Warehouse Banking

"I'd prefer that nobody ever touch my safe deposit box. Not them, not you, not the authorities. And the sooner this situation ends, the happier I'll be."
--Arthur Case (Inside Man)

The earliest banks began as money warehouses. Entrepreneurs created safe places for people to keep their money and other valuables secure. The business model was simple. Bankers would charge a fee to store and safeguard depositor property. The fee was based on the value of the property and the time that it was stored.

When they dropped off their property at the bank, depositors got a 'warehouse receipt' signifying that the bank had control of their property. When they wanted to withdraw their property, depositors would present their warehouse receipts at the desk and bank employees would retrieve the valuables from the vault or other safe space.

The primary risk of this model was loss of property while stored at the bank (e.g., bank robbery, fire, etc.). This risk was borne primarily by the depositor unless a) it could be shown that the bank itself had stolen property under its management or b) part of the original contract involved the bank's promise against property loss. In the case of b), the bank would have to insure its business either by self-insuring or buying a policy from a third party insurer. Still, if the insurance policy could not cover claims, depositors were left high and dry.

A good example of the warehouse banking model still exists today in the form of safe deposit box operations at a bank. Lock boxes of various sizes are available for customers to rent. Because these boxes are usually located in the bank's general vault, they are deemed very secure. However, the lease agreement that the renter signs up front absolves the bank from liability should the property be lost from theft, weather events, et al. (unless, of course, it can be shown that theft was an 'inside job').

Because the renter of a safe deposit box sees the bank as a secure storage facility--more secure, say, than the mattress back at the homestead--then the risk of loss is perceived as relatively low, and the money warehouse banking model can thus offer value to the marketplace.

As we know, however, few if any banks operate solely in this manner today. Enterprising bankers have found other ways to leverage (quite literally) this business model. We'll discuss how the return prospects of money warehouses were ratcheted up in a future missive.