Historical Banking Model (Pre-1990s)

• Banking based on simple concept: depositors keep money safely, banks lend to borrowers with ideas
• Banks provide financial intermediary service, profit from interest rate spread
• Personal relationship-based lending through local bank managers
• Bank managers highly respected professionals (judge/doctor level status and pay)
• Loan decisions based on personal knowledge, family vouching systems
• Colloquial approach worked well but created scalability problems
• New city expansion difficult due to lack of local knowledge about borrowers

Technology Revolution and Credit Scoring (1990s)

• Computers began replacing junior banker decision-making
• Credit scores introduced 1989, didn't exist before
• Credit files replaced relationship building with banks
• Three loan application methods: online, branch, mortgage broker
• Assessment offices moved to low-wage countries (India, Philippines)
• Workers verify data and input into algorithms for approval/decline
• Elegant solution: more applications processed at lower cost
• Some cost savings passed to consumers (sub-3% mortgages)

Banking Consolidation Crisis

• Early 1990s: ~20 large banks competing in US
• Today: only 4 major banks through mergers/acquisitions/bankruptcies
• Uniform operations preferred over thousands of individual bank managers
• Good business sense but bad for society overall

Modern Lending Problems

• Perfect credit, good savings, stable income borrowers still rejected
• Issue: financial situations outside rigid automated framework parameters
• Salary workers ideal for applications (single data point)
• Supplementary income types problematic:
  • Tips, royalties, investment returns, rents, business profits
  • Government allowances (retired police/military)
• Computer systems can't handle variable income despite often being more secure
• Ultra-conservative approach: use lowest annual figure (50k vs 500k example)
• Major banks reject these income types entirely
• Borrowers forced to higher-rate "non-prime" or "non-conforming" loans
• Same banks often provide both products at different rates

Economic Impact on Entrepreneurship

• Forces people into regular jobs over business building
• Business risk mitigation requires solid personal finances
• Home ownership crucial for financial security
• Median net worth: homeowners $255,000 vs renters $6,300 (2020 survey)
• Promising individuals return to workforce to access homeownership

Business Lending Decline

• Dr. Richard Werner's warnings about consolidated banks unwilling to lend to business
• Business lending inherently more difficult than consumer/residential
• Mortgage defaults: bank retains house as collateral
• Business failures: total loss likely
• Business assessment requires complex evaluation beyond standardized process
• Non-standardized = expensive for big banks
• $100,000 small business loan assessment costs may exceed interest profits
• Banks either refuse small business loans or charge much higher rates

Historical Context and Data

• Small businesses crucial for economic health
• Past: small banks with personalized processes funded viable business ideas
• Present: big banks only lend to big businesses
• Graph shows mortgage lending spike in 90s coinciding with non-mortgage lending plateau
• Stagnation worse than appears: credit cards, car loans, personal loans grew
• Business lending represents smaller slice of stagnating pie

Systemic Problems and Solutions

• Big businesses favor generic, uniform, replicable products
• Retail banking nearly impossible to enter
• Successful small banks typically get acquired
• Breaking up banks difficult due to consumer preferences
• Big banks offer better products, accessibility, services than smaller banks
• Consumers don't want account disruption from bank breakups
• Would undermine financial system confidence
• Banks as financial intermediaries will continue focusing on projects worthy of world's biggest companies