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This should not have been a surprise to anyone paying attention

Now there’s an all purpose headline. I could have used it for a dozen posts, but the particular unsurprising event I choose to talk about today is this:

Collapse of ethical lenders stokes fears over credit access

Ethical lenders that have been touted as alternatives to high-cost firms such as Wonga and BrightHouse are going out of business at the fastest rate in years, fuelling concerns that less well-off customers are in danger of losing access to credit.

Eight credit unions across the UK have collapsed in 2018, affecting 14,000 customers with more than £25m in savings, according to an analysis of data from the Financial Services Compensation Scheme. Meanwhile some of the most successful remaining groups are being forced to cut back on lending.

The figures mark the worst year since at least 2010, as the sector battles against rising regulatory and technology costs.

Credit unions provide savings and loan products for members, with loan rates capped at 3 per cent per month.

The Financial Conduct Authority and the government have been cracking down on high-cost sectors such as payday lending and rent-to-own retailers that are seen to take advantage of vulnerable customers, and have repeatedly encouraged unions as a more affordable alternative.

Tim Worstall has been going on about this for years. Anybody that lends to the poor – be it Wonga or the Church of England – is either going to have to charge hefty fees in proportion to the sums lent or lose money. There are two reasons for this. One, any sort of lending has to cover administrative costs. Whoever answers the phone and fills in the form and makes the decision has to be paid. The cost in staff time to approve a loan of a hundred pounds might be less than the cost of paying someone to approve a loan of a hundred thousand pounds, but it is not a thousand times less. Two, you have to cover the losses caused by those borrowers who default. Where does the money to do that come from? That’s right, the borrowers who don’t default. And, um, how can I put it tactfully… the sort of borrowers who need to turn to a payday loan company or a credit union are exactly those who are most likely to default because they are “running on empty” when it comes to money.

If a well-meaning government decrees that loan rates should be capped at three per cent per month, then the amount of money needed to cover the lender’s losses ain’t coming in. Soon the law-abiding lenders must leave the lending business, sending the poor who need money quickly into the hands of the loan sharks, people whose debt collection operation tends to be done via steel-capped boots. But never mind that, at least nasty payday lenders have been stopped from making a profit from poverty.

43 comments to This should not have been a surprise to anyone paying attention

  • Mr Ed

    Didn’t the Archbalrog of Canterbury say that the C of E was going to buy Wonga, the payday loan company, and run it ‘properly’? Or didn’t the Commissioners get the memo that he had no authority to send?

  • Yes indeed, another one for the “No Shit Sherlock” files 🙄

  • Tim Worstall

    Two additional little points on this subject:

    1) If debating worth pointing people to this from the Federal Reserve:

    https://libertystreeteconomics.newyorkfed.org/2015/10/reframing-the-debate-about-payday-lending.html

    “Except for the ten to twelve million people who use them every year, just about everybody hates payday loans. ”

    Nice opening line, isn’t it? And it continues in similarly robust fashion.

    “Even though payday loan fees seem competitive, many reformers have advocated price caps. The Center for Responsible Lending (CRL), a nonprofit created by a credit union and a staunch foe of payday lending, has recommended capping annual rates at 36 percent “to spring the (debt) trap.” The CRL is technically correct, but only because a 36 percent cap eliminates payday loans altogether. If payday lenders earn normal profits when they charge $15 per $100 per two weeks, as the evidence suggests, they must surely lose money at $1.38 per $100 (equivalent to a 36 percent APR.) In fact, Pew Charitable Trusts (p. 20) notes that storefront payday lenders “are not found” in states with a 36 percent cap, and researchers treat a 36 percent cap as an outright ban.”

    2) This gives us a simple test of those excessive interest rates. Or what are claimed to be. Look at the accounts of the lender. Are they making “excess” profits. Or even economic profits. This being defined as above the general profit rate for the economy. An easier and largely equivalent metric is are their profits above the cost of capital more generally? If not, then profits aren’t excess, so therefore interest charged must be about right simply to cover the costs of the business.

    Last time I look, Friends Provident was making normal – ie not excess – profits. And that was before their profit collapse brought on by new management trying to change things.

  • Stonyground

    In the early 1980s I remember talking to guy who sold loans door to door. He would visit weekly to pick up the repayments and then when the loan was almost paid off he would offer it to them again. He told how they would be surprised and happy that reloan day had come around again and perceived it like an unexpected windfall. I can’t remember what the interest rates were but I don’t suppose they were cheap. I seems that it was stupidity rather than poverty that he was exploiting.

  • Stupidity, like poverty, will always be with us.

  • lucklucky

    the stupidity starts with calling them “ethical” without “” like if the others are not.

  • bobby b

    Government would far more effectively serve its declared goals by price-capping expensive high-status athletic shoes and iPhones.

  • Nullius in Verba

    I always regarded these complaints as shocking evidence of the pervasive innumeracy of the chattering classes. It’s along the same lines as observing the percentage of people who think the sun orbits around the Earth.

    You go out to lunch and select a £4.95 sandwich, but at the checkout realise you have forgotten to bring any money. Your friend offers to pay for you, and you eat lunch together. An hour later back at the office, you give your friend £5 and say “Keep the change.” Do you think 5p for saving you from missing lunch and going hungry is generous or mean? Calculate the interest rate on the loan your friend has just given you.

