If you want to take down the world’s most powerful industry, you call someone who’s done it before.
“We pay 7% to 10% interest. You can take your dollars or euros, you convert them into stablecoins like Paxos or USDC, deposit the coins in the Celsius app, I lend them out. I make 9% to 12%, I give you 80% of what I make back,” Alex Mashinky explains. “I cannot do it with dollars. For that I need a banking licence. But with stablecoins I can pay you up to 10% anywhere in the world and not have a banking license. This app is helping the depositor, not the bank.”
You’ll get a sizable amount back too, in the ballpark of an overly-generous 7% per annum. It seems a little too good to be true next to the 1-3% range typical of savings accounts, and as the old scam warning goes, if it seems too good to be true it probably is.
Mashinky brushes the concerns away.
“It really all has to do with who you look to as your reference,” he argues. “If your reference is the bank, and they’re giving 1% then we look crazy. We look like we’re cheating, like we have a scam. How can they do 7% when the bank can barely pay one and a half, right? That looks like a Ponzi scheme.”
Plucking the chicken
We’ve just gotten too accustomed to low interest rates, Mashinky says.
“It’s like plucking a chicken one feather at a time. And soon enough, the chicken has no feathers, and no one noticed. No one noticed because you didn’t do it all at once, you didn’t rip the chicken to shreds. That’s what the banks have done to us over 20 years. They bought all their competitors and they squeezed and squeezed and squeezed! And when they make a mistake, we have to bail them out, right?”
“They get in trouble every 10 or 15 years and we the taxpayer have to go and bail them out. And then they keep making more money. So it’s just a crazy relationship, y’know? You can see a direct correlation between the number of banks and the interest rates going down. It’s not just me kind of making shit up!”
He presents the graph.
According to Mashinky, around 40 banks in 1990 to 1995 consolidated into just four by 2009, and the average interest paid trended downwards as the banking industry consolidated.
The pattern is similar in Australia. A constant stream of bank mergers and acquisitions has stripped the financial landscape, and savings account interest rates have dropped at the same time.
To be fair, it’s not entirely possible to separate the falling bank interest rates from outside factors, such as the falling reserve bank cash rate. But that’s not a hugely mitigating factor given that Australia’s big banks tend not to pass the full benefits of rate cuts onto their customers.
“Go and do a Google search on their financial statement,” Mashinky urges.
So we did.
Warning: Viewer discretion is advised, because some of these numbers are quite inappropriate.
You should also take the precise figures with a grain of salt, as there are a lot of factors in play and we’re mostly looking at ballparks and broad trends. Fortunately those trends are extremely clear.
Let’s start with Commonwealth Bank, as it’s the biggest.
According to the Commonwealth Bank 2018 financial report (p.134), its total interest income was about $33.53 billion while its total interest expenses were about $17.76 billion. That’s a tidy net interest income of about $15.7 billion. So before expenses, the bank is making almost 100% profit on the funds it holds, while paying about 2% on savings accounts.
So where’s all the money going? In many cases, here.
|2019 interim ROE||13.8%||10.4%||11.4%||12%|
These are the most recent ROEs from interim 2019 financial reports for each bank. The ROE is the return on equity, so it shows the returns being paid to the bank shareholders. Account-holders, eat your heart out. Mashinky’s promised 7% returns suddenly look a lot more feasible.
But before you spend too much time sharpening your pitchfork, note that if you’re Australian you’re very likely one of those shareholders, either directly or through your superannuation, so some of those profits are likely finding their way back to you, regardless of which bank it is. Plus, all those shareholder profits also represent a fat chunk of tax which theoretically gets reinvested in the community.
But it’s hardly efficient.
The primary shareholders of all the big four banks are near-identical groups of other banks’ custodian arms, which pick up fees by earning those returns on behalf of their members. So right off the bat, you get this weird feedback loop where banks are collectively sucking back a cut of their own and each other’s profits, which then become part of the profits for the next wave of dividends, and so on. At the same time, if you’re getting loans or other products from the same institutions you’re a depositor at, you’re functionally being double dipped.
And although it’s tough to say with precision who the CBA shareholders all are, it’s clear that it’s an extremely top-heavy picture.
In its annual report CBA says the average retail investor received $3,853 in dividends in the 2018 financial year. Run that through the amount paid per share ($4.31) and current share prices ($77.88), and we have the claim that the average CBA retail shareholder owns about $70,000 in CBA shares. A quick sniff of that number shows that retail shareholder demographic is very richly skewed.
The thing is, customer deposits made up 69% of CBA’s funding in 2018 (p.103), with the majority of that just being your everyday household bank accounts. Average Australian households are the backbone of the bank’s operations, but their deposits are increasingly being used to fill the wallets of the wealthier shareholders.
In the financial year ending 2018, Commonwealth Bank paid around $9 billion in interest to those everyday customers who are funding the bulk of its operation, and $7.6 billion to shareholders.
And the balance keeps shifting. Mashinky’s chicken is still getting plucked.
|Net interest income||$16.858 billion||$17.543 billion||$18.341 billion|
|Shareholder dividends paid||$7 billion||$7.4 billion||$7.6 billion|
|Interest paid on deposits||$11.764 billion||$10.518 billion||$10.243 billion|
You can see a similar picture almost everywhere else.
