—Nironjan Roy—

Non-banking finances have made a good position in the economy during the last decade. These are financial services received from the companies other than banks, and considered as the substitute to the conventional banking. These services have become so popular in the market that have thrown a big challenge for the conventional banks.

Once upon a time, banking was a proprietary business, and banks enjoyed exclusive advantages in offering financial services to the people. This exclusive advantage of the banking industry had started eroding since the financial debacle in 2008 when the entire industry was badly impacted in the USA and other parts of the developed world. Therefore, non-banking finances have started taking good shape in the financial industry not only in the US but also in other developed countries.

Now people prefer depositing money with hedge funds, fund managers, private equity funds and recently in cryptocurrency. Similarly, obtaining a loan from a private fund manager, bond market, equity fund provider instead of bank borrowing are also very common. Now it is well established that coexistence of non-banking finances and conventional banking has become a new reality in the financial industry.

Even in some cases, banks are trying to survive competing with non-banking financial service providers. As soon as non-banking finances have been well established in the market, the concept of debanking has emerged. Debanking is the way of keeping the people out of banking services. Both non-banking and debanking seem to be a way of bypassing the banking industry for receiving services, though there are fundamental differences.

Debanking is the strategy applied by the bank to decline financial services to the targeted customers, while non-banking is the alternative service options developed in the market taking the banks’ weaknesses in the market. Non-banking is the voluntary option which the customers can prefer while debanking is forceful measures applied by the banks to keep the customers away from the access to the bank.  Debanking is very common in the developing world where banks can easily decline its services to the customer whom they do not like for any reason. But this practice, although covertly rampant in the developed world, has surfaced in the recent past.

During the last few years, particularly in Biden’s administration, there was serious allegation against US big banks including Bank of America and JP Morgan that they have resorted to discriminatory approaches while providing banking services to the customers. They adopted the “pick and choose” policy while allowing customers to open bank accounts and offering other financial services. This issue came up as a huge blow when high level politicians including President Donald Trump after his first term presidency were declined banking services. It is learnt that after Trump’s departure from White House in 2021, many republic leaders and supporters were declined financial services by big banks. Even they were not allowed to open the account and many existing accounts were forcibly closed. There have been similar allegations from cryptocurrency companies against banks.

Banks’ discriminatory approach was so bad that President Trump openly expressed his utter frustration. According to media reports, President Trump, in an interview, had castigated the big banks and remarked that he was dropped by JP Morgan after his first term as president. He further said, “I was loaded up with cash and they told me, ‘sorry, sir, we can’t have you, you have 20 days to get out.” Saying so in the interview, President Trump repented that he was never in this situation before. While explaining his plight in dealing with bank accounts, he said that he called Bank of America’s CEO, yet he was denied. Many conservatives have also complained that the banks were not allowing them to do business. Cryptocurrency businesses have also raised allegations of refusing banking services to them by the big banks.

Banks have, however, repeatedly denied the allegation of discriminating against customers and stated that they never deny financial services to the customers based on political connection, religious ground and business choice, which is partially true. Banks’ such defence is not fully true because they have had some regulatory instruments which provide the scope for them to decline services to the selective customers. Most common instruments include compliance requirements and reputational risk, which allows banks to easily exclude the targeted customers from the onboarding periphery.

After coming to White House for the second term, President Trump has taken his stance against such discriminatory approaches followed by big banks to many customers. Declining banking service to the customer for any reason is very common, however, this did not come up in the discussion that much. Since high-ranking politicians including a former US president have been its victims, the matter has got importance. More importantly, President Trump has issued an executive order to stop debanking, so the issue is being widely discussed in the industry. After this order, debanking may slow down but will not end and may take a different dimension after Trump’s tenure is over. Eventuality is that bad practice once started, never ends, so debanking is now becoming a regular practice across the world.

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The writer is a certified anti-money laundering specialist and banker based in  Toronto, Canada. Email: [email protected]