    Most people I ask this question have no idea where to even start calculating an answer! Even those who do are usually astonished at the result, having no intuition for it.

    5p on £5 is about 1% of the quantity, incurred over one hour. We need to calculate the effect of 1% per hour compound interest over the period of a year. This is roughly:

    1.01^(24*365) * 100% = 7,165,299,300,428,436,850,707,723,984,233,673,890,616.7%

    (Exercise for the student – what would the interest rate have been if the loan had been repaid in 10 minutes?)

    Lenders in the past used to use complicated charging policies with variable rates that made it impossible for the innumerate public to figure out what they were charging or which one was better. So they standardised it by making them all report the annual percentage rate – the equivalent interest rate over a year. The problem with this measure is that it gives misleading/nonsensical results for very short term loans with administration charges included. It’s a stupid and useless metric to use. Government, eh?

    Wonga – a company that has evoked a lot of ignorant hate in this country – actually only charges 360%. They have something like a 11% default rate and an average loan period of about a month, so they have to make 11% a month just to pay for all the people who fail to pay their loans back. 1.11^12 gives about 350%. The rest is a per-transaction fixed fee to pay for the website, office expenses, legal expenses, bank transfers, credit checks, and so on that anyone would have to do. The only way to do it cheaper would be not to pay the staff.

    And it would surely be obvious to anyone who understood how markets worked that if they were overcharging, you could make money yourself and help the poor by undercutting them. It should surely puzzle everyone who thought charges high as to why nobody was doing so. Or why none of the people complaining about it did so. Competition, not regulation.

    Expressing hatred for payday loans is like pasting an “I am stupid and proud of it!” notice to your forehead, and showing it to all your friends. It is a sad indictment of the educational system, that we send people out into society without even the basic maths skills to understand how interest rates work. But such is the modern world.

  • Julie near Chicago

    It seems to me, but of course I could be wrong, that over here some years ago — maybe in 2008? — we had something called TARP. Some banks, probably run by greedy Wall Street bustards, seemed to a little short of the funds that would be necessary for them to pay certain creditors (or depositers) if Push came to Shove.

    Or so the Fed was convinced, anyway.

    Suffice it to say that banks had been encouraged to make mortgage loans to people who really couldn’t afford to make the payments. It’s hard to believe, I know, but eventually the banks that went along the the Gov program to make these loans found themselves underdoughed. So the Gov (against the ongoing advice of Pres. Bush, I believe) decided that some of those banks were Too Big to Fail, and… Well, go see the movie Too Big to Fail, or listen to John Allison on the topic. YooToob video, 3 parts. He talks about the S&L crisis of around 20 years ago in Part 1.

    https://www. YOOTOOB .com/watch?v=T31UlBnkQr0

    . . .

    O/T, on Wikipedia on TARP and the Race to the Bottom:

    I was going to write a little something about the Savings and Loan mess myself, but in consulting the Great Foot, I found something that is absolutely indicative of the KoolAid smoking stoking that’s purveyed as the real skinny in this august encyclopedia’s pages. To start, I quote part of a passage at

    https://en.wikipedia.org/wiki/Savings_and_loan_crisis#Brokered_deposits

    Deposit brokers, somewhat like stockbrokers, are paid a commission by the customer to find the best certificate of deposit (CD) rates and place their customers’ money in those CDs. Previously, banks and thrifts could only have five percent of their deposits be brokered deposits; the race to the bottom caused this limit to be lifted.

    Wikipedia links to its article on the “Race to the Bottom”:

    https://en.wikipedia.org/wiki/Race_to_the_bottom

    where it informs us that

    The race to the bottom is a socio-economic phrase which is used to describe government deregulation of the business environment, or reduction in tax rates, in order to attract or retain economic activity in their jurisdictions. ….

    [SNIP]

    [Around the turn of the 19th-to-20th century] there was charter competition among states to attract corporations to domicile in their jurisdiction. Some described the concept as the “race to efficiency”, and others, such as Justice Louis Brandeis, as the “race to the bottom”.

    [SNIP]

    [I]n Wisconsin, Governor Scott Walker decreased state environmental staff’s capacity in order to accelerate the approval time for a proposed development.[10] Pursuing a race to the bottom philosophy in environmental politics allows states to foster economic growth, but has great consequences for the environment of that state. ….

    [SNIP]

    The first footnote to this opus refers to an article in the Sage’s favorite rag, The Economist.

    The reading list has titles that don’t strike me as particularly celebratory of the free market.

    Just something I noticed….

    . . .

    And in closing: What Perry Said. 😮

  • pete

    The people who moan about high interest loans to the poor wouldn’t lend any of their own money to a cash strapped person.

    As usual they exhibit the ‘do as I say, not as I do attitude’ of the concerned liberal, people who are experts in spending other people’s money while taking very good care of their own.

  • llamas

    As it relates to the situation with payday lending and check-cashing in the US, there’s rather a good book called ‘The Unbanking of America’, by Lisa Servon. The author, an academic researcher in city planning and urban development, took several front-counter jobs at payday lending and check-cashing stores (the two are often one in the US) to find out just why and how these systems operate and flourish.

