Fed up with fees, man opens his own community bank

Deposits are not insured by FDIC

PITTSBURGH - Angry at his bank for taking too big a scoop in overdraft fees, one Pittsburgh ice cream shop owner decided to set up his own flavor of a community bank, with interest on deposits paid out in sweets.

Ethan Clay, a 31 year-old Steel City native, began running the Whalebone Café Bank out of the Oh Yeah! Ice Cream and Coffee Company in January and says so far he's taken in around $660 in deposits, mostly from regular customers. He also performs cash back transactions and for a $4 fee, check-cashing services.
"I want to skinny up these big banks," Clay said. "This is people putting their money together to transform the retail banking industry."
But deposits at Whalebone are not insured by the Federal Deposit Insurance Corporation (FDIC), which is why he's caught the attention of the state banking regulator.
"He does not have a license or charter to advertise as a bank or to take deposits," Ed Novak, a spokesman for the Pennsylvania Department of Banking, said in an email statement. "You need a bank charter to take deposits under Pennsylvania law."
Novak would not comment on any potential enforcement action by his agency.
For his part, Clay claims he isn't subject to Pennsylvania Department of Banking rules because he's using gift card accounts to hold customers money. He says he has been in contact with an investigator from the agency, but isn't aware of any enforcement proceedings against him.
To start depositing money, customers must open a gift card savings account. The gift card account accrues interest -- at an attractive average rate of 5.5% -- which can then be used for in-store purchases, including ice cream, waffles, and coffee, Clay said.
Whalebone also offers small loans, and currently has three loans outstanding, according to Clay.
"These are short term, micro loans to give people so they can save some money in their accounts," Clay said.
Since he's not FDIC insured, Clay acknowledges his customers need to have faith in him.
"You do have to trust my process, there is an element of that," he said.
But from a pure economics standpoint, Clay's business model faces its fair share of challenges, according to Dr. Chester Spatt, a professor at Carnegie Mellon's Tepper School of Business who served as the Chief Economist at the Securities and Exchange Commission from 2004 to 2007.
"On a small scale, there is a good rationale for this, to get attention and for the promotional aspects," Spatt said. But he could run into "issues involving creditworthiness or limitations on creditworthiness," due to the high interest rate he's promising.
"Realistically, could somebody pay out 5.5% a month, even in commodities? Of course not," Spatt said. But if Clay can "get attention to sell more ice cream, then yeah, that could work," Spatt said.
Nonetheless, Clay is committed to his vision and ultimately wants to open overdraft fee free checking accounts and help provide funding for community projects.
As Clay put it, "I want Whalebone to be a place where people with progressive ideas who want to change the financial world can get access to the funding they need."