[leelin]

I used to wonder why Midtown Manhattan had so many bank branches, especially the redundant branches a mere block or two away. How could that be the highest and best use of prime commercial store frontage in a competitive market?

I figured out in 2009, when I was working at a hedge fund trying to bid on the assets of bankrupt banks post financial crisis.

Basically, every branch loses money to gain depositors. All the fees on monthly accounts, safety deposit boxes, ATMs, cashiers checks, etc. do not offset the cost of the office and employees. However, if the loss is small compared to the volume of deposit money the branch attracts, then the bank headquarters has "borrowed" money at a very low cost.

I think a typical suburban Countrywide or Washington Mutual branch was losing about $100K/yr but had deposits of $20M; not bad at all considering Fed Funds had been around 5.25% until fall of 2007, and that having the capital was the life blood necessary to do all the profitable operations (originating mortgages, credit cards, student loans, EDIT: meet regulatory capital requirements, etc). In Midtown, those numbers might be multiplied many fold, so very few retail stores can compete and stay profitable.

[nostrademons]

I thought it was pretty well-known that you're the product of a bank, not the customer. I don't pay any fees to my bank (my balance is high enough that they waive them all), and they actually pay me some miniscule interest rate. But in return they get to use my savings to make loans on high-priced mortgages and credit cards, which earns them literally thousands in interest charges.

Retail banking locations are a market-share grab. They want to make it as convenient as possible to put your savings in a bank, because then they have access to your deposits, which can be loaned out as a lucrative product.

It's much like the Chrome Omnibox or Google Toolbar for Google, or the Facebook mobile app. These derive no revenue, but they make it as convenient as possible to use the company's products. That user attention can then be sold to advertisers for a nice profit.

Ditto Hacker News as well - your comments here don't benefit YCombinator at all, and they have to spend money maintaining & moderating it. However, insightful comments on HN attract intellectual people interested in startups, which are YCombinator's prime customer demographic, and so your contributions here are effectively very cheap advertising for YCombinator.

[tw04]

I've honestly never understood the point of even dealing with large banks. My credit union doesn't charge any fees, regardless of how much I have in my account. Free overdraft protection, extremely low interest car loans and used car loans, etc.

Oh, and they didn't become insolvent handing out crappy mortgages.

[unclebucknasty]

I prefer credit unions too and take loans through them when possible.

But my primary checking and money management accounts (business and personal) are with a major national bank. For cash flow, access, and generally moving money around it's hard to beat the convenience.

[yuhong]

I wonder if it makes sense for for profit banks to have interest bearing savings accounts at all these days.

[jschwartzi]

My bank was profitable through the entire mortgage crisis. It's a savings and loan though.

[branchless]

I'm like you, but realise that you are paying a fee by keeping your balance high enough in a low interest account to avoid other fees.

I like to have cash at the ready but that doesn't matter to the bank. They get 1 or 2k for nothing.

[roblev]

Well the banking model is to take demand deposits to issue longer term loans. Is that bad? People want loans, people want to deposit cash... Why should banks not operate this way?

Would it be better not to have deposits and loans?

[nostrademons]

I didn't say anything about good or bad in my post - I'm just commenting about what is.

I suspect that you (and probably other readers) are injecting some of the sentiment around the "You're the product, not the customer" meme that surrounds advertising-supported tech companies. I don't think those are bad things either, but a number of other HN readers do. I'm just pointing out that this business model has existed for centuries.

[themartorana]

I think there used to be a balanced trade - like exists in many small banks and credit unions now. For holding your money with FDIC insurance and whatnot, the banks got fractional reserve and the right to lend your money at a particular interest rate - which they then shared a small piece of.

Now, banks are predatory. They charge you fees for everything (including having a deposit account!!), barely if at all share revenues derived from your money, and routinely flirt with disastrous insolvency, propped up only by the largest government on Earth.

That's why people feel like they've gone from customer to Matrix-style energy plant.

[yuhong]

I think it probably started when the banks became less profitable, right?

[themartorana]

Wait... Did that happen? Or was it their need to be always more profitable than before?

[meric]

I'd like to think I'm a supplier to my bank.

[nostrademons]

I think "supplier" would've been a more accurate term when bank accounts actually paid interest. Savings accounts at my bank pay 0.01%; standard CD rates top out at 0.05% for a 1-year.

(I do have a high-yield online-only savings account that pays significantly more than that, and feel like I'm much more of a supplier to them, although in some way "supplier" connotes that I'm actively doing work to provide a product or service for them, which I don't feel toward my bank. But the article is about retail banks; the bargain with most retail banks these days is "They give you convenience; you give them money, which they can loan out to make more money." That's much more like the bargain that Internet companies and TV make than the one that say AdSense, App Developers, and Uber make.)

