Reader warning – this is not well thought out, and I am narrating it to my phone via voice as I am driving to work this morning.
It occurs to me that either retail financial institutions are intensely sclerotic, old-school, dinosaurs, or that regulation is strangling what they are able to offer retail customers, or I suppose that the economics of retail finance do not lend themselves to making that sector very innovative. Think for a moment about the variety of products and services that are available to retail banking customers. The array of options doesn’t look entirely different from what was offered in the 1930s. Sure, in the 30s we had 5-year mortgages with balloon payments at end, and CDs did not exist – but we had savings accounts paying interest and before 1933 we had deposit accounts paying interest on the liability side and on the asset side the banks were making mortgage loans, small business loans, etc. About the only new products on the lending side are revolving credit type arrangements either on consumer durables or housing, and on the liability side you might argue that the array of savings options and deposit options is somewhat expanded – but I disagree with the notion that any of it is very innovating or offers customers really great financial options for issues that are important in the 21st century. Indeed, many of the programs retail banks offer are a result of the disintermediation crisis of the 1970s and regulatory arbitrage in the face of that and increasing competition from global commercial banks and from non-bank lenders and borrowers.
Here’s an example. If you want to make elaborate financial transactions, say like buying and selling futures, you have to do that via non-bank intermediaries and do so in a sort of complicated way. Certainly those intermediaries are not marketing to and reaching out to “regular Joes” who may want to participate. What is an example of how retail customers might want to participate? How about the energy sector? Think about the amount of electricity or gasoline or heating oil you use every year, and expect to use year after year after year after year. Having some confidence that you know what the costs of such inputs would be as you plan your future would obviously be enormously helpful for all kinds of planning purposes, and of course people have different tolerances for risk and different horizons for how long they need/want to be exposed to fluctuations in those markets.
For instance, right now on the East Coast, the average price of gas is $2.43. I’d very much like to be able to lock in that price for gasoline over the next X years. My family drives about 30,000 miles per year and conservatively uses 1,200 gallons, including my lawmowers and snowblowers and the like. So, when gas was $4.00, that was costing us about $4,800 per year at our estimated average gasoline efficiency. At $2.43, that means I’d be spending $2,916, a savings of nearly $2,000 per year. That’s a ton of money – it pays for sports for my daughter for a year, or all of our school supplies and clothes for the year, etc. I’d be thrilled to lock in that price.
So, where are the retail agencies offering me the opportunity to buy futures at that price? Sure, there is a question of storage, but aren’t there obviously sellers of such futures – agents who are happy selling at the price because they are worried the price would go lower?
Why must one be a major institutional player, using sophisticated intermediaries, to participate in such a market? It’s not actually extremely complicated to get involved in. If a commercial bank functioned as the clearing agent on such transactions wouldn’t they stand to make very considerable profits? And once you think about this, you can begin to think about the huge variety of goods that retail financial services would make sense to cover.
A related question is, independent of the banks doing anything, why don’t individuals make greater individual efforts to lock in these low prices? After all, if I am better off by $2,000 per year by the current price of gas, you might think that I should be interested in spending up to $2,000 per year to take advantage of it. Sure, a 1,200 gallon tank to store a year’s supply of gasoline is large, and a 12,000 gallon tank to store 10 years of gasoline is huge, but they’re not huge beyond the scales of typical large home or certainly not huge beyond scale of anything a middling industrial park building could absorb. Why are groups of people not getting together to create the storage, or to finance the purchase of this gas? Yes, there are probably physical issues about long term storage of gasoline, but you can swap the commodity gas (if it is a commodity, it may not be since the formulations across states and over the time of year varies widely) for some other similarly currently cheap good, the problem is the same.
So, why aren’t we seeing a flourishing of these kinds of projects? I am a financial conservative in my behavior, but I’d be extremely attracted to this sort of a thing. I have lots of ideas as to what the problem is, what thoughts do you have?