Last week the Internet was ablaze with disgust after a man was physically dragged off a United Airlines flight.
What’s amazing, though, is that there are countless cases of another industry abusing its customers in far, far worse ways than the airlines.
I’m talking, of course, about the banking industry.
When investors are looking for a hedge fund to invest their money with, they usually look at returns. Of course, the larger the positive return, the better, but what about during major market selloffs? It may be easy to discount a hedge fund's negative return when everyone else lost a lot of money. However, hedge Read More
1. Banks treat you like criminal suspects too.
Sure, United had a man dragged away like he was a rape suspect being hauled off to jail.
But banks treat their customers like criminal suspects on a daily basis.
If you think I’m exaggerating, try walking into your bank and asking to withdraw $20,000 in cash.
See how quickly they start acting like police investigators, demanding to know what you intend to do with your own savings.
Thanks to a law called the Bank Secrecy Act, banks are legally required to fill out “Suspicious Activity Reports” on their customers and send them to the government.
Banks filed nearly 1 million suspicious activity reports in 2016 alone.
Think about that; United treated one passenger like a criminal suspect. Banks treated 1 million customers like criminal suspects last year.
2. Banks nickel and dime you even more.
The airline industry is constantly being ridiculed for its incessant and ridiculous fees. Selecting a seat, checking a bag, booking over the phone, even ‘payment fees’.
My favorite is the ‘fuel surcharge,’ which most airlines imposed back in 2007-2008 to compensate for the high price of fuel after oil prices surged past $120.
Of course, when oil fell to below $30, they didn’t get rid of the fuel surcharge.
Airlines rake in tens of billions of dollars each year on these fees that absolutely infuriate their passengers.
But once again, banks are no different, endlessly nickeling and diming their customers with unnecessary fees… especially if you’re a small business owner.
Some of the most infuriating are fees for sending and receiving money.
To send a domestic wire transfer, for example, banks charge a fee of $25 to $35.
Yet the actual -cost- of banks sending each other money through the Federal Reserve system is just pennies– as low as 3 cents per transaction.
So banks are literally charging more than ONE THOUSAND TIMES as much for a wire transfer as it costs them.
3. Overbooking? Try fractional reserve banking
Last week’s United incident highlighted the common practice of overbooking, in which airlines deliberately sell more seats for a flight than actually exist.
If there are 150 seats on a plane, an airline might sell 160-165 seats on the assumption that 5% of ticketed passengers won’t show up.
In other words, they make money by selling something that doesn’t actually exist… which isn’t a problem until all the passengers show up.
Well, this happens in the banking industry as well; banks routinely make loans and charge interest on money that doesn’t actually exist.
It’s called “Fractional Reserve Banking”, a type of financial system that only requires banks to hold a tiny portion (or none) of their customers’ deposits in reserve.
If you deposit $100,000 at a bank, for example, the bank might hold 5% of that money in reserve, and loan out the remaining $95,000.
That $95,000 will eventually be deposited in the bank, upon which the bank will hold 5% of that amount ($4,750) and loan out the remaining $90,250.
This continues again and again until the bank has made $2 million in loans on a single $100,000 deposit.
The other $1.9 million doesn’t actually exist. But the bank is raking in the interest.
Just like airline overbooking, fractional reserve banking is a risky practice. And we saw in 2008 how quickly the entire system unraveled.
But that’s OK because. . .
4. Banks are in bed with the government too.
After the 9/11 attacks, the already-troubled airline industry was quickly sliding into bankruptcy, so the US government provided a $15 billion bailout through the Air Transportation Safety and Stabilization Act.
Airlines, as it turned out, were too big to fail.
Seven years later, the banks received a bailout worth more than $1.7 TRILLION, over 100x what the airlines received.
So no matter how stupid or risky their practices are, banks expect the taxpayer to bail them out.
5. Yet they brazenly screw their own customers
One of the things that was most disturbing about the United episode was how quickly the situation escalated to violence.
After overbooking the flight, United offered $800 in vouchers to passengers who voluntarily got off the plane.
$800, apparently, was the magic number. After breaching that limit they resorted to violence.
It shows a pitiful lack of respect for human dignity and a terrible violation of the public trust.
It’s the same in banking.
It never stops.
At least airlines pretend to compete with one another and engage in the occasional ‘fare war’.
Banks actually conspire to screw their customers.
And even when they get caught there are hardly any consequences.
One guy got dragged off a plane and the Internet lost its mind. But banks abuse their customers on a daily basis. Where’s the outrage?
If people are angry about United, they should give serious thought to their financial system.
Sadly there are no real alternatives to the airline industry.
If you need to get from Vancouver to London, you pretty much have to fly.
But with banking, there’s a whole world of solutions.
Everything from deposits to lending to exchange services can already be done better, faster, and cheaper outside of the banking system.
With options like Peer-to-Peer platforms, Blockchain services, or even physical cash and precious metals, there’s no reason to keep 100% of your savings in a system that is rigged against you.