GOING, GOING, GONE
For big banks, operating safe deposit boxes no longer makes financial sense. But as the likes of Chase and Capital One exit the safe-deposit business, they have accidentally created an intractable problem for consumers. People still want safe deposit boxes and now it’s nearly impossible to get one.
Capital Thinking • Issue #1161 • View online
In the opening sequence of The Bourne Identity, a young Matt Damon wakes up with no idea who he is. All he has is a code — the account number for a safe deposit box in Switzerland.
At the bank, an attendant leads him into an elaborate steel vault, where he’s presented with a safe deposit box. Inside are the first clues to his identity: a gun, a watch, stacks of cash, and a series of passports under different nationalities, including one bearing the name “Jason Bourne.”
The quiet disappearance of the safe deposit box
Over the years, safe deposit boxes have become iconic — a staple not only of the banking industry but also of heist movies and spy flicks. Inside Man, The Dark Knight, Casino, and The Da Vinci Code all feature pivotal safe deposit box scenes.
In Hollywood, safe deposit boxes are so prominent, in fact, that it’s easy to miss the seismic changes racking the industry: In the wake of the 2008 financial crisis, big banks have quietly abandoned the safe-deposit business.
Both HSBC and Barclays have shuttered their safe-deposit services in many countries, and Capital One joined them in 2016. Most recently, this past September, JPMorgan Chase announced it was phasing out its safe deposit boxes, too. In the coming decade, other major banks seem likely to join them.
What went so wrong?
The rise of the safe deposit box
The Civil War was just days away when a New York businessman named Francis Jenks stumbled on an idea that would change the face of the banking industry.
In March 1861, while on a trip to England, Jenks — the moneyed son of a Harvard professor — began to wonder what he was supposed to do with his valuables while he was out of town.
He decided to create a company that would store items for New York’s “fashionable inhabitants,” who wanted to, say, decamp to Europe for the summer.
Rather than worry about burglaries, Jenks suggested that the urban elite store their books, wills, jewelry, tea sets, and silver with him.
He opened a massive, marble building in lower Manhattan, complete with a thick steel vault. Inside, he offered 500 safe deposit boxes to customers.
To ensure the safety of the boxes, Jenks required two keys to unlock a box: one key for the customer and one key for his employees. Guards armed with muskets stood in front of the building at 146 Broadway through the night.
He called it the Safe Deposit Company of New York.
It was the first company of its kind — and as the Civil War broke out, demand soared. Bold-faced names like the Vanderbilts, the Guggenheims, the Roosevelts, and more began storing their valuables with Jenks. Hetty Green, the millionaire businesswoman, maintained a private vault so big that it could fit a desk inside of it.
It was such a success that copycat safe deposit box companies began proliferating across the US, with names like the Mercantile Safe Deposit Company and the Lincoln Safe Deposit Company.
While the first safe-deposit companies were stand-alone organizations, dedicated solely to safekeeping, major banks soon got involved. By the early 20th century, nearly every bank in America had a safe-deposit arm.
The tricky economics of safe deposit boxes
In the decades after Francis Jenks created the Safe Deposit Company of New York, the safe deposit box industry had a clear internal logic.
Stockpiles of gold and jewelry were a staple among the wealthy, and so were wills and stock ownership documents. In an era in which fires were common and home security systems weren’t very complex, the choice was simple: store your valuables with your local bank.
People began dumping all kinds of prized possessions into safe deposit boxes, including:
- A Honus Wagner baseball card that later sold for $220k
- An Abraham Lincoln campaign button
- Purple Heart medals
- A supposedly forged Van Gogh painting
- An NFL ticket from the 1950s
- Sets of false teeth
- Albert Einstein’s eyeballs (once owned by the physicist’s eye doctor)
Even famous authors used safe boxes: Harper Lee’s lost book Go Set A Watchman was found in her safe deposit box, potentially alongside other unpublished works.
“We end up insuring first-edition book manuscripts, movie paraphernalia — it’s kind of all over the place,” said Jerry Pluard, a former lawyer who now sells insurance policies on safe deposit boxes through his company Safe Deposit Box Insurance Coverage. “Certain clients are insuring Olympic medals with us.”
Yet the economic logic of safe deposit boxes quickly began to erode. In the early 1900s, bank executives confronted a troubling problem. Safe deposit boxes weren’t actually raking in big profits.
In 1941, one industry expert admitted, “It is not inconceivable that a vault might be 100 per cent rented and still be operating at a loss, due to low rental rates.”
One problem was that the cost of building a vault for safe deposit boxes put companies in the red almost immediately.
These vaults are made with heavy concrete and layers of reinforced steel, and they are built to withstand the unimaginable. One bank vault, made by the American company Mosler Safe Company, survived the nuclear bomb in Hiroshoma in 1945.
But the ability to withstand a nuclear explosion comes at an incredible financial cost.
Safe-deposit vaults are “the most expensive square footage you can put in a branch location,” said David McGuinn, who has educated banks on safe deposit boxes through his consultancy Safe Deposit Specialists for over thirty years.
Though some banks have tried to compensate for the costs by upping their rates, it rarely works for long. In the 1980s, a crop of new safe-deposit businesses began charging as much as $600 per year for boxes that customers could get for $60 elsewhere. Many of these quickly crashed and burned.
The issue? Competition from home security. If bank boxes are much more expensive than, say, a home safe or a home security system, customers will opt for the latter.
Michael Waters
*Featured post photo by regularguy.eth on Unsplash