    Her findings and analysis are quite surprising, and include her own change-of-mind from the standard do-gooder liberal position to a much-more-developed view. Most-surprising to me was her description of the number of people who use these services who are most-definitely not either in desperate need, or financially-incompetent, but who actually use them in very-rational ways that are to their own benefit, often because traditional financial systems just don’t address their real-world needs. She also does a deep dive into the fascinating world of informal and non-regulated financial systems, typified by the Hispanic-American tradition of the ‘tienda’, the ‘hawalas’ of the Middle Eastern tradition, and so forth. It’s a fascinating read. I always knew that the crusade in the US against these services didn’t make much sense – after all, tens of millions of people use them all the time, and they can’t all be witless incompetents, despite what high-minded do-gooders say and think about them, so there has to be more to it than just ‘greedy rapacious leeches sucking the blood of the downtrodden poor’.

    llater,

    llamas

  • Mr Ed

    Stupidity, like poverty, will always be with us.

    There is an obvious relationship between stupidity and poverty, in that the value of labour of the stupid is likely to be low. However, there is perhaps a blurring of the line between ‘stupidity’ and ‘short time preference’, as economists call it (or ‘poor impulse control’ as psychobabblers might call it).

  • llamas

    @ Mr Ed – you hit the nail on the head when you referred to “time preference”, and, by association, several other concepts of what ivory-tower economists like to call ‘preferences’ and what, in the real world, are more like strong compulsions.

    Prime example – culled directly from Ms Servon’s real-life experiences. Now comes a drywall-contractor. He employs a half-dozen Hispanic workers, who are well-regarded in the trade, both for their skills and their work ethic. They are the key to his success.

    They require to be paid in cash. Every Friday. In cash. Every Friday. If he fails in this basic requirement, he is out of business Monday.

    He gets paid for a prior job on Tuesday, by check. He needs this money to make his payroll. On Friday.

    Now, he can go to Gigantic Merged SuperBankCorp, where he keeps his business account, and deposit the check. Between 10.00 am and 3.30 pm. Oh, did I mention that it’s a check written in a different Federal Reserve district? Oh, well, sir, then regulation CC allows us to hold the funds for 3 business days, while the check clears. (Little secret – the check likely cleared via electronic clearing while the teller was actually telling the customer this little snippet of banking joy, but that’s not the point). Come back Friday and your funds will be available. Between 10.00 am and 3.30 pm. Have a nice day.

    Or he can go to CashNowAmerica, which is open 24 hours a day, maybe 7 days a week, and in 10 minutes, they will cash his check, make up his payroll into envelopes individually prepared for each employee, and send him on his way. Sure, they’ll charge him $30 or $40 for the privilege – but when you take account of his time, fuel, inconvenience and the risk to his business if he doesn’t have envelopes of cash on Friday afternoon – it’s a bargain.

    That’s “time preference” in the real world – not just time preference, but multiple other “preference” drivers that the current retail banking sector just doesn’t take account of in any way at all. At Gigantic Merged SuperBankCorp, it’s still 1957 and Mr Cunningham can amble in on Friday afternoon with the takings from the hardware store before he goes off to play golf. George Bailey and his brothers are helping out the Italian baker so ZuZu can get her petals or whatever. A 3-day wait is normal. After all, the whole world still works on net 30, right? And you can always send your girl down to the bank for the money?

    Meanwhile, in the real world, things are very different. That’s why these services are so popular, even when all the smart heads say that they shouldn’t be – because the world that the smart heads live in is very different from the world where these services are used. Many times it’s not ‘poor impulse control’ – it’s more like ‘what’s my best choice here?’. IOW, an entirely rational decision.

    llater,

    llamas

  • John McCartan

    Quite. I’ve long felt that a Stupid Tax is no bad thing. Currently it’s manifested in the UK as the National Lottery and the duty on cigarettes, so there must be room for more imaginative versions.

  • Stonyground

    I have often wondered why banks still claiming that cheques take three working days to clear when the process now happens electronically in a fraction of a second isn’t fraud. Can anyone enlighten me?

  • Fraser Orr

    @llamas thanks for the info on that book, I am going to get a copy because it sounds fascinating. I used to write computer software used by some banks for dealing with the “unbanked” and the amount of activity that goes on there is unbelievably large, and, as you say, rarely much to do with poverty. For example, large amounts of the blue collar Hispanic community eschew traditional banking (many times when they don’t have the the right to work in the USA, but often when they just don’t trust banks). And so banks’ commercial customers insist that the banks cash their checks for non bank customers (usually for a small fee.) Other times it is that old attitude of many people, regardless of their mother tongue, is “I don’t trust banks so give me cash”, and who can blame people with that attitude (except, perhaps for their assumptions about what cash is?)

    The whole payday loan thing is all about “what is” verses “what ought to be”. “What is” is very different from what “ought to be”, at least by some people’s lights. Politicians live in the world of “what ought to be” because it makes people feel good and gets politicians elected and allows the civil service to grow even though it often has no link to reality. We, poor schmucks that we are, are destined to live in the world of “what is”. The universe apparently doesn’t care so much about “what ought to be”.

