Livinglies’s Weblog

Mortgage Meltdown Consequences — New Money, Old Money and New Dynamics — 

Cashless ATM, “second chance bank accounts” and other services auger well for Small Banks and Credit Unions.

The simple fact is that there isn’t any small bank who can’t provide the same services to any type of customers that a large one can. And if States would start depositing their entitlement and other money and revenue into state chartered local community banks, they would regulate their own state and local economies by insuring that reinvestment through loans would be on the local level with local deposits and a return to common sense in lending. It would also score political points for anyone running for local or statewide office. 

News from the Bureau of Engraving and Printing in Washington D.C. (BEP) — they are going to change the size of the various denominations of U.S. currency. There are also changes coming to prevent the Supernote coming out of North Korea which uses the same paper and managed to get the same printing presses that the BEP uses. They have been flooding the market with counterfeit currency quite successfully and the trend seems to be on the increase although, according to government reports, if they can be believed, the problem is not yet a large one.

A clean-out of the ATM cash locations will start to occur when the new bills come out since 85% of the cash terminals in most portfolios are unprofitable anyway and the operators will not be inclined to spend more money on a new cash dispenser for a location that isn’t making money anyway. This will present a new opportunity for those who permit or operate Cashless ATM terminal locations (Community banks, Credit Unions and Independent Sales Organizations). 

Networks like NYCE, AFFN, American Express, COOP and CU24 that allow “scrip” terminals (A/k/a Cashless ATMs) will be the prime beneficiaries of this trend. Cirrus and PLus who merely look away are likely, especially now that they are public, to specifically encourage the use of Cashless ATM after years of “opposing” it on paper. 

Companies like SMARTBanks (which has long-dominated the world of cashless ATMs) are likely to become major players in financial services as their volume once again mushrooms and their offering of services continues to diversify. It seems that with every step, the financial institutions that seek to block the ability of the small bank or credit union competitor cause another event that eventually comes up and hits them in the face, like a rake stepped upon in the field. 

Add to that the availability of “second chance checking” for those who don’t qualify to open a regular checking account and overdraft privileges on these strictly electronic bank accounts, and you have a prescription for a resounding come-back of the small financial institution and the death-knell of the once mighty giant players. 

“Second chance checking” places the small financial institution squarely in the path of the giants (who are now otherwise occupied with saving their skins) seizing the opportunity to provide services to the “unbanked” or under-banked population. Overdraft privileges allows small institutions to partner with -non-predatory lending vendors and offer a smart and socially acceptable way of providing short-term emergency loans placing them squarely in the way of growth of Payday loans.

Adding to this are world events that certain increase the risk if not the certainty that the dominance of the U.S. dollar in world currency is coming to an end, and that with constant devaluation of the dollar and inflation, merchants are starting to demand other currencies. There is even a tendency in foreign markets that will be vastly exacerbated by the advent of the new money being printed — where older wrinkled dollars are being devalued on the spot in favor of newer, crisper ones. 

In short, the mortgage meltdown with its CDO/CMOs, (really financial derivative breakdown, including over $500 trillion in derivative issues over the years) which undermined the confidence in American financial markets, is likely to cause a not-so subtle shift in the willingness to accept U.S. currency for payment of non-tax debt. And dollar reserves held by central bankers around the world are likely to reflect this shift by lowering the amount of dollar reserves and increasing the reserves of other currencies, especially the Euro. 

In short, people going to an ATM will be looking for alternatives. Even if the twenty dollar bill is preserved as to size in order to save the cash dispensing ATM terminal, the level of distrust as tot he quality and buying power of that money is likely to cause something of a shift in consumer and merchant acceptance of old dollars or even the new dollars, causing merchants to keep more than one currency in their drawers — old U.S. currency, new U.S. Currency and probably the Euro. 

