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The author could not be more wrong. Branches exist to handle and process A) cash demands, B) check and other non-specie instruments, and C) paper for commercia

The author could not be more wrong. Branches exist to handle and process A) cash demands, B) check and other non-specie instruments, and C) paper for commercial clients. If they’re a community or specialty bank, branches also exist to serve the particular, unusual needs of their community,—usually business needs. These special needs often include unusual skills such as assessing the quality of a crop or meeting with specialized experts. That branches happen to also offer convenience to consumers is a happy accident, mostly, and it’s happier in that businesspeople are themselves consumers and often select their business bank based on where they personally bank. Branches are JUSTIFIED regulatorily by their public benefit which centers, in most cases, around consumer and SMB (which is to say, prosumer) access. But like many things, the regulatory rationale and the real purpose do not fully correspond. I’m sure you’re as shocked as I. If branches were about sourcing consumer deposits, they would be uninsurable properties, because banks would burn their branches to the ground. Rest assured. Source: I run banks.

sixhobbits 4y ago
The Author has a broad reputation around here for knowing what he is talking about, so I think 'I run banks' might need more context if you really want this to be an appeal to authority argument, especially as your HN bio doesn't support the claim that you run banks and 'running banks' isn't really a role
- jwr 4y ago
  Well, to be fair, The Author has a broad reputation for authoritatively saying things about banking and is a HN celebrity, which does not necessarily mean he works at a bank or knows one from the inside. I read the article, and the described model does not apply at all to countries with modern banking, e.g. for example Poland, which I know well. And this sentence: "The dominant engine for profitability of deposit accounts is net interest margin" is decidedly untrue here. Today, banks here do not want your money. What they seem to want (but I do not know this from the inside, just from observations) is a long-term relationship, so that they can sell "products" that involve fees (visible or hidden): cards, investment products from third parties, etc. Also, most modern banks have no tellers anymore here.
  - sixhobbits 4y ago
    That is fair and an actual argument with your opinion and some evidence while to me the parent was more 'Author is wrong, opposite is true, and I have more authority' Appeal to authority is usually annoying but I just meant that if you do it you should appeal to a higher authority which I didnt really recognise in this case.
- solarengineer 4y ago
  Regardless of the author's reputation, the point does stand that branches often cater to specific needs of the locality. For e.g. bank branches in rural areas in India often understand rural needs and work with local government administration to offer special loans that have no place in cities (like loans for water pumps, seasonal loans to fund the transport of produce to central market places, etc). In a small city that I worked in, bank branches were aware that they would get lots of account holders visiting during "lunch time" at factories. Various factories ended up collaborating with the bank branches to have different lunch times so as to reduce the load of visitors at the branch. In Industrial locations within that same city, branches unofficially specialize in small loans to help suppliers tide over payment cycles of the large customers. In another distant suburb of Mumbai that I lived in for many years, the local bank and its branches within that suburb had higher credibility than even nationalised banks! The Bank officers would be invited to attend local industrial meetings, township planning discussions, merchant meetings, etc. They learn from the meetings, arrange for special loan and financial packages. There are business communities where reputation is everything. Such business persons sometimes do visit a branch and ensure that certain cheques by clients get honoured while they present cash or hand over their business documents for hypothecation. In many suburbs and rural areas, bank branches provide a "daily deposit" collection service where a branch officer visits various businesses in the evening to collect cash for deposit into the current account. These are not part of the banks' official services, but are arrangements and accomodations made at local levels. As an erstwhile small business owner, I had learned at a very young age of the importance of having a great working relationship with the local branch officers (tellers, other officers, the branch manager). We would invite them to events at our business, and they would attend, too. My examples are all from specific regions in India that I have stayed in, but I do think that other parts of India as well as in the world (including in the US) would have specialised needs that an "online" presence would not adequately cater to.
lowkey 4y ago
Both you and the author, while correct about many details, are completely wrong about the business model and economics of retail branch banking. To be precise you are off by 100x or two orders of magnitude on the profitability of depositors to the branch. What you both missed is the biggest open secret in banking - the fractional reserve model. Fractional reserve references the fact that banks don’t merely loan out depositor funds at a 3-5% spread. Instead they are required to keep at most 3% of depositor funds on—hand while they loan out the other 97% at a very profitable spread between interest charged on loans and interest paid to depositors. For this reason every $1000 taken in by a branch allows them to make on average $97,000 in new loans. They pay the depositor 1% in interest on the $1000 deposit while charging 4-7% interest on approximately $97,000 in loans for a rough profit of almost $3,000-$6,000 for every $1000 deposited. Where does the $97,000 come from? It comes in the form of bank credit - literally numbers added in the bank’s computer. This is one of the mechanisms of money creation. The other being sourced by the Federal Reserve when they purchase securities on the open market with money they create out of thin air. This is also what causes inflation, despite what politicians wish you to believe. Banks do not operate as non-profits. They wouldn’t operate retail branches unless the economics warrant it, which they very much do.
- gamegoblin 4y ago
  How does your model explain that reserve requirements are now 0%? Why haven’t the banks created infinite money? The loanable funds model that you describe is no longer accurate (though it is still taught by courses using outdated textbooks, e.g. the classic “Macroeconomics” by Mankiw. Newer textbooks, e.g. Core Econ do not teach the loanable funds model. It is incompatible with empirical data. [1] https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
  - lowkey 4y ago
    I simplified for the sake of the audience since it does, I’m sure you would agree, seem absurd that the current reserve requirements are near 0% which only makes my argument stronger. Technically, though the reserve requirements are still >0%. There are limits as exhibited by other required ratios that must still be preserved. But effectively with near 0% reserve, the benefits of holding deposits are only amplified.[0] [0] https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking
Taniwha 4y ago
Originally they existed because nothing was computerised. You went to your bank (and it was just that one physical bank) because that's where the definitive paper record of how much of the money in the bank was yours was kept. You also had a bank book, your copy of that record. Every time you went to a teller for a deposit or a withdrawal the teller would go to the bank's file storage, remove your record and update it, and your bank book to match the transaction, then return the record to the file storage. If you moved town, or across town you applied to the bank to have your records moved. Your checks (if you live in a country that still uses them) had your branch number on them, banks would reconcile checks using that info so they could update those all important file folders.
- eru 4y ago
  Keep in mind that in large parts of the US, branches used to be banned. Every bank was only allowed a single office in one single city. If you moved town, you had to find a new bank. Not just a new branch. Obviously, that was a recipe for fragile banks, and thus frequent banking crises.
simonebrunozzi 4y ago
> Source: I run banks. Great job title, I guess. Could you tell us a bit more about your job / occupation?
A4ET8a8uTh0 4y ago
Both, parent and author, are right ( in a qualified way ). The issue that I have with it is that the article attempts to generalize a little too much. There is definitely a business model built around selling ( opening accounts ) for retail customers and it is sufficiently common for a lot of locations in US, but it hardly the only one. Not to search very far, Chicago banking market is extra weird and congested so it requires some banks to specialize, which results in some boutique banks, which focus on markets other than pure retail.
dan-robertson 4y ago
How do the three things you listed make money for the bank? I thought withdrawing cash (maybe by (A) you mean originating loans?) and handling checks are offered at no charge by most banks as a loss-leader/because of regulations. I don’t really know what your (C) is. Perhaps another thing is maybe the OP is mostly talking about massive banks in the United States with many branches and you’re talking about smaller credit unions or community banks which make money in different ways? That might explain why you might both talk about ‘banks’ while both being right and yet talking about totally different businesses.
- deleted 4y ago
  [deleted]