  • Sonny Wayze

    NiV:

    “And it would surely be obvious to anyone who understood how markets worked that if they were overcharging, you could make money yourself and help the poor by undercutting them. It should surely puzzle everyone who thought charges high as to why nobody was doing so.”

    At one of Megan McArdle’s previous blogging gigs, she described a charitable organization (Salvation Army?) which did just that. They ran up against exactly the factors described in the OP, and wound up the program.

  • A century ago, garment sweatshops got similar treatment from the left of their day, even though some denouncers – Jacob Riis, for example (a classic example of a “your help is hurting” reformer) – would occasionally parenthetically note that the evil capitalist exploiters were in fact typically operating on thin margins, with bankruptcy a real risk. Such basic questions as whether some accused greedy exploiter of the poor is making obscene profits – or even mildly risque profits – is one of many that do not occur to ‘enlightened’ minds. 🙂

  • Paul Marks

    Normally I make the point that one should only lend out money that one actually has – not “money” that has been invented by book keeping tricks (Credit Bubble). But this calls for another basic rule….

    Only lend money to people who are going to pay you back.

    This should be obvious – but it does not appear to be obvious to many people. For example the people who dealt in “mortgage backed securities” never asked themselves the question “who are the people who borrowed the money to buy houses and apartments – and are they going they going to pay the money back?”. The Credit Rating Agencies stamped everything (whatever it was) “Triple A” – and few people asked questions.

    Credit Unions are not motivated by “greed” – but they are often motivated by false compassion. False because it is not real compassion to lend money to people who are not going to pay it back.

    What is your reason for borrowing this money? To what productive purpose are you putting this loan? How are you going to pay this money back?”

    If the answer to the first question is something like “to buy my children new trainers” then the other two questions are also answered – and in the negative.

    For CONSUMPTION – either pay out of your income, or SAVE over time to buy what you want. If you borrow money to fiancé CONSUMPTION then you are a fool – and the person who lends you the money is also a fool, and they are NOT helping you.

  • Paul Marks

    Of course according to Professor H. (Max Keiser’s, Putin’s boy, latest cause) the way out of this is to “forgive” people their debts – i.e. legalised DEFAULT (as the lender is being FORCED to “forgive”) why anyone should lend to people who will be “forgiven” their debts is not explained.

    But do not try and point that out (or anything else out) on “Wikipedia” you will be banned as a reactionary if you do. Remember “anyone can edit” is like the slogan “all animals are equal – but some animals are more equal than others” some “animals” (the vermin – the scum that rises to the top in a bureaucracy) have “editorial privileges”.

    Even pointing out that “Sargon” (Carl Benjamin) is not a “conspiracy theorist” and did NOT violate the terms of service of Patreon does not appear to be allowed. Lies are pushed and the truth is forbidden. Ask “GeneralisationsAreBad”.

  • CJ Nerd

    Tim- do you mean Friends Provident, or Provident Financial? Two completely different organisations.

  • Mr Ed

    The Credit Rating Agencies stamped everything (whatever it was) “Triple A” – and few people asked questions.

    AIUI, some ‘securitised’ mortgages were ‘sold on’ with presumably a good credit rating, but they kept the term ‘sub-prime‘ for the underlying mortgages, so the clue was in the name all along. There were lots of other malinvestments of course, but hearing people talk about the ‘sub-prime mortgage crisis’ was a bit like, conversely, as if we were hearing talk about an IJN Kamikaze pilot pension surplus.

  • Nullius in Verba

    “I have often wondered why banks still claiming that cheques take three working days to clear when the process now happens electronically in a fraction of a second isn’t fraud. Can anyone enlighten me?”

    Because AFAIK it doesn’t happen electronically in a fraction of a second. Cheques can potentially be forged, counterfeited, altered, or otherwise invalid, so the issuing bank generally needs to check the physical cheque manually. The receiving bank doesn’t necessarily know what to look for – if you’re not their customer, how would they even know what your signature was supposed to look like? Are banks willing to share customer databases? Would you trust an algorithm to compare scanned signatures? How do they know what anti-forgery measures that bank uses in its cheques? Even supposing they know, what do they do if the other bank disagrees and won’t pay?

    It would probably be possible to set up some joint inter-bank system with mutual agreements, data sharing, electronic transfer, and remote (but still manual) checking of scanned images – I gather the UK banking system is in the process of rolling one out – but it costs money and probably isn’t a priority. Banks would like to kill cheques and move to other less manual methods of payment. But the campaigners for the old folks who still need cheques stopped them.

    “What is your reason for borrowing this money? To what productive purpose are you putting this loan? How are you going to pay this money back?”

    What if it was to buy a £4.95 sandwich for lunch? 😉

    Who gets to decide what other people are allowed to spend money on? And how do they check? What if you was going to buy a new car and also wanted a big bar of chocolate, found you didn’t have enough for the chocolate, so bought the chocolate anyway, got a loan, and told them you was using the loan to buy a car. When cash is untraceable, how do you decide what bit of money goes where? And how far back does a lender get to know (and judge) your spending?

    Frankly, it all sounds a bit ‘nanny state’ to me. Is it any of anyone else’s business?

  • bobby b

    “Who gets to decide what other people are allowed to spend money on?”

