Ice cream shadow banking markets in everything

by on September 15, 2012 at 7:13 am in Economics, Law | Permalink

State banking officials want to put the freeze on the owner of an ice-cream parlor who opened a community-bank alternative that pays interest in the form of gift cards for ice cream, waffles and coffee.

Ethan Clay, 31 years old, opened Whalebone Café Bank seven months ago in his shop, Oh Yeah!, a year and a half after he was hit with $1,600 in overdraft fees from a local bank where his account was overdrawn by a series of checks.

Mr. Clay says he wants to offer an alternative banking experience, and has accepted small deposits and made small loans. He claims he isn’t subject to banking rules because his operation is a gift-card savings account.

“It’s a strange case, we don’t have the authority to go close an ice-cream store,” said Ed Novak, spokesman for the Pennsylvania Department of Banking. “But we are going to do something. You can’t mess with people’s money.”

The article is here, here is Philip Wallach’s new paper (pdf) on whether we need a new Glass-Steagall.

1 Bill September 15, 2012 at 9:31 am

Ethan was also da guy who opened da pizza parla and took in some moola which he then lent out, ya know what I mean, to some neighborhood slobs who would get a knee job if dey don’t repay da moola.

Ya put you money with Ethan, and it is as good as putting it dat der Lehman Brothers, but dont ya ask for it right away because Ethan lent it to dat guy Madoff who promised spectacular returns.

I’m so glad ya support small business on this site–my kinda business.

2 Hei Lun Chan September 15, 2012 at 9:47 am

Way to bust out the racist stereotype.

3 Bill September 15, 2012 at 10:20 am

Just a reminder of the need for banking regulation.

The Mafia does exist.

Watch out.

4 John Thacker September 15, 2012 at 3:27 pm

And yet loan sharks and mob services also flourish even more when regulations are too severe and force people into the shadow economy in other ways.

There is a need for the proper amount of regulation and laws, but sometimes certainly there can be too much.

5 Bill September 15, 2012 at 5:06 pm

Oh, yeah, but for the regulations we wouldn’t have the mafia and loan sharks.

6 kuant September 16, 2012 at 2:34 am

Yeah Bill just like murderers

7 Grant Gould September 15, 2012 at 9:36 am

Perhaps a decade ago a local bookstore here financed a relocation by selling “bonds” that paid interest in store gift certificates. I suppose someone could have shut them down as well. Ironically if I recall correctly the bulk of the relocation money ended up being spent fighting a licensing battle with City Hall for the right to put sofas in the store. Still a substantial chunk of my bookshelf says that it all turned out okay.

(They have not repeated that tactic since, though: the owner told me that it nearly gave his accountant a heart attack.)

8 Rahul September 15, 2012 at 10:45 am

“If a bank goes under, the depositors get their money back,” said Mr. Novak. “If the ice-cream store goes under, who knows what happens?”

What happens if I buy a Target gift-card and Target goes under? You cannot protect a customer from everything!

9 Bill September 15, 2012 at 10:54 am

If Target were to go bankrupt, the trustee or successor in interest would likely redeem the card to maintain your goodwill. Same thing with airline miles. But, if you lent or deposited money with Target, good luck.

10 MikeJ September 15, 2012 at 11:48 am

Lent or deposited money with Target? You mean in a way that Target could use my money and I would get paid back if Target did well and wouldn’t get paid back if Target did poorly? Kind of like buying an equity share of Target’s value maybe? We allow people to do that, in fact our economic system is kind of built on that idea, why is that so different from letting people contract loans easier – especially with their own money as opposed to letting a Banking manager do it with somebody else’s money backed up by the taxpayers promise to insure?

Maybe by making loans something where risk is felt by those doing the bank operations we could decrease moral hazards and better allocate credit to the productive sectors at the same time. Food for thought…

11 Bill September 15, 2012 at 1:54 pm


Sorry, but there is a difference between taking a deposit and equity securities. The closest you would have to your idea is a bond, but then you would also have disclosure requirements.

12 sort_of_knowledgable September 15, 2012 at 2:44 pm

Even under a reorganization I have seen magazine subscriptions not honored. In a liquidation the gift card or miles aren’t doing any better on a percentage basis than cash.

13 Bill September 15, 2012 at 5:08 pm

Sort of,

Actually, before I posted I did a little research. Most of the airline bankruptcies resulted in people keeping their airline miles because they were not liquidations, but reorgs, and the management claimed that loyalty was an asset that would be wasted if mileage points were dishonored.

14 Andy September 15, 2012 at 10:49 pm

That’s not what happens. Look at Sharper Image, Circuit City, or any other large retailer bankruptcy. Generally the gift card holders lose everything.

15 Tom West September 15, 2012 at 12:26 pm

You cannot protect a customer from everything!

Which points out that the protection really depends upon customer expectations and the level of loss.

With gift certificates, it’s pretty much understood that if the store folds, you lose the certificate, and losing one might make you cash other gift certificates more quickly.

With banks, there is an assumption (undeserved or not) that you assets are protected, and more to the point, losing faith in the over all system could, in the worst case, be catastrophic of the economy.

However, what it really points out is that it’s really really hard to draft rules that make common sense over the entire range of scale. What’s over-kill for the ice-cream store is absolutely necessary for larger organizations and making common sense (banks with less than 5k of deposits are subject to…) is subject to gaming (this isn’t a multimillion dollar bank, this is thousands of sub-5k deposit banks…)

16 Miles September 15, 2012 at 11:44 am

Mr. Clay does charge a $4 fee for cashing checks, unless the customer has an account with him, in which case there is no charge. “You have to account for people bouncing checks, and we’ve had two checks bounce out of the 20 we’ve cashed.”

17 Nigel September 15, 2012 at 12:11 pm

“But we are going to do something. You can’t mess with people’s money.”

Extreme irony awareness fail there.

18 somethingblue September 15, 2012 at 12:20 pm

“But we are going to do something. You can’t mess with people’s money.”

A novel and refreshing attitude in a bank regulator. I look forward to the day when it will be applied to actual banks.

19 Doc Merlin September 16, 2012 at 12:03 am

‘“It’s a strange case, we don’t have the authority to go close an ice-cream store,” said Ed Novak, spokesman for the Pennsylvania Department of Banking. “But we are going to do something. You can’t mess with people’s money.”’

He isn’t, Ed, you are.

20 dan1111 September 16, 2012 at 2:25 am

Some people seem to be treating this as an “overzealous government regulation” story, but I don’t think so. The guy pretty clearly is trying to offer banking services. Ice cream gift cards are one thing, but he is also making real loans and cashing checks. It is also not clear from the article whether the deposits are entirely into a gift card scheme, or only the interest on deposits is given as a gift card. He says his goal is to “become the neighborhood bank.”

If any banking regulation is legitimate, I don’t see why he should be exempt from it.

21 joshua September 16, 2012 at 8:35 am

Are the Feds going to freeze his assets? Do they have any concrete proposals or are they just waffling? Does anyone have an inside scoop?

22 Salem September 16, 2012 at 8:47 am

‘“It’s a strange case, we don’t have the authority to go close an ice-cream store,” said Ed Novak, spokesman for the Pennsylvania Department of Banking. “But we are going to do something. You can’t mess with people’s money.”

We don’t have the authority to act, but we are going to do so anyway.

Government in a nutshell!

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