sixhobbits 4y ago

The Author has a broad reputation around here for knowing what he is talking about, so I think 'I run banks' might need more context if you really want this to be an appeal to authority argument, especially as your HN bio doesn't support the claim that you run banks and 'running banks' isn't really a role

jwr 4y ago
Well, to be fair, The Author has a broad reputation for authoritatively saying things about banking and is a HN celebrity, which does not necessarily mean he works at a bank or knows one from the inside. I read the article, and the described model does not apply at all to countries with modern banking, e.g. for example Poland, which I know well. And this sentence: "The dominant engine for profitability of deposit accounts is net interest margin" is decidedly untrue here. Today, banks here do not want your money. What they seem to want (but I do not know this from the inside, just from observations) is a long-term relationship, so that they can sell "products" that involve fees (visible or hidden): cards, investment products from third parties, etc. Also, most modern banks have no tellers anymore here.
- sixhobbits 4y ago
  That is fair and an actual argument with your opinion and some evidence while to me the parent was more 'Author is wrong, opposite is true, and I have more authority' Appeal to authority is usually annoying but I just meant that if you do it you should appeal to a higher authority which I didnt really recognise in this case.
solarengineer 4y ago
Regardless of the author's reputation, the point does stand that branches often cater to specific needs of the locality. For e.g. bank branches in rural areas in India often understand rural needs and work with local government administration to offer special loans that have no place in cities (like loans for water pumps, seasonal loans to fund the transport of produce to central market places, etc). In a small city that I worked in, bank branches were aware that they would get lots of account holders visiting during "lunch time" at factories. Various factories ended up collaborating with the bank branches to have different lunch times so as to reduce the load of visitors at the branch. In Industrial locations within that same city, branches unofficially specialize in small loans to help suppliers tide over payment cycles of the large customers. In another distant suburb of Mumbai that I lived in for many years, the local bank and its branches within that suburb had higher credibility than even nationalised banks! The Bank officers would be invited to attend local industrial meetings, township planning discussions, merchant meetings, etc. They learn from the meetings, arrange for special loan and financial packages. There are business communities where reputation is everything. Such business persons sometimes do visit a branch and ensure that certain cheques by clients get honoured while they present cash or hand over their business documents for hypothecation. In many suburbs and rural areas, bank branches provide a "daily deposit" collection service where a branch officer visits various businesses in the evening to collect cash for deposit into the current account. These are not part of the banks' official services, but are arrangements and accomodations made at local levels. As an erstwhile small business owner, I had learned at a very young age of the importance of having a great working relationship with the local branch officers (tellers, other officers, the branch manager). We would invite them to events at our business, and they would attend, too. My examples are all from specific regions in India that I have stayed in, but I do think that other parts of India as well as in the world (including in the US) would have specialised needs that an "online" presence would not adequately cater to.