    Me, if I’m their lender.

    In fairness, wasn’t Mr. Marks posing his questions in that role?

  • staghounds

    1. On six occasions I have lent money in amounts between $350 and $5000 to people that I personally knew as friends.

    Every single time, I was repaid not one cent without suing them. How banks make credit worthiness decisions is beyond me.

    2. If the ethical lenders can’t break even at 3%, how does the government manage to lend trillions for less?

  • Fraser Orr

    @Nullius in Verba
    Because AFAIK it doesn’t happen electronically in a fraction of a second. Cheques can potentially be forged, counterfeited, altered, or otherwise invalid, so the issuing bank generally needs to check the physical cheque manually.

    FWIW, this is not correct. Most checks (or cheques) are cleared without manual intervention, and most banks do close to nothing to validate the signature (they certainly don’t check it manually — there are some automated signature validation software, but the error rates are so high they might as well not bother, and many banks don’t.) The main manual process is looking at the amount in hand written checks and entering them in. There are banks of people (mostly in India) that just sit and look at images of a tiny part of the check and punch that number in.

    All the rest, fraud detection, number scanning, validation, transfer etc. is done electronically. Just as well because the USA uses about 20 billion checks a year.

    BTW, the history behind this is interesting. (I ran company that produced software for the banking system when this all went down, so had a bit of a ring side seat.) The genesis of it was actually the terrorist attack on 9/11. When that happened, all planes were grounded in the USA for a few days, and something that not a lot of people know is that the American banking system almost ground to a halt. At that time checks were physically moved in aircraft from one banking center to another and manually cleared. This almost disaster lead to the Checking in the 21st Century Act, which set out rules in the banking industry for the use of IRDs, image replacement documents, which allowed the use of check images (along with other data) to be used as the equivalent of the actual physical check, and allow it, with so called “truncation”, which is to say a guarantee of the destruction of the physical paper, to be the equivalent of sending the physical check.

    There was a massive explosion in technology to support that in the early 2000s including primitive signature checkers, and fraud detectors, some of which worked, and some of it which didn’t. It lead to all sorts of useful innovations like being able to do check deposits with your phone, or greatly improving the process of deposits in ATMs, as well as vastly speeding the clearing process.

    Now the answer to the question — why does it take three days to clear a check? The answer is simple — because that is the amount of time the government regulations allow it to take, allowing the paying bank to float some short term cash.

    This is the way it is in the USA, but I am sure it is pretty similar in other countries too.

  • Julie near Chicago

    Fraser! Thanks a whole bunch for that info! I’ve been working up a righteous rant for years, to let fly at the populace when the nuke between my ears goes off.

    ***WARNING. The following is a toned-down version of The Rant, but it’s still probably tl;dr for people who aren’t fascinated by my rants. But it’s all around the lack of any real security surrounding checking and credit-card accounts.***

    Namely! My bank — now a possession of BMO — doesn’t require that you endorse a check when you deposit it. How the H*** do they know you’re even entitled to deposit it? There’s no ID check at all. For many, many years (even going back decades) some banks didn’t require a signature endorsement, but you did write on the back “For deposit to account # x…..x” Now you don’t even write that. Means my next-door-neighbor’s dog can go through my mail, pull out the interesting check on my IRA, and take it to the bank. They won’t even ask for his paw-print! I’m rightfully able to deposit it to my own personal account (as his heir), but if little Toto takes it in and says it goes to his account, what’s to stop him?

    I thought it was just BMO, but the Young Miss informs me that she doesn’t sign anything when depositing checks to her account at another of the Big Banks. I guess that’s the New Normal, Fraser, and by me it stinks.

    Here’s the next thing: My Honey was a physicist working for one of the National Labs. They still send “him” (his estate, meaning me) a few royalty checks each year for his (joint) patents — patents taken out by the Lab for inventions done by him and various of his colleagues.

    Last year they mistakenly paid twice on one of the patents. Some months after I’d deposited the checks, I got a notice from BMO saying that the payor of such-&-such a check had stopped payment on it, and they were charging me a stop-payment fee! What the H!!! I didn’t make the mistake. I can understand they want to cover the cost of the pixelwork involved (plus lawyers’, accountants’, etc. general administrative-overhead fees); but they ought to get that from the issuing bank, not from the payEE of the check, li’l ol’ me, who deposited the thing in good faith. And let the Lab’s bank charge the Lab for whatever BMO wants as a reversal fee, along with its own stop fee.

    So I guess you got the rant anyway, but Geese!

    For the last 5 years or so of my own programming career, I worked for a bank data-processing center (this was, interestingly, around the time when Harris was going back and forth over whether it should run its own programming shop or contract with us for its DP). There, I was assigned to work on file maintenance programs for DDA accounts.

    In those days we didn’t have this nonsense!

    And while we’re at it, what exactly is the point of that cute little “security code” on the back of your CC? By the time you’ve charged a few things over the phone and given it to everybody and his uncle, it’s about as “secure” as your Social Security #.

    Some lady ahead of me in the line at Walgreen’s (drugstore) dropped her CC on the floor and didn’t notice. I picked it up, gave it to the cashier, explained to her why they bloody well ought to go back to proper verification of signatures. Snooze….