I might add that regulatory influence European Central Bank will be probably vastly increase with respect control of financial markets all over the world including the United States where we have always jealously guarded our sovereignty but now surrendered it to a few financial “wizards” who undermined the position of the U.S., in the world at the worst possible time in the worst possible way with the worst possible outcomes for many borrowers, lenders, underwriters, auditors, investment bankers, and investors. 

Even if the twenty dollar bill is kept the same size there will be a run to the teller windows of banks, the drawer of merchants, and anywhere else people can lay their hands on the new currency which appears more sound. After all, since we are not on any gold standard or other back-up to the value of currency, the ONLY thing maintaining the dollar’s value is the confidence people have in it. 

It therefore follows that most operators of Cash ATMs are going to experience either a drop in the use of the ATM or a complete end to their use if the size of the twenty dollar bill changes — until they install a new cash dispenser. But even if a new cash dispenser is installed, merchants, as in New York City and other parts of the country are encouraging payment with Euros. The current ATM electronic and mechanical infrastructure is not sell suited at present to handle multiple currencies or multiple denominations in different sizes.

The ONLY infrastructure available to handle the versatility of demand for “money” is the merchant’s cash drawer, which will not only inure to the benefit of the operators of cashless ATM machines, but to the benefit of the merchants themselves. It is ONLY by getting a receipt and going to a live cashier that the demands of the customer will be met, at least in the short-term. 

A clean-out of the ATM cash locations will start to occur when the new bills come out since 85% of the cash terminals in most portfolios are unprofitable anyway and the operators will not be inclined to spend more money on a new cash dispenser for a location that isn’t making money anyway. 

This will present a new opportunity for those who permit or operate Cashless ATM terminal locations. Networks like NYCE, AFFN, American Express, COOP and CU24 that allow “scrip” terminals (A/k/a Cashless ATMs) will be the prime beneficiaries of this trend. Cirrus and Plus who merely look away are likely, especially now that they are public, to specifically encourage the use of Cashless ATM after years of “opposing” it on paper. 

Companies like SMARTBanks which has dominated the world of cash ATMs are likely to become major players in financial services as their volume once again mushrooms. It seems that with every step, the financial institutions that seek to block the ability of the small bank or credit union competitor eventually comes up and hits them in the face, like a rake stepped upon in the field. 

With the large financial institutions all in some sort of trouble now and the fact that the small ones were barred from playing in the CDO world (and therefore face no write-offs or liability), the time is ripe for small banks and credit unions to reassert their superiority in numbers, customer service and their ability to field more ATM locations than their largest competitors. Cashless ATMs cost, even now, less than 1/3 of the smallest cash dispensing countertop Cash dispensing ATM and cost 5% of the operating costs of the cash dispensers. Things are changing.

The good news for the consumer is that their convenience fees will go down or be eliminated in greater numbers because of the number of small banks offering surcharge-free access to a growing number of what the NYCE network calls “Point of Banking (a/k/a Cashless ATM a/k/a scrip terminals). 

The bad news is only for the banking giants who will see their ATM fee income and monthly statements income decline as more and more people gravitate back to their local banks. As depositors move and loan business moves and decentralization takes hold of the marketplace, supplanting what was a government-sponsored hegemony of a handful of banks, the flimsy foundation on which the giant financial services business model was built will crack and crumble. 

Add to that the availability of “second chance checking” for those who don’t qualify to open a regular checking account and overdraft privileges on these strictly electronic bank accounts, and you have a prescription for a resounding come-back of the small financial institution and the death-knell of the once mighty giant players. 

All these services and more are now available to any financial institution to offer customers who walk in through their door, through the proliferation of third party vendors who are willing to set up, sell, monitor, score risk and even take the risk on these accounts. It is the dawning of a new age, where the syndication and derivative schemes of the old fashioned giants are replaced by a better market system for distribution of credit, wealth and prosperity. Free-market enthusiasts should be excited.

