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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?


3 Responses to “Retail Financial Markets in Nothing”

  1. sherlock says:

    This doesn’t address your overall point but does get into the nitty gritty of your example

    You’re probably looking at around $20,000 for a 12,000 gallon tank plus the possible permitting and inspections requirements. Not sure if the government would classify a group of people coming together and doing this as a “industrial” activity though. If they are “industrial”, you could very well be subject to a Storm Water Pollution Prevention Plan (SWPPP) which would require engineers and consultants looking at the grade of land, possible pollution areas, mapping out the area, etc. You’d also have weekly and quarterly inspections to perform along with “event” testing that requires you to sample the water when storm water over flow the basins/drains they typically go to.

    You’d also be subject to a Spill Prevention, Control, and Countermeasures Plan (SPCC) which deals specifically with oil. Similar requirements to a SWPPP but maps exactly where all your oil is. You can get around this (as gas stations do) because they are only required when you have more than 1,320 gallons stored above ground and 42,000 stored below ground. So if you put your 12,000 gallon tank underground (upfront cost higher and now UST regulations may apply), you don’t have to worry about a SPCC.

    So I can easily see why a group of people would not want to deal with all of this, but I can also see an opportunity for companies selling storage at locked in rates that do take care of this.

  2. Scott says:

    A few thoughts on potential retail banking innovations:
    – How about a website for growing businesses where they can accept payment from customers now in exchange for “dividends,” in the form of product, over a period of time. For example, a brewery which wants to purchase more equipment may offer customers the opportunity to pay $100 today in exchange for a $20 coupon delivered on the first of the month over the next 12 months. If you are like me and frequently visit breweries, I could realize cost savings throughout the year, while the brewer can use the capital as an alternative to traditional forms of lending to invest in capital and increase production.
    – How about a website where we can set up private loans? If I have an Uncle with $10,000 to invest, maybe instead of putting it into equities he could loan it to me at 10%, which means I have less liabilities on my personal credit report, while my uncle has a good investment. Of course he would report and interest income on his tax return. Currently, there are some interesting similar concepts like LendingClub, but not a website to facilitate private loans
    – For the past few years I have been working on securing equity investments via 506(c) public raise exemptions (crowdfunding). This is a tiny step in financial innovation, and in most states these offerings are still only available to accredited investors (but I never hear politicians complain about that this is making the rich get richer without providing equal opportunity for the middle class).

  3. Gabe says:

    1) I’m not sure why it’s important for you to purchase retail futures versus commodity futures to secure a price. It seems to me that you are accomplishing the same thing by purchasing at the money options.

    2) There has been tremendous innovation, particularly in the annuities and life insurance market. These products offer various combinations of guaranteed income and market exposure. The point is, at least on the liability side, there’s been a tremendous amount of innovation.

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