    And those ubiquitous electronic-“signature” tablets are a joke. All the medical industry uses them also…the hospital…the visiting nurses…. They were visiting me 3x/week up through mid-Fall, and after each visit I had to “sign” their tablets with my finger as a stylus, and only with my initials. Every so often they needed what is laughingly referred to as my “signature” in full, with a real stylus. The results always look as if they were made by the webbed feet of a drunken duck.

    GA-A-AH!!! What a waste of time, energy, effort, and money all this horse-puckey is!

    😡 😥 👿

  • Stonyground

    Thank you for that concise and informative explanation.

  • Nullius in Verba

    “Me, if I’m their lender. In fairness, wasn’t Mr. Marks posing his questions in that role?”

    He was. I was just a bit surprised that totalitarian enslavement could be so easy. The SJWs and nanny-state campaigners are going to just love that one after they take over all the lenders… 😐

    “FWIW, this is not correct. Most checks (or cheques) are cleared without manual intervention, and most banks do close to nothing to validate the signature (they certainly don’t check it manually — there are some automated signature validation software, but the error rates are so high they might as well not bother, and many banks don’t.) The main manual process is looking at the amount in hand written checks and entering them in. There are banks of people (mostly in India) that just sit and look at images of a tiny part of the check and punch that number in.”

    Fascinating. And surprising. Thank you.

    I would have thought that if any part of the process could be automated with current technology, it would be reading the numbers. It’s done in the postal system. It doesn’t have to recognise the handwriting, only read what is written. And as the signature is the only authentication provided, I now have no idea what means of forgery detection would (or even could) be available. Do they have such means, or are stolen cheque books now totally insecure? (Julie’s story would seem to suggest the latter, but that’s only one data point.)

  • llamas

    Regarding check clearing in the US, before my current gig, I worked 30 years in the banking equipment industry. I know more about this than I care to. If you ever take a check to the bank to deposit, and the teller feeds it through a little thingamajig, better than a 50% chance that it’s one of mine.

    Fraser Orr has it 98.75% correct. Physical checks are almost-immediately converted to a data file consisting of the 4 key data items – account number, sequence number, R&T code and amount – and a medium-resolution image of the check. It is these files which are actually transacted. Most of the data is collected automatically in check reading equipment, even the amount is now usually read automatically 75% of the time. Manual amount entry is sometimes offshored, but often takes place locally because sometimes you need access to the actual check. Plus, banks are notoriously old-fashioned about security.

    Signature verification only takes place on high-value checks. Basically, the system only works on the basis that a check that makes it into the system is a good check. However, there is a surprising amount of intelligence built into the system that can detect fraudulent checks – our lives tend to be quite patterned.

    Most checks are now transacted in minutes. The Check21 law made it legal to transact data files as though they are actual checks.

    However, the pathways into that high-speed system are sometimes still C19. In my above example, of the dryeall contractor who needs to deposit a big check – sure, he can send the bank an image from his phone. Oooh, all high-tech and stuff. But his deposit agreement will impose a further delay on funds availability, and the bank will give themselves an out – if yhe image quality isn’t good enough, they won’t credit. Non-MICR codeline reads are also higher risk, so they’ll bake in other restrictions.

    CashAmericaNow gives him close-to-100% certainty of what the name says – Cash Now. They also do a massive business in the other direction – converting cash into system payments – bill payment, money transfer, money orders – which are vital to the 30+% of the US population that is unbanked.

    llater,

    llamas

  • Lloyd Martin Hendaye

    By “ethical lenders”, we assume this means unsecured loans, ie. those to Credit Union members who respect their “moral obligation” to repay principal and (relatively low) interest on-time as indicated.

    Some decades back, the U.S. New York State legislature abrogated its “full faith and credit” commitment to debt issuance in favor of “moral obligation” bonds issued as “promissory notes [IOUs] without the promise.”

    Needless to say, having issued legally worthless scrip to credulous buyers, ye olde State Government had no intention of ever honoring the debt. Scandal ensued… but who cares about fat-cat retiree bondholders anyhow? To this day, New York State borrows at an unstated risk premium, currently amounting to several tens of billion dollars over time.

  • Tedd

    Julie:

    I’ve been banking at BMO for so long I can’t even remember how long. Since university, I think. It has always been my understanding that you don’t have to endorse a cheque that you deposit if the cheque is made out to the same person whose name the account is in. Otherwise, you have endorse it. Is that not how it works?

    Regarding a fee for someone else’s mistake, I had a similar problem years ago with BMO. I wrote several post-dated cheques that were cashed before their date and, when they bounced, BMO tried to charge me fees. I had to meet with my branch manager to sort it out, but he did drop the fees. I guess they try it on to see if you’re a sucker.

  • Fraser Orr

    @Julie
    Just a couple of thoughts on your rant. First of all, checking a signature is actually a pretty high skill job, expecting anyone except an expert to validate a signature is unreasonable. (BTW, thanks to llamas, he is correct that high value checks are actually treated a bit differently and a lot more carefully. I was thinking more about the bulk of checks for paying your electricity bill and the dry cleaners.) You can write something like “Request ID” on the signature line of your credit card and the cashier is expected to ask for actual photo id, which is really quite a bit more secure. Algorithmic checking of signatures is extremely difficult. I know people who used to write those algorithms, and there is an extremely high error rate because people’s signatures are extremely variable, and, as we geeky people say, the interclass variability overlaps the intraclass variability.