Unfair Competition by Large Banks Created the Infrastructure for this Mess

A few people have asked: Why not do a story on the alternative to the cash-dispensing ATM? After considering the research, and seeing a connection with the mortgage meltdown crisis because this situation is the single greatest marketing tool used by  large financial institutions to decentralize banking deposits (sucking local deposits out of the places they were earned and placed for safe keeping and putting them all over the country, if not the world) and to attract banking customers away from their small local bank or credit union who can and does service their needs far better and far more safely than any large company could with its headquarters and decision makers located thousands of miles away.

If you look at this week’s Economist, you will find on Page 86 that countries in Africa (“third world?”) have discovered a far more elegant and inexpensive solution: The customer activated Point of Banking ATM. In fact, if you look hard enough you will find that more than 25,000 ATM’s are already running in this country. If we used that system as extensively here, crime would be reduced to zero at the site of an ATM, ATM fees paid by consumers would be slashed by at least 2/3, more locations and more convenient locations would provide ATM access, and local bankers and credit unions would start getting their share of the business stolen from them by the oppressive tactics used by large financial institutions to undermine the ability of the small financial institution to compete on a fair and level playing field. 

The Point of Banking ATM is what it sounds like. You perform any of the transactions that are currently available on those monstrosities you see attached to banks, in malls, or in large merchant locations. However instead of an “automated” (which frequently does not work) cash drawer and “vault” (which is fairly easy to penetrate), the customer must go to the cashier to receive their cash. Anonymity and embarrassment of NSF works the same way as all ATMs. But in 21 years of use all over the world there has not been a single criminal act against the user of such a machine, the merchant who maintains the store in his location, or the machine itself. Te concept was started by two ex-American Express managers who had been downsized out of their jobs in the 1980’s.

The standard ATM in this country quite successfully invites all sort of criminal behavior ranging from banging a customer on the head for the cash to using construction equipment to break the machine out of the wall. Only in the United States is the far smaller, far less expensive (in cost and operating expenses) Point of Banking terminal in “disfavor”. 

The reason is the usual — those who disfavor it, do so because it would increase competition, lower consumer fees for access to their money, require virtually no maintenance, require no increase in insurance, and require no extra cash on premises because the Point of Banking terminals produce an astonishing rate of 72% sales. In other words, for every $1 taken out of their account, they spend 72 cents of it on average. Thus the unfair hold that these large institutions and large merchants have over others offering or who would offer the same services, is stifled.

Thus competition generated by ATM convenience would be leveled out between small merchants and large ones if merchants could spend a few hundred dollars (there are even Independent Sales Organizations that will install them for free), and receive interchange revenue from the banking system as well as providing their customers with greater flexibility in their payment options and the convenience of going home both with the groceries (or whatever) PLUS the cash. and most of all, enable small banks to effectively compete against large banks.  

Like all ATM’s the Point of Banking terminal gives a receipt. With the cashless ATM the customer presents the receipt to the store operator or cashier and the customer receives his cash, less any purchases he made (if any). The merchants gets the withdrawal electronically deposited to his designated depository account at his choice of financial institution, just like the use of credit and debit transactions — but in this case the merchant makes money rather than loses it to fee charged to him by MasterCard, Visa, STAR etc.

The odd thing about all this is that the machine used to drive Cashless ATM machines is that not only is it readily available, it already exists (by the millions) in almost every merchant location, large and small. It is the exact same terminal you see in every merchant location that accepts credit and debit for payments. It is programmed over the phone to do ATM transactions instead of or in addition to the “Point of Sale” debit and credit. The card is swiped, the PIN inserted and the choices appear on screen as to what you want to do.

So why wouldn’t small merchants, community banks and credit unions demand access to Point of Banking? The reason it turns out is that the banking associations (or the “networks” as they are commonly called), have passed regulations either banning Point of Banking terminals or severely restricting their usefulness or their ability to generate revenue to anyone who installs one. It seems that to small fearful community bankers and credit unions and small merchants these behemoth data processing centers known as MasterCard and Visa, have taken on the aura of a quasi-governmental entity. 

