from Patrick McKenzie | by Patrick McKenzie

“The interest rate spread is (part of) the price for banking services” seems like both a banal observation and one which people, including sophisticated people, need spelled out in excruciating detail sometimes.

“Why can BigBank get away with offering 1 bps?” The interest rate spread… “Why do I get more competitive rates from banks with worse web apps?” The interest rate spread… “Why would a financially sophisticated party concentrate banking? The interest rate spread…

“How come the fed funds rate goes up but the interest I’m paid doesn’t?” The interest rate spread… (Inflations affects services in addition to goods, film at 11.) “How come this is negotiable?” The interest rate spread…

“How come people who don’t negotiate get systemically worse rates than people who do?” The interest rate spread is… “How come companies negotiate more than retail and banks give them more latitude in doing so?” The interest rate spread is…

“How come sophisticated users of banks don’t make decisions entirely based on interest rates?” The interest rate spread is…

I am trying not to sound insufferable but many people whose jobs are directly implicated seemed recently unable to comprehend that e.g. VC funds or startups do not spend the same amount on banking services that a typical middle class American does.

And they would probably not have said “Wait your startup with hundreds of employees spends more than $50 a month on Internet? God, you must be incompetent. Do you even have a CTO? Just call Comcast.”

Product dimensions for banking are, like product dimensions for Internet access, vastly more complicated than normal people expect to understand. Which is fine! But if you are, I don’t know, a telecom regulator, I would hope you’d be able to name at least two of them.

“Name three for banking.” Quality of web/mobile surfaces, flexibility of Compliance department during routine enhanced due diligence and overall productivity tax of the same in expectation, appetite to write loans. Could give you 50, but will offer 3 to show not blowing smoke.

“Big deal banks are basically indistinguishable on those axes.” No, they are not, they are not, they are not. The industrial organization of banking is premised on distinguishability being both unavoidable and desirable, to banks, customers, and society.

You may not care about the difference between A and B. Plausibly you don’t care about who makes the microchips in your computer. But there are people for whom a major focus of their career is understanding the differences in minute detail. Businesses employ them *for a reason.*

Note that you don’t have to resort to cliches about It’s A Wonderful Life to justify that two computer chips may possibly actually be different objects in the physical universe. Many of the differences in banking services are more like chip specs than vibes.

“Really?” Yes. Out of books I could fill with examples, “Will you close this account if the beneficial owner moves to Japan.” You could make a green/yellow/red grid and score thousands of banks based on that row. Which, irrelevant to almost all customers! Like most rows!