    My nine year old daughter loves those little kiosk things at Chillis. (This is a restaurant here which provides little kiosks on each table which has both video games and also the ability to pay at the table.) She loves to do the pay part at the end (with my CC unfortunately), and she usually signs it “daddy”. Hasn’t been a problem yet. The signature pad has two purposes — one is to inform you that you are making a legal commitment, two to have something on file should there be a legal case after the fact. It is never checked at point of entry (excepting, as llamas says, for very high value checks. BTW, often for high value checks what they will do is just call the signer/signers to verify.)

    BTW, some checks for the unbanked the bank will actually obtain a fingerprint and put it on the check as an additional security check. This has some success (it is why many american banks have fingerprint pads on their counters). However, it sometimes discourages people from using it because often the unbanked have a justified or unjustified fear of the police.

  • Mr Ed

    Around a decade or more ago, I read that British banks had a policy of only checking signatures on cheques over £1,000, on the basis that it was cheaper to let any low-level fraud go through and pay up for an obvious error rather than check all cheques, that sounds about right considering what our experts here have said.

    In the days before chip-and-pin cards, I went (in England) to a garage with a Japanese friend (the chap with the ‘expensive’ model ‘plane hobby as a lad) who was collecting his car. He paid with his debit card and signed the retailer’s chit with his Japanese ‘kanji’ signature. The look on the salesman’s face was a picture as he obviously felt wholly exposed to fraud as he tried to compare signatures, he started to ask for more ID and I pointed out that my friend was obviously ‘Oriental’ and no one who might steal the card was likely to be in a position to forge such a signature, and he then laughed when he saw my point.

  • bobby b

    It’s my (limited) understanding that the system has changed from being able to catch fraud or theft at the beginning to being able to look back and reverse fraudulent charges or theft after the fact.

    The onus of looking at every transaction for correct signatures, etc. – a very expensive onus – used to be on the banks. No more.

    It has been transferred to us. It is now critical for people to look over their transactions on a weekly basis for problems, and to report them quickly to their bank.

    With careful transaction review and quick reporting, you can protect yourself. Let a few too many days go by without reviewing your register, and your remedies disappear.

  • Rob Fisher

    Price controls *still* don’t work! One day they’ll figure it out…

  • llamas

    bobby b. – regrding the issue of where the onus resides for losses due to fraud – checks are cleared according to the provisions of the UCC, which is (AFAIK) adopted law in all 50 states.

    It used to be that the UCC placed most of the onus for fraud losses onto the bank – essentially, all you had to do was sign an affifavit saying ‘I didn’t intentionally sign this check’, and the bank had to eat the loss. This was a bit unfair – for example, it allowed people and businesses to stick banks for losses that resulted from their failure to exercise even the most basic measures to prevent fraud.

    So the UCC was changed to place the liability for fraud loss on the party ‘in the best position’ to prevent it, if it could have been prevented. This moved the needle somewhat, in that it placed some responsibility on the account holder to exercise some basic precautions.

    The banks still carry the lion’s share of fraud losses. But if you don’t reconcile your checkbook for 6 months, or you leave the business checkbook in an unlocked desk drawer, or you let the book-keeper write the checks – seems to me that you should carry some of the loss.

    Frank Abagnale is very good on this and other aspects of check fraud liability. Some of his stuff is on the Tubes of You, although the in-depth stuff tends to be more proprietary. If you can get an invite to one of his trade seminars – I believe that Standard Register still sends him on tour – grab it with both hands.

    llater,

    llamas

  • bobby b

    “Frank Abagnale is very good on this and other aspects of check fraud liability.”

    Love him! What a life he’s had.

    (His former life as a con man was so interesting, they made a decent movie about it – Catch Me If You Can. He was played by Leonardo DeCaprio. I find it ironic that I was introduced to this ex-conman by a local Chamber of Commerce, which was sponsoring his excellent anti-fraud seminars.)

  • Julie near Chicago

    Fraser, llamas, bobby, Tedd, thanks for all your information and advice.

    Of course I’m older than the Great Frog, but from the time I had my first checking account (in Chicago — probably 1961?) until at least 198x when Bk of Napvil became Hars Bk of Nap, I had at a minimum to write “For deposit only to account _______” on the back.

    Fraser, as for banks’ tellers and stores’ cashiers checking to see that the signature on a check more-or-less matched either the signature card on file (at the banks) or a driver’s license or some other ID signature (at stores) was absolutely SOP up until recently (perhaps 9/11, as you say above is when it changed at the banks), except where the person was recognized by the teller or cashier. At least, that always was my experience. I won’t swear to the dates when these things changed … but even at Walgreen’s, the cashier used to check my signature on the back of the CC when I used it to make a payment. (I’m talking about the era back when they inserted the CC into the mechanical stamper to make charge slips; they filled in the amount on the resulting slip, and the customer signed it, and the cashier at least LOOKED at the signature on the card and the one on the charge slip. The original went into the cash register and the customer got the copy.)