Westpac had a tight year from 2017-2018 but keeps finding the money to satisfy shareholders. Ditto NAB. Meanwhile, ANZ saw declining net interest income from 2017 to 2018 but still went out of its way to increase shareholder dividends.
And even credit unions, which do away with the shareholders and instead go for member-ownership, only pull mildly higher interest rates than banks. Plus, even though credit union membership is growing in Australia, they’re not exempt from industry consolidation either and are increasingly rebranding as banks.
It’s little wonder that income inequality in Australia is growing. The banking machine we’ve built is extremely good at siphoning wealth upwards.
Abusive banking relationships
We only have ourselves to blame, Mashinky says.
“We are to blame, not the banks. We are to blame. If this was a marriage, and your spouse was abusing you every day and stealing from you and calling you names and telling you you’re stupid - that you’re giving them your money for free, you would leave!” he exclaims. “You’d be, like ‘this is an abusive relationship!’ But we, all of us, insist on giving our hard earned money - after taxes - to the banks for free.”
“It’s an abusive relationship. You can quote me on that. It’s an abusive relationship. So, I just view it differently than most people. I view it as an unacceptable relationship.”
That tasteful analogy only gets more apt as you take it to extremes.
We got acclimatised to the banks’ behaviour and started shrugging off things that shouldn’t be acceptable. But one day we had to call a royal commission. And as the commission laid bare the facts of the matter and aired all the sordid details, we were left speechless.
The banks apologised and promised it wouldn’t happen again. They can change.
But either way, we have nowhere else to go.
Celsius Network was built specifically to kill banks, and Mashinky makes no bones about it.
“The mission is to bring down the banks. And I can tell you when you know that we’re winning; when the banks are selling the giant buildings downtown, the buildings with their name on it. Every building downtown has a name on it, right? Just like the phone companies sold all their buildings. So, that’s when you know that you’re winning. Because that means you took all that value that they used to give to the shareholders, and you gave it to the people.”
If that sounds oddly specific, its probably because Mashinky has seen it before. He was one of the inventors and earliest proponents of Voice over IP, and was pushing it back in the early 90s. In the process, he met a lot of resistance from the phone companies themselves, who were afraid of losing their cash cow.
“People might think I’m a lunatic. They think I’m a lunatic. They also thought I was a lunatic when I did Voice over IP. Like, ‘You’re gonna do what? You’re gonna bring down the phone companies? Yeah, right. 25 years old - you’re going to take down the phone companies? No chance!’ So that’s what people are saying now. They say, ‘Alex, the banks are the most powerful companies in the world. They’re the most profitable companies in the world. You’re going to bring them down?’ …We’ll see.”
In the end, the phone companies who survived were the ones that found alternative products, and in some cases even stoically butchered their own cash cow rather than milking it dry. And today, whether the “phone companies” business is a dead industry is just a question of perspective. The companies themselves, your Telstras and AT&Ts, are doing better than ever with this whole Internet thing, while the business of making phones now includes some of the most powerful names on the planet – Apple, Google and so on.
The phone business in its current form is bigger and better than ever, in part because the phone companies are no longer serving as gatekeepers.
What “killing the banks” looks like
Killing the phone companies was one of the best things that ever happened to the phone industry, and the simple idea of giving people things for free was one of the foundations of today’s phone industry.
When someone talks about killing financial institutions with cryptocurrency and blockchain, they’re probably talking about reducing it to phoenix ashes, not putting it in the ground.
That’s what can happen here. On every level there are extremely strong parallels between the rise of VOIP and cryptocurrency. In both cases they’re about using the Internet to bypass existing commercial infrastructure and give people an objectively superior alternative. Cryptocurrency is the same thing all over again.
“I’ve seen this movie before,” Mashinky emphasises. “When you see a movie the second time, do you know how it ends?”
“Moving from a TDM network (phone lines) to a TCP/IP network (Internet lines), that’s the key right? With the TDM network you had to go through a toll collector. But the TCP/IP network went around the phone company. It wasn’t up to them. So [it’s] the same thing with blockchain in the banking world.”
“You have to work through SWIFT, you have to work through IBAN. But with the blockchain, you bypass the whole banking infrastructure, right? I can give you a loan, or you can make a deposit and earn interest from Australia. All you have to do is download the app and move some coins instead.”
Just like it took the Internet and VOIP to reveal how much opportunity and value there was in phones, it’s going to take the Internet and digital currency to show just how much money there is in financial services. The profits to be made from a universally prosperous and financially well-served world are orders of magnitude greater than what banks are currently getting from nickel-and-diming customers and tithing the shareholders.
But with so many of the world’s largest banks locked into the need for constant, year-on-year profit growth, this shift was always going to have to come from outside the system.
Of course, it’s easier said than done.
Surveys show that financial services is one of the least trusted industries, and people simply don’t trust even the most familiar and well-regulated banks. What chance does an upstart app with a suspiciously good deal have?
Part 2 coming soon: Building the app, building trust, and the downsides of unregulated finance.