks are stiffly regulated. Nonetheless, this is a very valuable component for the bank.
Holding Funds
Another area of power that banks typically overlook is that just holding funds for somebody in a safe place is a valuable service. Unfortunately, today there are so many banks available for someone to get that service that you don’t necessarily get to charge a fee every time for that service, but it’s important to remember that just the act of holding funds for somebody is a valuable service. It becomes even more valuable when you delve into industries where it’s hard to get a bank to take on that activity.
Some banks have such a very good, robust bank secrecy act program, a KYC program, that they can charge fees just for depository services because it’s better to hold funds at a bank than it is to hold large amounts of cash on-site at a retail store.
Credit and Certainty Payments
An additional way to dig into the value of deposits is to look at it from a credit and certainty of payment perspective. One bank service that’s been around for a long time is the ability to issue a letter or statement of credit. Once a client has deposited funds and needs to make a payment, a bank may issue a letter of credit or a statement to say to the person or business being paid that they’ll get paid. Everyone knows this for certainty because these funds are being held at the bank and are available to make payments. That is a valuable service! As a bank, if you look at different industries, whether that be agriculture, manufacturing, or other industries, there are little niches where it’s very valuable to be able to say to a customer, “Yes, these funds are available.” And then to say to a third party, “Yes, these funds are available.” And to be able to say, “Yes, these funds can be set aside and payment to you is guaranteed.” That’s a valuable service. Nobody else can do that because they aren’t holding the funds. You see this come up in existing services, but it might be under-exploited. It’s a valuable service that could have more applications.
Divided Fund Responsibilities
Another way that deposits work is when you have to divide responsibilities with respect to funds. This is most obvious in a custodial or a trust account standpoint where you have a trustee who’s managing funds on behalf of somebody else, or where you have a custodian who’s holding funds on behalf of somebody else and has to pay those funds for the benefit of the owner. So, you put the funds in an account with a third party. The third-party can run a ledger and can keep track of things and help keep track of what’s in the account, so clients have some surety and assurance as to how the funds are maintained and spent. This, too, is a valuable service.
Deposit Conclusions
So, when you look at a bank and you think, “Deposit Account”, well, of course, just remember that there are a lot of applications for the deposit account. If you sit down and think about the division of responsibility, and you think about the certainty of payment, and you think about government guarantee return, and then you look at different industries and think about how those different industries need those things, there are a lot more opportunities that you may not currently be exploiting. This may be why many fintechs are jumping in and saying, “Hey, we can add these ledger services along with a bank account”. It’s valuable for these people not to pay a fee for it because it is valuable, and it is helpful.
LOANS
The next edge banks have is their ability to make loans. We may all say yes, of course, banks make loans – you go to the bank to get a loan. What’s not quite so obvious is that banks can make loans in 50 states without getting 50 different lending licenses. The fact that banks can make loans in all 50 states is powerful, and this becomes apparent to somebody who’s making consumer loans or even commercial loans and wants to do that in 50 states. It’s really hard to do that because you need to get a license in all of these states before you can do that. The bank doesn’t need to do that because the bank has a banking charter. You can make loans nationwide. This is another reason why you see a lot of FinTech companies approaching banks and saying, “Hey, we have this great lending product that we can support, but we don’t want to get licenses in 50 States. That’s very expensive. It’s time-consuming. It’s also really difficult to maintain. Do you want to make the loan and we can support you with the system to provide those loans nationwide?”
Conclusion
When you think about what kinds of things banks do, do you realize the power associated with being able to take deposits and make loans? There’s a lot that can be done with this power. That’s very valuable for a lot of different industries in a lot of different ways.
Brent Farley is the managing member of Farley Law, PLLC
Farley Law, PLLC helps business owners identify business and legal strategies they can use to protect business and personal assets, increase and keep more income, and increase peace of mind regarding the way their business operates. Have a question or a comment? Send us a note at business@farleylawpllc.com, or set up an introductory call using our bookings service.