The city is stuck with Wells Fargo for a few more years

You may recall that last year the City told Wells Fargo Bank that it would not be renewing its contract for bank depository service, and began the process of issuing an RFP for a new bank.  Yesterday morning the Council got an update on that process, and the news is not good — though it may expedite the process of achieving the city’s long-term goal of running its own bank.

The city decided to cut its ties with Wells Fargo for two reasons: because of the well-reported unethical practices of its staff in opening up unauthorized accounts on behalf of its customers, and because of its investments in oil pipelines including the Dakota Access Pipeline. Wells Fargo offered to terminate the banking contract immediately, but the city opted to continue the contract through to its conclusion while issuing an RFP for a new banking services contractor.

The city broke the banking services contract up into five modules to potentially allow smaller banks to bid on part of the city’s business rather than having to try to serve the entire thing. The city does about $3 billion in transactions each year, and on any given day keeps an account balance of approximately $50 million.  The five modules are:

  • banking services;
  • merchant services;
  • safekeeping services;
  • commercial card services;
  • coin-counting and on-site intelligent safes services.

The RFP was issued on November 14th, with proposals due by December 21st. A conference meeting was scheduled with potential bidders (over 200 showed up), and they were also allowed to submit questions in writing that the city staff provided written answers to (a compilation is here). Upon complaints that the five-week turnaround time during the holiday season was too short, the city extended the deadline for submissions to January 23rd.

According to Teri Allen of FAS, while the city received some bids on the commercial card services and merchant services components, there were no bids for the critical component: banking services.

There are several possible reasons why no one bid. First, the State of Washington imposes a strict set of criteria for public depositaries, which narrows the set of eligible banks to a short list of the largest commercial banks. Glen Lee, City Finance Director, claimed that they were in conversations with all of the eligible banks leading up to the submission deadline.

Second, some of the city’s revenues come from taxes and licensing of cannabis businesses. Providing banking services for businesses trafficking in illegal controlled substances (and marijuana is still controlled under federal law) is also prohibited; while this would be indirect, it still might have been enough to scare off some banks — especially under the Trump Administration. A question about how the city handles monetary transactions with cannabis businesses appears in the written Q&A, so it was clearly on the mind of at least one potential bidder.

Third, the city required bidders to answer a long list of questions regarding the their “socially responsible and fair business banking” practices. Most of that is standard practice, but it included a section specifically addressing the Keystone XL Pipeline project, noting the city’s resolution opposing it and asking bidders to explain whether they had made any investments in the project or in other TransCanada projects.

It’s certainly within the city’s discretion to ask about oil and gas investments, but given the after-the-fact indictment of Wells Fargo for investing in the Keystone XL project, one could see how other banks — even ones that haven’t invested in the project — might read that as license by the city to find fault with any other investments they have made or might make in the future. Of course the city can do that, but that doesn’t man that banks will willingly enter into that kind of business relationship.

Given its failure to find a new vendor for banking services, FAS decided to abandon the RFP and re-orient toward investigating the broader policy objective of establishing a municipal bank, either on its own or in cooperation with other cities and/or states.  They are now approaching other cities to find willing partners and learn about the issues involved in creating their own bank (including how to connect with the Federal Reserve, and capital reserve requirements). They are also looking at hiring one of several consultants who specialize in setting up banks.

The short-term issue with pivoting to that new goal is that the city still needs banking services, and its existing contract with Wells Fargo expires at the end of 2018. To that end, it recently signed an extension of the Wells Fargo contract for three additional years, which it hopes will buy it enough time to fully investigate and execute on a municipal or public-sector bank solution for the city’s future banking needs. The option to extend was built into the existing contract, so it didn’t require the city to beg Wells Fargo to take them back. That said, it’s a lesson in humility for the City of Seattle — including the City Council — that no commercial bank wants their business and they are forced to continue working with a company they have publicly disavowed.

Council member Sally Bagshaw, who chairs the Finance and Neighborhoods Committee, has invited Lee and Allen to brief her committee in the coming weeks on the prospects of creating a municipal bank.