Thus when the networks say the rules are changed, nobody challenges the rules because “you can’t fight city hall.” The networks have deftly positioned themselves as “city Hall” when in fact they are simply private data processing centers controlled by the largest banks in the country — and clearly doing so against the fair trade and practices statutes of every state, against the rules of the Federal Reserve and against the federal and state antitrust laws. The networks have gone even further by publishing information that associates the Point of Banking ATM with strip clubs, gambling prostitution and other vices, whereas the cash dispensing ATM the largest banks use, are genuine banking machines. it is the same tactic being employed in reverse by the ‘Community Association for responsible Lending” which is trying desperately to legitimize the practice of payday predatory lending charging interest upwards of 500% per year. 

The reason is simple. In economic terms it is called “barriers to entry.” There are 6,000 financial institutions in the Untied States alone. About 1% of these banks control the rules, and have in the recent mortgage meltdown, reduced the Federal Reserve to a whimpering ineffective vehicle for monetary policy. The 1% cannel all the fees, perks from deposits and the customers by offering conveniences that the small bank presumably cannot. 

The small bank or credit union cannot create a network of ATM locations that has convenient locations all over the its own marketing area, let alone the region, the country or foreign countries. But they could do so if they only had to pay a few hundred dollars per location and receive a revenue return on that investment. And the merchants whose daily foot traffic can’t justify the large ATM (with all its insurance, cash loading, armored car, security, maintenance and repair problems, not to mention its sheer size) could benefit along with the small friendly community banker or credit union that “installed” his ATM allowing him to put a sign in his window like “ATM 99 cents”, which is about one-third (1/3) the price charged by Bank of America and other banks at their ATM’s. 

Thank you all for your comments and suggestions. Very good thinking going on out there. The Garfield Handbooks will be completely ready to start downloading in about 3 weeks. I’ll keep you advised. We will be taking PayPal, Visa and MasterCard. Possibly American Express and Discover as well. We are presented with two issues that are sucking the economic and social life out of local areas and channelling the money into the hands of a few people. It is no accident that real estate in New York City is booming. That is where all our money went. And it won’t be any surprise when the market crashes there either — when it comes time to answer for what they did.In a fax and mail transmission to the governors, attorney generals, and local government officials of many states, combined with a cross country tour to meet with them, I am proposing plans for the establishment of two non-federal interstate agencies: The Interstate Finance Commission and the Interstate Currency Network. If we can get some traction on these programs, we can mitigate the dangerous, probably catastrophic effects of the credit crisis and mortgage meltdown on the local level. 

The first thing we have to do is freeze the entire legal process of foreclosures, with certain exceptions that have nothing to do with the predatory and deceptive practices employed to impoverish and enslave the middle class. 

The second thing we have to do is set up emergency regulations creating a new instrument that will replace the mortgage and note that currently exists on most homes that were purchased in the last 6-7 years. This instrument would provide for payments of interest and principle on a sliding scale, payments of utilities and other maintenance expenses of the home, and a commitment to remain in the home for at least 5 years. The instrument, technically dubbed a reverse negative adjustable rate collateralized debt obligation, would allow the lender or source of funds or holder of the risk to participate in the appreciation of the real estate on any amount of proceeds of sale or refinance over the original purchase price expressed in today’s U.S. dollars adjusted for an average of government indexed inflation and real inflation. 

The arrangement would last for a maximum of 10 years after which the deal would revert to the original contracts and instruments, with the right to enforce. The assumption here is that normal demand-pull will increase value and prices in real terms such that the actual value of the real estate is in excess of the original purchase price. This would eliminate write-offs for holders of CDO’s and an opportunity for everyone to recover their current paper losses. The program would be retroactive to January 1, 2007. No participant would be subject to criminal prosecution, civil claims or damages. (Amnesty program, because the perpetrators are participating in the solution).

