Not long after would-be counterculture banker Ethan Clay opened Whalebone Intergalactic Cafe Bank in 2012 inside his Oh Yeah! ice cream and coffee shop in Shadyside, it caught the attention of state banking regulators who didn’t like what they saw.
Two years later, following threats of big fines, Whalebone looks little like the low-cost community banking alternative to fee-gouging big banks that Mr. Clay initially envisioned.
Still, the 33-year-old Pittsburgh native remains unbowed.
As does his defiant streak.
After receiving a warning letter in November 2012 from the Pennsylvania Department of Banking and Securities saying his unlicensed bank could trigger $10,000 fines, Mr. Clay made some adjustments.
Among them were changing the operation’s name from “Bank” to “Banco,” replacing deposits with “never-ending gift cards” that paid interest in store credit, and replacing loans with “neverdraft cash sets” of $100 for a $5 monthly “rental” fee.
Unsatisfied, regulators followed up with another letter six months later. Among other things, they appeared unimpressed with the switch from “Bank” to “Banco.”
“Spanish-speaking customers may find the name to be confusing and assume that you are authorized to engage in banking activities,” the letter stated, requesting that Mr. Clay choose another name that “cannot be misinterpreted.”
The department also asked for more details about other changes to Whalebone’s various “activities,” saying regulators lacked enough information “to render a conclusion as to whether there is a violation of the pertinent laws.”
The letter asked for a response by June 28, 2013.
Mr. Clay complied, but he only got around to it this month.
“I apologize for the delay,” he wrote in his emailed response, explaining that the department’s letter initially had been misplaced in a pile of junk mail.
“When I found it, I read it briskly and put it in a safe place. So safe, in fact, I did not rediscover it until yesterday.”
Mr. Clay told regulators that Whalebone — born of disdain for traditional banks after a bad experience with overdraft fees — had continued to evolve over the last year.
Whalebone had stopped offering check cashing services and “neverdraft” cash advances to the public, he said. Only Whalebone “members” who open an account by buying a gift card can “borrow” or withdrawal money, and only up to the amount on their cards, he explained.
“As you can see, we have simplified our offerings,” he wrote.
He asked that he be allowed to continue to use the word “banco.”
“Although we are open to Spanish-speaking customers, we have not attracted any and we have clearly posted that Whalebone is not a bank or member FDIC,” he wrote.
It was unclear whether the transformation at Whalebone (an anagram of the words “whole bean”) would end regulatory scrutiny.
The banking department declined comment, as it has done repeatedly since an initial statement almost two years ago indicating it would be moving to shut Whalebone down for, among other things, not applying for a banking charter.
In an interview earlier this month, Mr. Clay said the reason he had continued to refine his banking concept wasn’t because of regulators’ concerns. Instead, it was a nod to the realities of making a living.
Some borrowers “weren’t being cooperative” when it came time to repay their cash advances, he said.
“We got the money back, but it was a lot of work.”
Whalebone also “ate some bad checks.”
“Open lending and check cashing just wasn’t working,” Mr. Clay said.
Now, he’s changed his mission.
“When I first started out, I was just really upset about the practice of overdraft fees. What I got clear on is it’s not just the banks. They are one tentacle on the giant octopus that is the Federal Reserve and the banking elite.”
For now, Whalebone, with roughly 30 cardholder members, is aiming to support a digital economy free of banks by acting as a cash exchange for digital currencies, such as Bitcoin.
“It’s a way for people to hold cash without commercial banks,” he said. “I don’t know of any other Bitcoin ATMs in Pittsburgh.”
Despite Mr. Clay’s dedication, Whalebone earlier this year appeared on its way to becoming another “banco” failure when he was forced to close Oh Yeah! for a few months after being away for a while and returning to find it in “complete disarray,” being used as “a party space” by employees.
The shop has since reopened on an abbreviated schedule and is slowly rebuilding, he said.
Whalebone also managed to avoid a run on deposits.
“We assured them we were solvent and no one took their money out,” he said.
“When we reopened, our dedicated folks were back using Whalebone interest.”
Patricia Sabatini: firstname.lastname@example.org or 412-263-3066.