Business Concept and Finance Strategy

Banks these days are not getting the best reputations, and this all has to do with the current financial crisis. Interestingly, it was the entire financial and insurance industry as a whole that helped to create the situation, but it tends to be the banks that receive the most anger. Banking has not always had such a “bad rap”, in fact the oldest bank in the world, the Banca Monte dei Paschi di Siena in Italy was started as a charitable lender. It operated as a vehicle through which the poor and needy would be able to get access to fast and low-cost loans, and eventually extended credit to agricultural and business venues as well.

Today, most banks are of the “for profit” type and must charge interest and fees on their many different products. What has happened, however, is that the consumer public has grown disenchanted with the many hefty fees and penalties that appear out of nowhere and seem to be far more punitive than necessary.

For example, one banking customer recently complained about the amount of money charged on an overdraft of their checking account. The bank had already taken their signature and was permitted to access any of the customer’s other accounts to cover a check that would “bounce”, but they still charged fees for this once “free service”. The entire process was automated, the check was actually covered by the funds in the customer’s other account, but there were still more than fifteen dollars in fines. Clearly, the oldest bank in the world operated along a different “mindset” than do modern banks.

So, the discussion tends to be around the role of banking. It is certainly a business aiming to make money, but should it cost a consumer an excessive amount to work with a for profit banking venture? For example, if a customer is a regular depositor of funds, they are actually providing the bank with assets that can be used to guarantee loans or other products. Why should this also cost the customer more?
Clearly there are many issues to be reworked and addressed, and all of the current legislation and work in the government is looking at many common complaints and issues. It is important to note that many lessons from the oldest bank in the world could be learned and put to use as well.

Consider those early, short-term, low-cost loans for people who had very limited budgets or even no money at all. Today there is really only a single example of where such trustworthy lenders are providing funding to those without money. These are called “payday loans” or “cash advances”. They are provided by companies that do not look at credit scores or credit reports, but simply ask the borrower to answer a few questions about their employment and their living arrangements. The loans are granted for short term borrowing and are due to be repaid over the next few paychecks. For instance, it is not uncommon for a payday loan customer to access a loan and repay it within the next four to six weeks.

This is a program very similar to the one granted by the Banca Monte dei Paschi di Siena, the oldest bank in the world, and is a model that should be expanded and incorporated into many lending agencies.

Why should credit be available to those with shaky scores or low incomes? If we are to recover from any financial crisis, it is important that all consumers have funds to spend in the market. Whether the funds are used to buy food, purchase medical treatments or splurge on vacations, home furnishings or other “big ticket” items, the money poured into the economy will stimulate growth and recovery. Preventing the roughly 17% of the entire population considered to be low income from participating in economic growth is foolish.

This is the primary lesson we should take from the oldest bank in the world – lend money, even if it is risky, to benefit the entire economy. Consider that the Banca Monte dei Paschi di Siena funded farmers and business professionals who were using the public pasture lands to earn an income. The bankers understood the importance of economic participation at all levels of income and society.

This is the very reason for the enormous success of the payday loan industry. It does not make judgments based on social status, income level or personal career. Instead a payday loan company is only going to consider the viability of the loan and the potential that each borrower has for repaying the funds. They acknowledge that someone with the potential to work will also have the potential to repay, and will use the funds to help improve their own economic conditions. This in turn translates to broader participation in the economy, which creates growth. The oldest bank in the world has known this since the 1600s, and maybe they have a good point!