Infinite Banking resonates with different people for different reasons. Today, we want to dive into the term "banking" by showing you how banks work, explain how virtually everyone is already in the banking business, and explain why your banking system is likely insolvent, or at least highly unprofitable. In Part 2, we’ll explain how you can flip the script by designing your own profitable privatized banking system. Let’s first talk about how banks work.
Bank Operations
Historically, banks have served as the middlemen for capital. Banks would pay to borrow by bringing in deposits (classified as liabilities) and get paid to lend by creating loans (classified as assets). As with pretty much every other business, the objective is to make more money on your assets than what you pay on your liabilities. As an example, let's say a bank has $450M in customer deposits (liabilities) and $500M in loans (assets), leaving $50M in equity. If, on average, the bank pays 2% on deposits and collects 5% on loans, then the bank's net interest income (NII) is [($500M * 5%) - ($450M * 2%)] = $16M.
Loans/Deposits | Return | Income/Loss | |
Assets | $500M | 5% | $25M |
Liabilities | $450M | (2%) | ($9M) |
NII | $16M |
Another common bank figure is net interest margin (NIM), which can be calculated as the NII divided by interest-bearing assets. In this case, the NIM is ($16M / $500M) = 3.2%. This is a return on asset (ROA) figure that describes bank efficiency. The more income a bank can generate on a certain amount of assets, the better.
Now, as a business owner, the concept and math are fairly easy to understand, but you may still be wondering why this is relevant. The truth is that you are already in the banking business whether you like it or not. Don't believe us?
Your Banking System
As a business owner, you lend basically every day. No, we're not talking about underwriting and issuing 30-year, fixed-rate mortgages. We're talking about what you do with your cash. When customers pay for your products or services, that revenue flows into your bank account. As we just mentioned, banks borrow customer deposits (liabilities from the bank's perspective), which means these are assets that you are lending. Generally, these loans are very short-term (days, weeks, or months) since business owners have future commitments like taxes, payroll, or buying new equipment. However, you consistently have assets flowing in and out of your banking system.
Business owners also borrow. This one is more obvious with equipment loans, credit cards, lines of credit, SBA loans, etc. These are all liabilities and come with an explicit cost. But, let's say you've listened to Dave Ramsey, and you have absolutely no debt at all. In order to grow your business, you still need to purchase things. Paying taxes keeps you out of trouble with the IRS. Making payroll keeps your employees happy. Buying equipment helps you maintain or increase efficiency. However, by financing all of this with cash, you're continuously winding down the interest-bearing (income-generating) assets of your banking system. In other words, you're surrendering the future growth on your capital.
Have you ever thought about what YOUR net interest income is? If you're like most business owners, you're getting virtually nothing on your savings, especially after inflation. Bankrate says the average savings yield is currently 0.61% APY, and now the Federal Reserve is expected to cut rates as the economy slows. While banks are still able to borrow at very attractive rates (what they pay you on your assets), small business loan rates (what they charge you on your liabilities) have doubled over the past few years to the highest level since the start of the century as shown in the chart below from Apollo.
Maybe you still have an attractive line of credit sub-8%, and maybe you're able to generate 5% returns in a high-yield savings account (albeit, pre-tax & before rate cuts). Even in this case, your banking system is costing you money each year. Similar to a bank, if losses are large enough, significant capital injections are required to keep your banking system solvent, which means sacrificing growth capital. This is how the average business operates today.
Business owners likely haven't calculated their net interest income, but they probably feel the pain of paying higher interest costs while receiving paltry returns on their liquid assets. Even though business owners may now be willing to accept the notion that they're in the banking business, we believe some owners may see this as the cost of doing business because no other viable solutions exist.
However, what if we told you there's a way to build your own privatized banking system to increase the efficiency on your capital and generate a positive NII? What if there was a way to avoid consistently winding down your banking system or injecting more capital? What if there was a way to leverage your short-term assets (bank deposits) to generate a compounding, interest-bearing, and long-term asset? What if there was a way to reduce your financing costs while also shedding liens on your assets?
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