Lending Club Blog

Building of Banks

Despite the well-publicized bank failures and bankruptcies in recent weeks, I continue to see a huge number of consumer banks being built. Tough economic times may drive the demand for such banks, but only those expected to be profitable would actually be built.

At one intersection in an expanding part of town, there are construction sites on all four corners. That area is in desperate need of a post office or gas station, so I’ve been holding out hope that one of the corners would serve that need. As construction progresses, the “Coming Soon” signs have started to go up, disclosing what is being built. Three of the four corners have now posted that banks are being built there. I’m not holding out much hope for the fourth corner because a large concrete square has already been formed in the center of the site. If the other corners were any indication, this will be a vault and the intersection will be home to four different banks.

As I mentioned earlier, demand for banks would only drive a new supply if those banks expected to be profitable. The fact that four banks can be built on one intersection while all remaining financially viable tells you one thing: traditional banks are highly profitable. While banks provide you with a service of both convenience and security, they do so without your best interests in mind. They pay you a tiny amount of interest on the money you give to them and charge a huge amount on the money they give to you. The difference between the minuscule interest on your accounts and the much higher rates they charge on loans is one of the main ways they make money. They need some way to justify constructing their building, paying all of the tellers, etc., and so they must look to recover their costs as quickly as possible.

If you have a financial need, but want a more reasonable spread between borrower and depositor interest rates, consider a P2P loan. With significantly lower overhead costs compared to traditional banks, social lending sites create a situation where all of their customers are treated fairly. Lower costs mean better rates for you, so be sure to consider peer-to-peer lending before borrowing money from that shiny new bank down the street.

Sunday, September 28th, 2008 at 9:34 am

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