During the debate over interchange fees Felix Salmon expressed skepticism that market entrants and disruptive technologies could ever provide serious competition to the Visa/MasterCard duopoly. We already know Walmart wanted into the banking game, and now we have another potential entrant: Google.

They have recently put out a Chrome browser extension that allows brick-and-mortar retailers to use Google Checkout, their online payment system, with customers using Android phones. This still uses a standard credit card, debit card, or other Paypal type account for funding, but it is not hard to picture Google becoming a depositor or issuing their own credit accounts. Of course regulatory barriers would prevent this, like they did with Walmart.

So here is my proposal: allow any company to become a bank with a very minimal regulatory barrier if they do 100% reserves on deposits. This means people will know their money is there whenever they want it, which will make the “bank” safe from runs, which will eliminate the need for FDIC insurance or heavy handed regulation.

It is easy to imagine Google offering the service for free and making a profit by selling ad space that loads onto customer and merchant screens while the transaction loads. Is there anything going on here more costly than Google maps? If they can profitably give that away, than profiting on this should be a cinch.

This reenforces my optimism that we could deregulate our way to a better and more competitive banking system, and that technology and competition are the best option for reducing interchange fees.

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