Unbundling Banking, Money, and Payments

• Author: Dan Awrey
• Position: Professor of Law, Cornell Law School; Research Member, European Corporate Governance Institute
• Pages: 715-784

ARTICLES

Unbundling Banking, Money, and Payments

DAN AWREY*

For centuries, our systems of banking, money, and payments have been

legally and institutionally intertwined. The fact that these three—theoret-

ically distinct—systems have been bundled together so tightly and for so

long reflects a combination of historical accident, powerful economic

and political forces, path dependence, and technological capacity.

Importantly, it also reflects the unique and often underappreciated privi-

leges and protections that the law bestows on conventional deposit-tak-

ing banks. These privileges and protections have entrenched banks as the

dominant suppliers of both money and payments—erecting significant

barriers to entry, undermining financial innovation and inclusion, spur-

ring destabilizing regulatory arbitrage, and exacerbating the “too-big-

to-fail” problem. Against this backdrop, the recent emergence of a vari-

ety of new financial technologies, platforms, and policy tools hold out the

tantalizing prospect of breaking this centuries-old stranglehold over our

basic financial infrastructure. The essential policy problem, at least as

conventionally understood, is that creating a level legal playing field

would pose a serious threat to both monetary and financial stability. This

Article demonstrates that this need not be the case and advances a blue-

print for how we can safely unbundle banking, money, and payments

thereby enhancing competition, promoting greater financial innovation

and inclusion, and ameliorating the too-big-to-fail problem.

TABLE OF CONTENTS

INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 716

I. THE BUNDLING OF BANKING, MONEY, AND PAYMENTS . . . . . . . . . . . . . . . 724

A. THE GOLDSMITHS’ LEGACY: BANKS AND MONEY . . . . . . . . . . . . . . . . 724

B. PLUMBERS IN PINSTRIPES: BANKS AND PAYMENTS. . . . . . . . . . . . . . . 731

II. HOW THE LAW ENTRENCHES BUNDLING . . . . . . . . . . . . . . . . . . . . . . . . . . . 739

* Professor of Law, Cornell Law School; Research Member, European Corporate Governance

Institute. © 2022, Dan Awrey. I would like to thank John Armour, John Crawford, Luca Enriques,

Stephen Lubben, Joshua Macey, James McAndrews, Lev Menand, Alistair Milne, Leon Sanderson,

George Selgin, Rory Van Loo, and David Zaring for their constructive comments, advice, and support. I

would also like to thank the participants of workshops organized by the Federal Reserve Board, the

Wharton School, and Boston University. All errors remain my own.

715

A. THE FINANCIAL SAFETY NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 740

B. RESTRICTIONS ON INFRASTRUCTURE ACCESS . . . . . . . . . . . . . . . . . . . 744

C. BROKERED DEPOSIT RULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748

III. THE DISTORTIONS CREATED BY BUNDLING. . . . . . . . . . . . . . . . . . . . . . . . . 752

A. LESS COMPETITION, INNOVATION, AND INCLUSION . . . . . . . . . . . . . . . 753

B. DESTABILIZING REGULATORY ARBITRAGE . . . . . . . . . . . . . . . . . . . . . 757

C. EXACERBATING THE “TOO-BIG-TO-FAIL” PROBLEM . . . . . . . . . . . . . . . 763

IV. THE UNBUNDLING PROJECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765

A. THE ESSENTIAL POLICY PROBLEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . 766

B. MODELS OF UNBUNDLING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 770

C. A BLUEPRINT FOR REGULATORY REFORM. . . . . . . . . . . . . . . . . . . . . . 774

D. BENEFITS OF UNBUNDLING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 776

E. POSSIBLE CHALLENGES AND OBJECTIONS . . . . . . . . . . . . . . . . . . . . . . 779

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 784

INTRODUCTION

Banks.

1

You have probably been aware of their existence for most of your life.

As a child, you saw them on television, learned about them in school, and perhaps

even heard your parents talk about them at the kitchen table. As a young adult,

you probably opened your first bank account—an important rite of passage along-

side your first job, your first kiss, and your first heartbreak. Today, your salary

probably goes into a bank account—and your rent, your electricity bill, and your

taxes probably come out of one. There is also a good chance that you or someone

you know has borrowed money from a bank, whether to go to college, buy a

house, or start a new business. Banks are part of the fabric of our world—institu-

tions in every sense of the word. And yet, like so many of our core institutions,

few of us have ever taken the time to consider the various functions that banks

perform, how they are able to perform them, or how exactly that they became

such an important part of everyday life.