[ThomPete]

Is this really true though? I though that large banke don't really make money on private account but primarily on investing in the market an lending money to really big companies. Seriously interested.

[WalterBright]

Exactly. That's why rich people aren't "hoarding cash". They deposit it in a bank, which loans it out to people who spend it. It is not dead money.

[titzer]

The real reason they want depositors is fractional reserve banking. If you deposit $1, they can go borrow $10 from the federal reserve, loan it out, and be making interest on $10 of created, loaned money.

[infinite8s]

That's not how the fiat system works out (there's no borrowing from the federal reserve). You deposit $10, they loan out $9, which ultimately ends up back in a bank account to be further loaned out.

[branchless]

The bank of england called with some bad news:

http://bankunderground.co.uk/2015/06/30/banks-are-not-interm...

[retube]

That's not what fractional reserve banking is at all.

[SHIT_TALKER]

The mechanics are incorrect but he has the general idea of the benefit banks accrue from each additional deposited dollar.

[dwd]

Highly recommend reading Steve Keen's "The Roving Cavaliers of Credit" for a dose of reality on the whole process.

tl;dr "banks extend credit, cre­at­ing deposits in the process, and look for reserves later"

http://www.debtdeflation.com/blogs/2009/01/31/therovingcaval...

[SHIT_TALKER]

You will find no dispute from me as to whether banks actually do restrict themselves to limiting their credit creation to a ratio of their deposits. But that is how it is supposed to work.

[laotzu]

According to the Fed's website, commercial banks (including foreign/international banks) can actually create and loan out up to $14,500,000 per loan and not be required to have anything backing it (0% required reserve ratio).

http://www.federalreserve.gov/monetarypolicy/reservereq.htm

[rahimnathwani]

Totally wrong. That document is not about loans. It doesn't even mention the word 'loan', except in the context of 'savings and loan associations'.

The document is about reserve requirements for deposits. Roughly speaking, if a bank takes in $100MM of deposits, it has to keep 10% of that ($10MM) in a way that's easy to access (either as cash in a vault, or as a deposit at the central bank). That way, if a depositor wants their money back, the bank will probably be able to give it to them.

If a bank has total deposits of less than $14.5MM, then the reserve ratio is 0%, instead of 3% or 10%.

[laotzu]

Loans are created as deposits/accounts receivables which are included in net transaction accounts. Back that loan with a Credit Default Swap and you cant skirt any reserve requirements which was exactly what ripped the world economy in 2008.

[rahimnathwani]

This doesn't make any sense. When a bank creates a loan of $X and disburses the loan into the borrowers account, two things happen:

1) The bank's loan assets go up by $X 2) The bank's deposits go up by $X

Deposits are part of 'net transaction accounts'[0] so the bank would now need to hold 10% of $X in additional cash (e.g. in their vault).

So, it seems like the bank can create a loan of $X with just $0.1X of cash. Hang on, though. This assumes that the borrower just keeps the money in his bank account, which is unlikely. When she withdraws the money to spend it, the bank's reserve requirements go down by $0.1X (good) but they also need to pay out $X of cash (bad). So, it really did cost them $X to make $X of loan.

Now, if they have a CDS related to this loan, then they are insulated from the risk of default. But, how is that relevant to reserve requirements?

[0] "Net transaction accounts are total transaction accounts less amounts due from other depository institutions and less cash items in the process of collection."

[kobayashi]

This info seems hard to believe and makes me think we're missing context

[rayiner]

What? No.

[roymurdock]

This is fascinating - I had never thought about commercial banks making obfuscated investments in real estate by opening branches in hot markets before.

Whatever money they lose on wages, construction, depreciation, amortization, overhead, etc. they make up on the appreciating underlying value of the land, increased brand presence (read: expensive advertising), and increased ability to secure federal funds due to higher assets as collateral on their balance sheet.

This could make for an interesting leading indicator for a real estate cooldown, and even a recession if extrapolated out:

When commercial banks start closing down commercial branches, we can conclude that either a) value generated by the appreciation of the real estate is slowing down or b) the value of the deposits in the area is not growing fast enough (people are not saving, with banks at least).

Also, it's worrying to see the that the true value of a branch is that of an investment and an asset against which to secure cheap federal loans. That these unprofitable branches exist for these purposes implies a huge misdirection of resources and energy from sustainable demand creation to rent-seeking, speculation, and poor fiscal policy that incentivizes banks to prop up hot real estate markets in order to secure Fed funding.

The Citibank branch that I use will be closing in January...

[RockyMcNuts]

No reason to obfuscate AFAIK. A bank can just as easily buy a building and rent it out at a profit instead of putting a money-losing branch there.

