Small Business Chronicles: Barclays Banking (2021)

Applying for a Barclays business credit card reminded me of E.B. White's essay: 

The quality in New York that insulates its inhabitants from life may simply weaken them as individuals. Perhaps it is healthier to live in a community where, when a cornice falls, you feel the blow; where, when the governor passes, you see at any rate his hat... It is a miracle that New York works at all. The whole thing is implausible.

I mention White not because New York has since become a global financial hub, but because his words warned us modernism would replace the intangible bonds we take for granted, assuming we remember them at all. 

My online credit application resulted in a June 4 letter request for identity documents from Barclays Bank in Delaware, a state our current president once represented. Delaware, a tiny area set up to cater to multinational corporations, is to banks what California is to unions: a place where accountability goes to die. Consequently, I wasn't surprised when Barclays requested I send copies of my driver's license and Social Security card to minimum wage workers who could easily sell them on the black market. As the owner of a new business, I couldn't be too picky, so I complied, spending 9.90 USD to priority-mail Barclays the documents. 

On June 16, after receiving my papers, Barclays--not German-based, but on the side that once fought militaristic, indebted Germany--demanded an IRS form giving them permission to access my tax return. 

I've done my own taxes since the age of 17 and passed a tax law course, but until yesterday, I had never heard of IRS form 4506-T. Two relevant facts: 1) my business, a sole proprietorship, opened this year, meaning it has yet to file its first tax return; and 2) my FICO score, according to Discover, is above 800 and "exceptional." Was Barclays really asking me for an IRS form that would give them access to a tax return that didn't yet exist? Unfortunately, yes, and yes, my credit application included the date I opened the business. 

After tweeting Barclays' own letter to @BarclaysBankUS, a phone number was provided. If you are denied credit, or even if your application is pending, you may call a "reconsideration" number and ask for a review. In Barclays' case, that number, as of June 2021, is 866-408-4064. 

The first call went well enough. The credit representative said the problem didn't involve my credit history, and I needed to call the security team. That number, as of June 2021, is 866-469-5977. After being transferred, I was on hold for thirty minutes before hanging up, then called directly. It took twenty-five additional minutes to get through. (Wasn't technology supposed to save us time? Why was I in the same situation as E.B. White in 1949, calling on a phone to resolve an issue about a letter?) 

The Barclays representative said she needed to verify my identity, and either a Social Security card or the tax form would suffice. Did they receive my identity documents? Yes, but my business's banking statement was not the most recent one, so the system followed up. After being put on hold several times so the representative could contact a manager, my application was finally approved. 

Let's set aside the fact that California's state constitution deems tax returns so private, even presidential candidates need not disclose them. As someone who pays off his credit cards each month, I understand I'm not an ideal customer. As someone who understands banking, I know banks profit from loans and asset management, not people who despise debt. At the same time, since I've not missed a payment in twenty years, you'd think banks would see me as a valued low-risk "bond" rather than higher-risk "equity" in their credit portfolios. You'd be wrong. 

Algorithms and AI don't understand someone who doesn't want to be found and who uses privacy tools like credit freezes to protect himself. If the mere use of privacy-enhancing measures increases your risk score under a security-driven algorithm, it renders the cost-benefit analysis of privacy tools prohibitive, giving the security state yet another win. It's like advertising--America doesn't need to censor or expel disfavored voices when it can use black box intelligence budgets to ensure anyone using a VPN, hailing from a foreign country, or unknown to them doesn't appear on the first ten pages of a Google search. (And if purchasing power fails to preserve an empire's preferred narrative, a government with multinational connections can pursue other options: suspension, domain seizure, and/or financial sanctions.)

CNN, June 23, 2021

The result? Brilliant technological innovations serve the status quo and risk-averse interests, disdaining diversity while activating Goodhart's Law. An algorithm that seeks out higher risk customers due to their more lenient use of debt while excluding lower risk customers like myself who use debt wisely cannot manage risk effectively. An imbalanced, non-diverse portfolio becomes destiny, and adding derivatives, margin, and leverage into non-diverse financial portfolios has predictable consequences. 

Thanks to Andrew Lo's Adaptive Markets (2017), we know the 2008-2009 financial crisis resulted from a combination of 1) excessive leverage; 2) illiquidity (housing is not a liquid asset); and 3) Wall Street firms using the same or similar strategies. But why, a mere thirteen years after a global financial crisis, do American banks and hedge funds continue to use similar growth strategies? Simply put, loans--not savings--generate revenue, and every financial institution rewards employees for putting businesses in debt. Assuming a finite number of new businesses each year, the stacks of non-banking and banking offers I received in the mail after publishing my fictitious business name makes sense. At the same time, if every bank's loan approval process uses algorithms excluding misers, then every loan portfolio, regardless of assumed risk, is inherently imbalanced. Think of the existing risk paradigm as calculated only to find the most attractive mates but unable to identify plastic surgery or makeup. 

It gets worse. Imagine the same algorithm designed to choose millions of partners, not just one, based on data already prejudiced in favor of more make-up and more plastic surgery, i.e., more risk. Homogeneous results are guaranteed. Yet, such results don't appear homogeneous because they occur in boom-bust cycles spanning decades, confusing regulators and voters alike. Was Archegos another Long Term Capital Management?  Not exactly. Did Barclays' procedures in my case prove risk management hasn't evolved since 2008 and needs experienced humans at all levels of customer service? Not exactly. Have we progressed since E.B. White's time, when bank managers had more discretion identifying responsible persons, most of whom they knew personally or who looked like them? Not exactly. 

E.B. White's essay was written in 1949, one year before the first credit card, Diner's Club, became available to Americans. Are we more prosperous today than before? Or have we just learned to appreciate lipstick more than genuine beauty? 

© Matthew Mehdi Rafat (2021) 

Bonus: "There will be only two classes of people—those with credit cards and those who can’t get them." -- Alfred Bloomingdale, president of Diners Club (1960) 

Update: once in a while, a corporation does the right thing.