1. For the purposes of this Article, unless otherwise indicated, any reference to a “bank” or “banks”

should be construed as encompassing conventional deposit-taking banks, savings associations, thrifts,

and other “insured depository institutions” as defined under federal banking law. See infra Part I

(detailing the historical development of banks, their definition, and functions). It therefore does not

include investment banks, merchant banks, or other financial institutions that have historically been

associated with the business of “banking” but which are not insured depository institutions.

716 THE GEORGETOWN LAW JOURNAL [Vol. 110:715

Banks perform three essential functions in a modern economy. Most of the

time, we understandably focus on the function for which banks were originally

named: making loans and extending other forms of credit to individuals, house-

holds, businesses, and governments.

2

The word “bank” is derived from the Old Italian (banca), Middle French (banque), and Old High

German (bank) words for the tables at which Medieval moneylenders lent and collected money. See

Bank, OXFORD ENG. DICTIONARY, https://www.oed.com/view/Entry/15237#eid28163689 [https://

perma.cc/62XD-FUDY] (last visited Jan. 31, 2022).

Yet, it is the other two functions that argu-

ably best explain the importance of banks in our daily lives. The first is money

creation, with bank deposits representing far and away the largest source of

money in the United States and most other countries.

3

The second is payments:

moving that money across time and space in satisfaction of our financial obliga-

tions.

4

The conventional definition of a “payment system” is captured by Hal Scott: “A payment system is

a network of interconnecting entities that facilitates the exchange of data required to initiate, authorize,

clear, and settle cash or credit claims between payors and payees.” Hal S. Scott, The Importance of the

Retail Payment System, PROGRAM INT’L FIN. SYS., Dec. 16, 2014, at 1, 5, https://www.pifsinternational.

org/research/?_research-years=2014 [https://perma.cc/P3QB-6P6R]. As we shall see, several aspects of

the unbundling process described in this Article challenge this conventional definition.

Ultimately, it is the bundling of these three functions—banking, money,

and payments—that has made banks such a successful and enduring institutional

innovation. It is also an important part of the reason why policymakers view

banking crises as such an existential threat to the very economies that these insti-

tutions helped build. This Article explores the dominant role of banks—specifi-

cally in the realm of money and payments—and asks whether we can promote

greater competition without posing new risks to monetary and financial stability.

5

The story of how banks became so deeply embedded at the heart of our finan-

cial and economic system is long, complicated, and—in many ways—still being

written. It is a story about war, politics, economics, entrepreneurship, technology,

and path dependence.

6

Importantly, it is also a story about the law. In the United

States, the law grants banks a number of unique privileges and protections.

Perhaps most famously, the law provides banks with a comprehensive public

backstop: a financial safety net that includes access to the Federal Reserve’s

emergency lending facilities, federal deposit insurance, and a special bankruptcy

regime for struggling banks.

7

This safety net gives banks a comparative advant-

age in the creation of monetary liabilities, transforming otherwise risky deposits

2.

3. See infra Section I.A, for a more detailed description of the role of banks in money creation.

4.

5. In its focus on how to promote greater competition within the consumer financial products

industry, this Article intersects with recent scholarship by Rory Van Loo and others. See generally, e.g.,

Rory Van Loo, Making Innovation More Competitive: The Case of Fintech, 65 UCLA L. REV. 232

(2018). While Van Loo focuses on the role and design of regulatory agencies in promoting greater

competition, this Article focuses on the structure and regulation of the financial institutions that offer

money and payments.

6. For a small sample of the enormous literature on the history and politics of banking in the United

States, see generally KATHRYN C. LAVELLE, MONEY AND BANKS IN THE AMERICAN POLITICAL SYSTEM

(2013); MURRAY N. ROTHBARD, A HISTORY OF MONEY AND BANKING IN THE UNITED STATES: THE

COLONIAL ERA TO WORLD WAR II (Joseph T. Salerno ed., 2002); and BRAY HAMMOND, BANKS AND

POLITICS IN AMERICA: FROM THE REVOLUTION TO THE CIVIL WAR (2d prtg. 1991).

7. See infra Section II.A, for a more detailed description of this financial safety net.

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