lowkey 4y ago

Both you and the author, while correct about many details, are completely wrong about the business model and economics of retail branch banking. To be precise you are off by 100x or two orders of magnitude on the profitability of depositors to the branch. What you both missed is the biggest open secret in banking - the fractional reserve model. Fractional reserve references the fact that banks don’t merely loan out depositor funds at a 3-5% spread. Instead they are required to keep at most 3% of depositor funds on—hand while they loan out the other 97% at a very profitable spread between interest charged on loans and interest paid to depositors. For this reason every $1000 taken in by a branch allows them to make on average $97,000 in new loans. They pay the depositor 1% in interest on the $1000 deposit while charging 4-7% interest on approximately $97,000 in loans for a rough profit of almost $3,000-$6,000 for every $1000 deposited. Where does the $97,000 come from? It comes in the form of bank credit - literally numbers added in the bank’s computer. This is one of the mechanisms of money creation. The other being sourced by the Federal Reserve when they purchase securities on the open market with money they create out of thin air. This is also what causes inflation, despite what politicians wish you to believe. Banks do not operate as non-profits. They wouldn’t operate retail branches unless the economics warrant it, which they very much do.

gamegoblin 4y ago
How does your model explain that reserve requirements are now 0%? Why haven’t the banks created infinite money? The loanable funds model that you describe is no longer accurate (though it is still taught by courses using outdated textbooks, e.g. the classic “Macroeconomics” by Mankiw. Newer textbooks, e.g. Core Econ do not teach the loanable funds model. It is incompatible with empirical data. [1] https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- lowkey 4y ago
  I simplified for the sake of the audience since it does, I’m sure you would agree, seem absurd that the current reserve requirements are near 0% which only makes my argument stronger. Technically, though the reserve requirements are still >0%. There are limits as exhibited by other required ratios that must still be preserved. But effectively with near 0% reserve, the benefits of holding deposits are only amplified.[0] [0] https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking

Taniwha 4y ago

Originally they existed because nothing was computerised. You went to your bank (and it was just that one physical bank) because that's where the definitive paper record of how much of the money in the bank was yours was kept. You also had a bank book, your copy of that record. Every time you went to a teller for a deposit or a withdrawal the teller would go to the bank's file storage, remove your record and update it, and your bank book to match the transaction, then return the record to the file storage. If you moved town, or across town you applied to the bank to have your records moved. Your checks (if you live in a country that still uses them) had your branch number on them, banks would reconcile checks using that info so they could update those all important file folders.

eru 4y ago
Keep in mind that in large parts of the US, branches used to be banned. Every bank was only allowed a single office in one single city. If you moved town, you had to find a new bank. Not just a new branch. Obviously, that was a recipe for fragile banks, and thus frequent banking crises.

simonebrunozzi 4y ago

> Source: I run banks. Great job title, I guess. Could you tell us a bit more about your job / occupation?

A4ET8a8uTh0 4y ago

Both, parent and author, are right ( in a qualified way ). The issue that I have with it is that the article attempts to generalize a little too much. There is definitely a business model built around selling ( opening accounts ) for retail customers and it is sufficiently common for a lot of locations in US, but it hardly the only one. Not to search very far, Chicago banking market is extra weird and congested so it requires some banks to specialize, which results in some boutique banks, which focus on markets other than pure retail.

dan-robertson 4y ago

How do the three things you listed make money for the bank? I thought withdrawing cash (maybe by (A) you mean originating loans?) and handling checks are offered at no charge by most banks as a loss-leader/because of regulations. I don’t really know what your (C) is. Perhaps another thing is maybe the OP is mostly talking about massive banks in the United States with many branches and you’re talking about smaller credit unions or community banks which make money in different ways? That might explain why you might both talk about ‘banks’ while both being right and yet talking about totally different businesses.

deleted 4y ago
[deleted]