I don't think banks are generally prohibited from investing in real estate, subject to other risk-based capital and liquidity requirements. If there's some loophole that results in an owned branch being treated differently from investment real estate, I'm not aware of it.

In NYC anyway, banks typically rent branches. They don't want to be in the real estate and property management business, although they often end up in it involuntarily after foreclosures.

[ghaff]

The wireless carriers are the other industry that have retail branches of a size seemingly out of all proportion to what they need to transact business. The contrast to many locations overseas, especially in Asia, where cellphones are often sold over a small counter in an electronics store is striking. I assume it's some combination of the big branches acting as advertising and being part of what's effectively a sort of arms race between carriers.

[pyre]

They also upsell you on third-party accessories for your phone.

[ghaff]

I assume that those are pretty minor compared to getting the contract though.

[dredmorbius]

I don't know. Electronics retailers are getting few and far between. Some of that's moved to drugstores or hardware stores, some to office supply stores. But the most obvious place to go for many phone accessories is a phone store, particularly if you need it right now. Otherwise, Amazon seems to be the retailer of choice. I suppose Target and Walmart also carry some items, and of course, Apple.

What surprised me in a recent road trip was the selection of electronics-related items for sale at highway stops, particularly Loves. If it goes with an Android or Apple device, or CB radio, or uses USB power, there's a surprising selection of items. Prices are not unreasonable either.

This is a fairly high-volume market, with specialised interests, and a captive (or at least easily captured) market. The one thing Loves hasn't sorted out is that free WiFi trumps paid, by a long shot. After a few highway stops, you figure this out pretty quickly.

[roymurdock]

You're right - it's less about obfuscation, and more about figuring out the strange incentive structure behind many bank's decisions to open a ton of branches in hot real estate markets.

I'm not sure how bank investments in real estate work, but as long as a branch is bringing in a steady flow of deposits it would be much more attractive than a standard real estate investment.

Those deposits bolster the bank's reserve requirement [1] and the banks then earn interest (0.25%) on these reserves as of 2008.[2]

In a world of zero and negative interest rates on short-term, safe debt, [3] I would imagine deposits would be an attractive revenue stream for a commercial bank with guaranteed upside and little downside, and that the major cost of leasing/buying the real estate to set up a branch would be negligible, especially if the land was increasing in value.

So branches will be shut down when the land starts decreasing in value, or when the flow of deposits into the banks slows down due to a lower propensity to save (not likely in a recession), or due to people earning less disposable income in the first place (more likely in a recession + stagnant wage growth). Both are very bad signs for the economy.

[1] https://en.wikipedia.org/wiki/Reserve_requirement

[2] http://www.federalreserve.gov/monetarypolicy/reqresbalances....

[3] http://www.wsj.com/articles/u-s-treasury-bonds-pull-back-144...

[yxhuvud]

Branches can also be shut down when the use of physical cash in society tapers off. This is already happening here in Sweden - bank offices here is increasingly only used for managing accounts and lending money.

[WalterSear]

San Francisco is littered with giant Wells Fargo locations with 30ft+ ceilings, and dozens of employees just hanging around, waiting for a customer to help. In the financial district, it feels like there's one on every block.

[zeckalpha]

> Wells Fargo & Company is ... headquartered in San Francisco, California.

https://en.wikipedia.org/wiki/Wells_Fargo

[WalterSear]

And how does that explain why they have an oversized retail branch on every corner of the financial district?

[lhh]

This isn't really them "losing money" then, right? Generally, a bank's business model is to borrow money at X% (where X = interest paid to depositors) and lend at Y%, where Y > X, and where that interest revenue exceeds operating costs. I'd be surprised (and appalled) if they actually turned a profit just on fees.

[RockyMcNuts]

Kind of makes you wonder why there are still so many branches when the bank can borrow for next to nothing and has billions in excess reserves parked at the Fed.

[cylinder]

You're not really making any sense. By your own account, they are making money by accepting deposits. They aren't losing money by having branches because they make money on deposits they wouldn't have had without branches. All you've really said is "banks make money off deposits"

[ALee]

The same applies to why there is a McDonald's on the Champs Elysse in Paris, in the heart of Beijing, New York City, etc. It's a loss for the location, but it's really just an investment vehicle where the land itself is not being used for traditional purposes.

[angelbob]

McDonalds is very open about investing in real estate. They own all their own locations. The restaurant is basically just to pay the rent on the land they own.

[mikeash]

Paris, maybe, but I'd be surprised if McDonald's loses money in Beijing. Their prices are high for that market and yet somehow they're always very busy.

[jsn117]

and all retail establishments on major/famous streets

[devy]

Very informative for people from fields.