    Paper trails are good things. (Unless you’re Hillary Clinton, I guess. SNARK)

    Anyhow, so thanks again. Some pretty knowledgable as well as nice folks hang around the Hippo’s Hive. (Can hippos have hives? I dunno. Maybe only if they’ve had measles and are stressed? But if the cat can have a nest on the couch, I don’t see why a hippo can’t jive in his hive.) 😆

  • llamas

    Did he do the business with the ladies undergarments? 😀

    I used to be on first-name terms with him, although I suspect that may be over as I’m not in that line of work anymore.

    Fun fact – if you watch the movie ‘Catch Me If You Can’, he makes a cameo, right at the very end, as the French police inspector.

    llater,

    llamas

  • Paul Marks

    No booby b – I was not saying I would not ALLOW you to lend money for the CONSUMPTION of others.

    If you want to throw your money away – go right ahead Sir. But do not complain when they do not pay you back. And do not ask for, or accept, a bailout. And I am sure you would not Sir.

    The modern “financial system” is based on two fundamental errors – you are most likely aware of them, but I will say what they are anyway (because, like the fat and hairy hobbit that I am, I like stating the obvious).

    Firstly bankers and other such mostly lend out “money” that DOES NOT EXIST – it is NOT Real Savings (the actual sacrifice of consumption), it is Book Keeping tricks – Credit Bubble (“the expansion of broad money”).

    But that is not the only mistake – there is another one.

    The other mistake is to not really care about whether or not the borrower is going to PAY BACK the money – after all in most “financial institutions” (unlike “Loan Sharks” – who are actually a far more rational thing) the people lending the “money” and the people trying to get it back are not even the same people – they are actually in different departments.

    That is why (for example) Argentina goes bankrupt every few years – why do the bankers keep lending them money, after so many bankruptcies? Because the people doing the lending are not lending their own money and are not the people who are going to have to try and get the money back – the lending department people just see that Argentina is willing to offer a zillion percent interest on a deal and they salivate (like dogs at dinner time) at the thought of the lovely “bonus” they will make for getting such a “great deal” – the fact that the government of Argentina has no intention of actually paying the zillion percent interest is NOT relevant to these bankers and other such.

    Take an example closer to yourself Sir.

    Each new baby born in New York City comes into the world owning ABOUT 153 Thousand Dollars – that is the city debt, and the State and the Federal debt divided by the number of people who live in New York City. And I am NOT including Federal “unfunded liabilities” (which take the debt into outer space) – just the amount of money the City, State and Federal authorities already owe – per person.

    Do you think that most of those babies can pay 153 thousand Dollars Sir? Do you think that they will, net, ever be able to pay 153 thousand Dollars? Of course not – in fact they are going to try and borrow even MORE (both personally, via student loans and so on, and politically – by voting for wild spending politicians).

    No one in their right mind would carry on buying local, State and Federal bonds – i.e. would continue to lend the city, State and Federal governments money. At the very best they are going to be “paid” via the printing press (i.e. with near worthless fiat money Dollars via a massive inflation).

    Yet there is no great problem in selling city, State and Federal bonds – because the “financial system” is NOT sane, and has not been sane for a very long time (which is how that 153 thousand Dollar government debt per person was built up in the first place).

    “But there are city and State assets” – yes, but I deducted those before I gave you the numbers. New York City owes about 65 thousand Dollars per person after assets are deducted, the State of New York owes (if memory serves) something like 22 thousand Dollars per person (after assets are deducted from the burden) and the Federal government debt (WITHOUT counting unfunded mandates) makes up the rest. It has nearly all gone on CONSUMPTION – and everyone who lent the government money KNEW THAT and they knew that IN ADVANCE.

    People who “invest” in government debt are no better than people who “invest” by lending the dead-beat down the road money to “buy my children new trainers” – they are NOT investing (investing without the possibility of a productive return is NOT investing), they are flushing their money down the toilet, and I have no sympathy for them. “But the regulations MAKE me do this – via my pension fund and so on” – true that is a good counter argument.

    Get as far away from a “financial centre” as you can (especially the New York – New Jersey area – which is going to be “Ground Zero”). And make sure your sons have good practical skills – so they can make a living and look after you in your old age. Keep them away from universities – and guide them into useful trades.

    Hardly anyone in the “financial system” seems to have grasped that someone born in New York City can escape the City and State debt just by MOVING (there is no personal liability), although to avoid the Federal government debt (bigger than even the City debt – even per person) one would have to renounce American citizenship to escape the IRS.

    Contrary to Putin’s boy Max Keiser – people are NOT “debt slaves”, people can move (and they are not sent to prison or forced to work in order to pay the debts of New York City – and so on), without such slavery the “financial system” is just a House of Cards – a massive House of Cards (which will shake the whole Earth when it collapses), but still just a House of Cards.

  • bobby b

    Paul Marks
    December 31, 2018 at 2:52 pm

    “No booby b – I was not saying I would not ALLOW you to lend money for the CONSUMPTION of others.”

    Nor was I. What I was saying is that, if I am loaning you money, it is within my right to demand that you spend it in ways that please me, or go without it.

  • Paul Marks

    bobby b – I apologise for misunderstanding you.

    I agree.

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