business stuff, Dylan Gallagher

What’s the one thing you believe that no one else does?

bank_vault

Sarah Lacy of PandoDaily holds fireside chats with various people involved in the tech sector and at the end of each interview asks the question “What is one thing you believe that no one else does?”  This question provides insight into the person being interviewed and also makes for great conversation (see here for the fireside chats).  Given what I do each day and the conversations I have about banks, lenders, debt, cash flow, businesses and people needing money, etc. I thought my answer might make for an interesting blog post.

I believe that banks are moving closer to becoming custodians of our money and one day will lose the ability to be profitable by using our money to generate revenue.  Historically banks hold our money, pay us nothing for it (or close to nothing) and then lend it out to people and businesses in the form of mortgages, loans and other credit products.  The difference between the interest they earn and the no-interest they pay us is a large portion of their profits.  Over my career and because of the financial crisis I have noticed in our daily business activity that banks continue to be more and more difficult to get money from.  Not in the sense of having to meet their criteria but more in the sense of the due diligence and the time they take to fund a mortgage or loan.  Every detail and document is scrutinized to levels that border on insanity and when I ask for opinions on why this happens banks generally seem to say that government regulation continues to impose more procedural demands on how banks lend money.  This is why it takes so long to get money and why every detail is scrutinized so closely.  The sense is that government regulators do not want banks exposing their capital to any risk so instead of saying “don’t lend money” they simple say “if you are going to do it here are the hoops you need to jump through”.

Think of any self-storage company that is currently holding your stuff.  They have a building, high security and most of the time you never see anyone from the company wandering around.  They have low overhead and rent you space for your stuff which you pay for through a monthly fee arrangement.  They earn revenue through charging you a rental fee and by selling you other services like containers, boxes, locks, renting their moving truck, online camera access to your unit, etc.  I believe this is where our banks are going to end up as a result of government regulators not wanting to deal with the financial disasters that can result from the banks being anything other than custodians of our money.

So how will banks be profitable?  By continuing to earn revenue through service charges and cross/up sells to other products and services like investments, insurance, cash management, etc.  This will leave the lending of money to other non-banks that are better equipped and are more nimble to manage the risks associated with providing mortgages, loans and other credit facilities to the market.  When I started working with private lenders back in 1996 there were less than 4 companies in our market lending money to borrowers that the banks did not want to lend to.  Today I would have no way to know how many there are but suffice to say that if I counted up the ones I am aware of the number would easily be more than a 1000% increase.  The portfolio I helped manage was about $6,000,000 in 1996 and had grown to $40,000,000 when I left to start Bridge Capital in 2001.  Today that same company manages over $500,000,000 in private lender capital.

There are several other reasons I believe banks will one day no longer lend money, but I will save that for another day.  So…what is the one thing you believe that no one else does?

“When everything seems to be going against you, remember that the airplane takes off against the wind, not with it.” – Henry Ford

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