The third thing is to set up new regulations providing for accountability and meaningful enforcement and penalties to lenders, title companies, mortgage brokers, appraisers, investment bankers and retail securities brokers for non- disclosure and participation in kickbacks, rebates or sharing in yield-spread premiums. as well as inflating prices and approving loans based upon the ability of the lender to earn a fee rather than the ability of the borrower to pay the loan.

The fourth thing is to enact emergency provisions that reduce the ability of credit card issuers to levy and enforce fees and usurious interest payments.

The fifth thing is to set up and order procedures that would enable community banks and credit unions to gain greater share of the market for deposits. Benefit programs for State and Federal Sources should be distributed into deposits to community banks and credit unions in a network that works much the same as present payment systems. Host computers could be established to to deliver benefits, but existing infrastructures of gateway, intercept and national network processing could easily handle this feature. Local money would be kept locally where it would be distributed. In addition, emergency enactment overriding the network prohibitions against use of terminals that emulate or duplicate ATM functions, such as Point of banking and Cashless ATM (dubbed ATM Scrip by some industry insiders) should allow local financial institutions to compete with larger institutions in providing convenient electronic access to cash for far lower costs. Current private network regulations require huge expenditures by community banks and credit unions to deploy ATAM technology which favors only the large institutions who lock out the small banks and credit unions from fairly competing with them.

Sixth allow small financial institutions to convert turnaway customers to prepaid cardholders. The logistics would be easy for any bank to do it. Allow outsourcing for program management and risk management vehicles. 

If a person does not qualify for a regular account, the FI could start one anyway. In the first permutation, they don’t give him the R&T, or the account number, and they don’t give him checks. They just give him a card. The account number is only known to the bank. If they want to include direct deposit, it might get a little more dicey but there is a digital field that identifies the transaction as check or EFT. The processor could simply deny all check transactions. In fact, the arrangement could be that that the employer gets the routing and transit and account number and the employee doesn’t. This could lead to further cross marketing products with the employer.

If the bank or a third party wishes to offer overdraft protection, this will require some technical changes but not much. The accounting for the overdraft and the automatic direct deposit repaying the loan can be handled by either an outsource provider or the bank’s processor. 

This gives the bank the opportunity to build relationships with both individuals and employers. Loans tend to become decentralized even they continue to use FICO, providing they emphasize face to face relationships which we all know reduce defaults. 

Later, when the portfolios are proven, an association could be formed that pools the risks of defaults and decreases the costs attendant to the creation, maintenance and expansion of the program. This association could be expanded into an EFT network and probably should be,  by simply making all participants automatic members of the network. 

On derivative security (distribution of risk) I would not throw out the baby with the bath water, although I certainly would not present it as an option at this time. But at some point, through CD’s that offer higher interest rates because of the higher profits in the local banks, or even an investment pool that is offered within each state, you satisfy the main purpose of decentralized banking — keeping deposits, loans, creation of money, and economic growth local. The argument that local economies had the life sucked out of them by big banks and big business is going to get a lot of traction right now even if there are some arguments against it.

By increasing revenues and decreasing risks, a rewards program could be established for saving on the issuance of prepaid cards. And local merchants could participate in a generic loyalty program associated with the local banks. Then of course we add the Cashless ATM, and we have a much more level playing field for competition between banks and credit unions and between small Financial institutions and large financial institutions. (By the way, in Nigeria and other parts of the world, the ATM Scrip ATM is the machine of choice, works very well, and the customers and merchants are very happy with it. See current issue of The Economist.)

The great likelihood is that the party is over for the credit card companies, the mortgage brokers, the appraisers, the construction lenders, the investment bankers and the retail brokerage companies. This plan, which requires very little tinkering with the technology currently in use is one step in the direction of recovering from the currency and inflation disaster that is already in process. 

More on the currency network in the next post.