Banks in the UK pay out a maximum of 1% interest on even the best savings accounts (i. e. the return doesn't even keep pace with average person's PoV inflation). I am skeptical of this explanation for why we should let the banks hold our money. Or indeed remain alive as anything but a source of borrowing.
> Banks in the UK pay out a maximum of 1% interest on even the best savings accounts (i. e. the return doesn't even keep pace with average person's PoV inflation).
Interest paid on deposits is a free market (generally speaking); if that rate isn't worthwhile to people, they will start leaving and the bank will raise its rates.
> I am skeptical of this explanation for why we should let the banks hold our money.
You aren't 'letting' them and it's not a collective decision. You personally choose to give them your money. Put it elsewhere if you like.
> Or indeed remain alive as anything but a source of borrowing.
They can't lend money without deposits. The deposits are the money they lend.
> if that rate isn't worthwhile to people, they will start leaving and the bank will raise its rates.
No, that is evidently not happening. When I said "banks", I meant "literally all banks" (minus tiny regional credit unions or the occasional fluke that might give you up to 1.2% - wow, that is so much money, I could retire on it). People generally don't move banks either. They tend to stay with whomever they started banking first.
> You aren't 'letting' them and it's not a collective decision. You personally choose to give them your money. Put it elsewhere if you like.
My main alternative to holding cash in a bank is cryptocurrencies (which are accepted ~nowhere), or holding my money as cash. Handling cash has been in decline even before the pandemic, and nowadays I very rarely see people pay cash. Assuming that cash remains on the current trajectory, banks will become the only mainstream option.
> They can't lend money without deposits. The deposits are the money they lend.
They have enough money saved up in their coffers for that. I also can't imagine that most loans for a higher value than a credit card account would be entirely unsecured. This is especially true for house purchases - it's generally impossible to buy the house you want without a mortgage, and the house is what you lose I'd you don't pay them back.
It’s somewhat true in the sense that banks need to keep some fraction of their deposits in cash as reserves (the “reserve ratio”). So if they lend money it needs to be backed to that extent by their deposits.
