I am a bank.
Honest, I really am. This is not a joke.
You see, I lend people money. Or, more accurately, I allow them to run lines of credit, which I create for them out of thin air.
Let me explain. My day job is teaching singing, much of it to teenagers in secondary schools. These teenagers' lessons are paid for by their parents. I invoice them for 10 lessons at a time and they are supposed to pay for the whole series of lessons before the series starts.
In practice, hardly anyone does. About half will have paid by the 5th lesson and the remainder have to be chased. The vast majority do pay by the end of the series of lessons, but there are a small minority who have to be cajoled, threatened or even sued. Some negotiate with me for payment in instalments and then forget to make those payments.
No doubt because of their own financial difficulties, the proportion of people who pay late is rising, as is the proportion of people who don't pay at all. In the last year I have sued two people at the County Court for non-payment of fees, one of whom didn't reply and has had default judgement served against them - but I still haven't been paid. The other has offered to pay off the fees and associated charges at £20 per month, which is all she reckons she can afford.....but if that is true then she couldn't afford the lessons in the first place, because the fees for 10 lessons between January and March were £135. In effect she is expecting me to extend her an interest-free loan.
But she is not the only one. In fact every single one of the parents who pays late is effectively expecting me to lend them the money to pay my fees.
Which is why I say I am a bank. But unlike a normal bank, I am expected to lend to them interest-free - parents get very angry if I start imposing interest on late payments, although the law does allow me to do this and even recommends a rate. If I upset parents, they may take their business elsewhere - and student numbers are falling at the moment because poorer parents are finding it difficult to maintain their childrens' musical activities at the moment. So I could end up even worse off if I insist that parents have to pay up front.
I am by no means alone in this. Most small businesses are forced to extend lines of credit interest-free to customers, particularly large and rich ones who have the leverage to squeeze them out of business if they complain. Most small businesses, therefore, are unofficially acting as banks.
And they do it at considerable cost. Like most micro businesses, I rely on the fees from my singing lessons to meet my personal living expenses. Because parents routinely breach my terms and conditions that clearly state that payment must be made in full within 14 days of the invoice, which is sent at the start of term, I have no idea when I will be paid - but my own bills still have to be paid. Unlike parents, I have no access to interest-free credit: I can only borrow from the bank, and if I go over my overdraft limit that funding is at a penalty rate. And as I said above, it is difficult for me to pass these costs on to my customers.
There has been considerable discussion recently about trust in banking. People are understandably angry that banks have betrayed their trust and behaved disgracefully. I have no doubt that the parents who fail to pay my bills on time (or at all) are among those who are angry at the fraudulent behaviour of banks. What a pity they can't see that their own behaviour is just as bad.
Businesses like mine depend absolutely on trust - trust from the parents, that their child will be properly taught: and trust from me, that parents will pay in accordance with agreed terms and conditions. If one side fails to abide by their obligations, that trust is broken. I already feel as if I should, for my family's sake, seek employment with a steady income, but I resist that pressure because I love the work I do and believe that I deliver real value to my students. But if the present trend - increasing volumes of late and failed payments - continues it will not be possible for me to continue.
Now, instead of being negative about this, I could treat it as a business opportunity. Currently my business overdraft rate is 6%, and the rate that I can charge on bad debts that are going to the County Court is 8%. It may be that the reason parents get cross if I charge them interest is that they don't realise that I'm lending them money. Suppose I were to make it explicit in my terms and conditions? I could say "A credit account will be opened for you when you book your first course of lessons. To avoid interest charges, you must pay the account in full by ..... date. After that interest will be charged at 8%". I would need to send out statements of account, of course, and I would still have bad debts. But I would be making money on the credit I extend to my customers. I would be borrowing short (overdraft) at 6% and lending long (3-month credit line) at 8%. This is credit intermediation and maturity transformation.
And note that credit creation is involved. I only have to borrow when I have a bill to pay, which may be some time after I've extended lines of credit to my customers. The line of credit is a stream of future payments plus interest and I would borrow on the strength of those future cash flows. But my customers in effect have borrowed money from me to pay my bill, even though I don't actually have that money until I borrow from the bank to meet my expenses (money that I wouldn't have had to borrow if they ACTUALLY paid upfront - I hope that is clear). In this way I have effectively created money.
Effectively, I would be an unregulated and unlicensed bank - a "shadow bank", making money on the spread between borrowing and lending. And you will note that I would be borrowing from real banks - which are supported by the taxpayer - to fund my shadow banking activity. If I went bust, the real bank would lose money and the taxpayer would be on the hook. I am hopeful that those taxpayers would include the parents whose failure to pay caused my business to fail - but if they cheated me, perhaps they cheat the government too?
The thing is, though, I don't want to run a bank. I don't want to make money by borrowing short and lending long. I want to teach singing and be fairly paid, on time, for what I do. Is that too much to ask?
A shorter version of this article is cross-posted at singingiseasy.blogspot.co.uk.