Big Banks Are Getting In The Way Of Innovation

Treasury Prime makes technology for banks. CEO Chris Dean watches the regulatory world closely. 

“We keep an eye on who is getting in trouble with regulators, because normally we want to make sure that we never get in trouble with regulators and that we’re the bank’s best friends,” he told me.

Much of Treasury Prime’s technology centers around auditing and reporting, for that reason. Dean also keeps his eyes on certain economic indicators, such as the Fed Rate.

“If it drops from two-and-a-half, that directly affects our business,” said Dean. “If it’s high, then more people want to create bank accounts. As the Fed’s interest rate goes up, more people create bank accounts. As the Rate goes down, people get worried and they don’t create as many.”

The rate at which new banking charters are issued by the Fed, however, has been in decline since the 2008 financial crisis, and it’s not due to the Fed rate. According to a report at the Federal Reserve Bank of Dallas, since the financial crisis, the Dodd-Frank Act and other financial regulations have kept new banks from forming.

This is the return of bank account information when using the Treasury Prime API.

“[P]ractically no new banks have entered the market since 2008,” wrote Preston Ash, Christoffer Koch and Thomas Siems in a Dallas Fed report.

Said Dean: “There’s essentially no new bank charters created, [though] there is starting to be a few every year.” 

2018 was a “banner year” for new banks, yes. “But, compared to the number that exist and the number they close [down], it’s tiny.”

The decrease in new banking charters goes back to the 2008 crash, during which banks didn’t fare so well. In 2007, there were 175 new commercial banking charters issued. Between the years 2009 and 2018, there were 43 new commercial banking charters issued combined. 

“The regulators [became] way more concerned about banks and [them] being well run,” said Dean. “They decided that there were too many banking charters in the United States. If you looked at the numbers with banking charters that were in active use ten years ago, it’s way more than exists now, and, in fact, we lose about 10% of the banking charters per year.”

There are currently approximately 5,500 banking charters in all. “But, you can see that number is going to go down,” Dean said. “Partly, it’s because, as the US economy becomes more integrated, it becomes less of a big deal to have a bank on Main Street, in the proverbial small town, because you can get everything on the internet, on your phone, and there’s branches in supermarkets.”

Alongside the number of new charters being opened, Treasury Prime tracks open banking regulations, which are often designed by committee. Open banking enables third party providers to offer a wide variety of new services. Financial institutions use open banking to securely provide other financial institutions with access to customer data through Application Programming Interfaces (APIs).

There have been no US government initiatives to support the development of Open Banking products and services, and Dean suggests that, behind the scenes, big banks have a lot to do with this approach.

A US Treasury report did recommend the development of regulatory approaches to ensure secure data sharing in financial services, and US banks recognize the power of Open Banking, fintech partnerships, and developing API-based offerings. 

“Open banking has never really taken hold in the US,” said Dean.“It’s very much the bigger bank usually trying to influence how the systems work, and they have very different needs than most real users. So we keep an eye on that.”

Banks are the only ones who can hold money, he notes. “And, if you have a monopoly, you normally don’t innovate. So most of the banks are not innovative. They’re just sitting there on their laurels.” 

There are only about three or four companies in control of the majority of the US’s banking software infrastructure, as well, Dean notes. In 2013, the most up-to-date numbers I could find in an internet search, the likes of FIS, Fiserve, Jack Henry, and D+H owned about 96% of the banking software vendor market share. 

“They’re entrenched,” Dean said. “They have a monopoly, essentially. They don’t see any reason to innovate. It is surprising how little innovation is going on. If you look at market forces, people, corporations, and the economy still want innovation. The banks aren’t providing it, so you see the growth of fintech. If the banks were innovating, you wouldn’t see as many fintechs, because the margins are way better at a bank, because they control the money and every fintech partners with the bank essentially. So, you can always be cheaper at a bank, but banks aren’t innovating.” 

Market forces are leading to innovation, anyway. “Fintechs are actually growing,” said Dean. “A large part of the reason for cryptocurrencies, in my opinion, is that people want better, faster, different systems, and they’re searching for something. If the banks would do a better job…people wouldn’t need to try this crazy fintech.” 

The company works with some of the few blockchain-friendly banks, though banks have been hesitant to touch this technology for the same reasons they have stayed away from open banking. 

While Treasury Prime has seen a consistent drop in the amount of new bank accounts being opened over the past decade or so, banks have shown concern over competition from fintech.  “[The drop off] is pretty consistent across different banks,” said Dean. “If you look back maybe 20 years ago, and you want to open a bank account, it was pretty common that you wouldn’t get any interest or very little. But, as banks are starting to worry now that fintechs are around, a lot of them are starting to offer interest.” 

While the largest banks, such as Wells Fargo, are experimenting internally, the smaller banks are having trouble allocating the resources to experiment with new innovation. Treasury Prime exists to help such banks.

“The smaller ones are feeling a lot of pressure,” he said. “Wells Fargo and JP Morgan or whoever do some innovation. They’re looking for solutions as they try to survive.”