Dan Awrey on *Unbundling Banking, Payments and Money*

Episode Summary

Executive Summary: Dan Ari argues that banking, payments, and money are artificially bundled together by law, regulation, and path dependence, giving banks a privileged role in the financial system. He proposes letting non-bank financial firms access Fed master accounts while restricting them to customer funds, preserving private innovation while reducing barriers to entry, instability, and too-big-to-fail risk.

Main Topics: Why banks dominate money and payments (Priority: 5/5): Ari explains that banks centralize lending, money creation, and payment processing, making them foundational to everyday financial life and difficult for competitors to displace. Legal and regulatory barriers to competition (Priority: 5/5): The financial safety net, FDIC-backed credibility, Fed master-account access rules, clearinghouse membership limits, and brokered-deposit rules all favor banks over non-bank competitors. The case for unbundling banking functions (Priority: 5/5): The paper’s core proposal is to separate money and payment services from lending, allowing non-bank financial institutions to hold Fed accounts and directly participate in payment infrastructure. Innovation and inclusion effects (Priority: 4/5): Ari argues that current bundling slows U.S. payments innovation, constrains competition, and contributes to persistent problems like high fees, poor product design, and underbanking. Too-big-to-fail and financial stability (Priority: 4/5): Concentrating money and payments in a small group of large banks increases systemic importance and political leverage, reinforcing expectations of government support in crises. Comparative and international context (Priority: 3/5): The discussion contrasts U.S. banking with the UK, Canada, Europe, India, and China, showing that other systems have experimented with different access and settlement models. Open questions and implementation path (Priority: 4/5): Ari notes that implementation would likely require changes to the Federal Reserve Act and then Fed rulemaking on master accounts, reserve remuneration, and account design.

Key Arguments: Banks are central not just because they lend, but because they create money and operate the dominant payment rails; these functions have become heavily concentrated in a small number of institutions. The U.S. financial safety net improves credibility of bank liabilities, but it also creates a major entry barrier for non-banks that cannot match bank deposit safety. Fed master-account restrictions and clearinghouse rules force fintechs like PayPal to rely on correspondent banks, often their competitors, creating holdup and dependency problems. Bundling encourages U.S. payments laggards: slower adoption of modern payment technology, continued reliance on checks, limited availability of always-on infrastructure, and weak open-banking development. A broader set of firms with direct access to central-bank-style settlement could improve innovation, reduce fees, and expand financial inclusion without fully replacing private-sector incentives. Too-big-to-fail pressure is amplified when a few major banks control the core of money and payments; more diverse business models could reduce that concentration of systemic importance. Ari is skeptical that either fully internationalized money or highly rigid rules alone solve the underlying global-dollar liquidity problem; trade-offs remain unavoidable.

Data Points: Share of U.S. money supply held as bank deposits: about three-quarters - Used to emphasize banks’ role in money creation. Number of licensed commercial banks in the U.S.: 4,500 - Illustrates the large but highly tiered U.S. banking system. Number of U.S. credit unions: over 5,200 - Shows the broader set of deposit-taking institutions. Number of U.S. thrifts: 659 - Part of the U.S. institutional landscape for money and payments. Banks in Canada: between 40 and 50 - Compared with the U.S. to highlight American outlier status. U.S. banks per person vs. Canada: about 30 times more banks per person - Population-weighted comparison of banking system fragmentation. Core banks in U.S. payments network: about 60 to 70 banks - Fed network analysis cited to show concentration at the center. Global money-center banks at the heart of the system: four or five - Described as the beating heart of the U.S. payments system. Typical FedWire business hours: Monday to Friday, 9 to 4:30 - Mentioned as an example of outdated payment infrastructure. Trend in U.S. unbanked population: decreasing - FDIC survey referenced as a positive but incomplete trend. Time horizon for foreign liquidity facilities: last year / financial crisis response - Referenced in discussion of Fed dollar swap lines and overseas interventions.

Pivotal Quotes: "Banks are a part of the fabric of our world, institutions in every sense of the word." — Dan Ari: Opening of the paper, used to frame why banking functions deserve scrutiny. "The three roles are really the classic lending role... But as a plumbing guy, I think it's the other two functions that are the ones why banks are so central to their lives. The first one is money creation... And then payments" — Dan Ari: Explains the paper’s functional decomposition of banking. "I want to see banks subject to more competition in the money and payment space." — Dan Ari: Summarizes the policy motivation behind unbundling and expanded access.

Implications: The debate over master accounts and bank unbundling could reshape payments, fintech competition, and financial stability. If adopted, Ari’s framework may lower barriers to entry and reduce bank dominance while preserving room for private innovation and better customer services.