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The History of the Safe Deposit Box

1 March 2016

Having acquired one of London’s oldest safe deposit businesses, Christopher Barrow of Metropolitan Safe Custody explores the life of the safe deposit box during its 150 year history.

There are, by some estimates, 25 million safe deposit boxes leased in the US. In Sweden, as many as one in three people have a safe deposit box. In France, it is estimated that one in five rent a box. Having a safe deposit box is a regular feature of life in the US and continental Europe, where the incidence of ownership is far higher than in the UK. Traditionally in the UK, the need for safe custody of valuables was met by the clearing banks. The same has been the case in Europe and the US. Vaults or strongrooms were built in the basement of banks where the ceilings were vaulted, hence the name. Modern bank vaults typically contain columns of safe deposit boxes alongside other valuable assets belonging to the bank or its customers. To a lesser extent, safe deposit boxes are found in post offices, hotels and now increasingly in private vaults. In the past decade, banks in many parts of the world have been withdrawing from providing safe deposit services to their customers. Though the vast majority of safe deposit boxes still reside in bank vaults, their withdrawal raises questions about the future of the safe deposit box.

The origins of safekeeping

The history of generic safekeeping dates back many thousands of years to ancient Egyptian civilisation, where powerful individuals were entrusted with valuables in return for a fee in arrangements that resemble modern banking practices. The first traces of a lockable device that resembled keys were discovered in the tomb of Pharaoh Ramses II who reigned in the 13th century BC. It was not until the ancient Greeks developed a more democratic and individualistic culture with small, self-contained communities (around 2500 years ago) that the equivalent of our modern vault first developed. Many examples can be seen today in their temples. Greek locks, however, were generally viewed as unsecure. It was the Romans who improved upon Greek and Egyptian locks by introducing metals as their primary material. In addition to providing greater strength, Roman locks were much smaller and keys could be worn in pockets or around the neck.

Banking has since developed as a result of trade and commerce which, in turn, created wealth that required safe places for storage. Given the financial responsibilities of banks and the development of their relationship with wealthy customers, these financial institutions became the natural storage house for the valuables of their customers.

The history of safekeeping by banks is best documented in the United States. The first American commercial bank, the Bank of North America, was founded in 1782, shortly followed by the Bank of New York and the Bank of Massachusetts. None of these banks were then involved in safekeeping since commerce was still transacted by means of barter and very little wealth was monetised or capable of storage. As money systems developed with coinage and paper money, the number of banks expanded. By the early 1800s, US banks started offering safekeeping services. There is documentary evidence of US banks accepting “special deposits” (often gold) for safekeeping purposes before 1814.

The US birthplace of the safe deposit box

These early days of safekeeping of customer valuables in open vaults were not particularly satisfactory due to unclear regulations and security problems. Typically, a bank would store a trunk or case containing the family silver and jewellery in its vault. However, a technological innovation was introduced in the 1860s in the shape of the modern safe deposit box. This impacted the US banks in two respects. Firstly, it revolutionised safekeeping as customers were able to place their valuables in a sealed container in the vault and obtain individual access to the box. The second impact was that the invention of the safe deposit box brought about the advent of competition from safe deposit companies that were independent of banks.

The first such independent safe deposit company, The Safe Deposit Company of New York, was established in 1865. This specialist vault not only provided traditional safekeeping of trunks and packages, but also, as advertised in The New York Times on May 1st 1865, offered “five hundred safe boxes of iron each having its own combination lock with renters having complete control of their individual box”. This was the first safe deposit box facility to be launched globally 150 years ago. What is less certain is the identity of the person who came up with this invention. What made the invention credible must have been the creation of a suitable locking device. It is conceivable that this was provided by New York-based James Sargent, a young employee of Linus Yale Jr, who invented the first key changeable combination lock in 1861. This lock was a rapid success with safe manufacturers and may have been the catalyst for the invention of a “safe box” for small items of value.

In the late 19th century, the number of private safe deposit corporations grew in the US, partly as a result of technological advances and partly owing to the legal uncertainties surrounding the banks. US banks did not then have the official right to engage in safe custody activity, albeit they continued to provide the service demanded by important customers. Ironically, whilst legislation was unclear, it did permit the banks to invest in safe deposit companies. This was often a preferred option for the banks as their own safe custody functions had never been particularly profitable. Indeed, banks regularly accepted a wealthy customer’s valuables at little or no cost; and even the rental of safe deposit boxes (in a bank vault) was at a nominal fee in order to perform a service that had become (and remained) incidental to the mainstream business of banking. It was (and remains today) a loss leader.

The safe deposit box became popular across America

The early 20th century saw the US banks greatly expand their safe deposit business. Indeed, banks all over the world were busy installing safe deposit boxes in their branch vaults. Improved legislation provided US banks with greater legal clarity to engage more actively in safekeeping during a period of strong economic growth. At the same time, the banks increasingly recognised that their traditional business model of safekeeping was flawed. Firstly, they were not profitable and, secondly, placing customer valuables, together with the banks’ own money and documents, in their open vaults was high risk from a security point-of-view. Now that the (successful) independent safe deposit companies had established that customers were prepared to pay for the service, it became a logical move for the banks to equip their vaults with safe deposit box facilities and start charging their customers a more reasonable fee. This was a smart idea in principle, but bank customers were (and still are) notoriously reluctant to pay for what they regarded as “part of the service”. However, the banks with their existing branch networks and ready-made customers would prove too powerful for the emerging independent players, especially in less populous areas.

Further legislation in the US in the 1920s permitted banks to engage in the safe deposit business through safe deposit subsidiaries. This enabled banks owned by a bank holding company to engage “lawfully” in safe deposit activities and it also accelerated the process of acquiring their independent competitors. Eventually, the banks almost completely displaced the private safe deposit businesses, except a small handful of companies in some US cities. Until recently, nearly all US banks had safe deposit departments. However, the banking sector globally has become increasingly aware of the cost implication of secure storage and the lack of return on the space provided. With the financial world a long way off recovering from the crash of 2008, these pressures are unlikely to go away. This has led to some banks withdrawing from the service and has resulted in a mini revival of independent safe deposit start-ups in North America and elsewhere.

Safekeeping had similar origins in UK and Europe

The history of safekeeping and the safe deposit box in the UK and Europe is not dissimilar to that of the US. In the mid-17th century in London, before any banks had been established, goldsmiths offered safe custody of customers’ valuables in their fortified vaults. When these customers needed to borrow money, a new breed of goldsmiths began to make loans, against which they held the items in their custody as security. Payments between individuals were made in the form of notes resulting in the transfer of ownership of items in the goldsmiths’ vaults. These notes eventually evolved towards what we know today as banknotes and cheques. The goldsmiths had become Britain’s first bankers and established the link between safe custody and banking. They preceded the immigrant Rothschild and Baring families who came to dominate banking 150 years later.

The world’s second safe deposit box vault opened in London

Whilst the likes of Rothschild and Baring were making their fortunes, the UK (and then continental Europe) followed the US in launching safe deposit box facilities. The UK’s first was the privately-owned National Safe Deposit Company Limited, which was established in 1872, seven years after The Safe Deposit Company of New York was launched. It opened its doors in 1875 to huge specialised premises at 1 Queen Victoria Street in the City of London. This vault became successful and, by 1968, had 15,000 customers, but it had to close its business less than 20 years later as its lease had run out. The building is now the City of London magistrates’ court. Europe’s first safe deposit facility was opened in 1881 by the Danish bank, Den Danske Landmandsbank, in Copenhagen. Other European banks, notably in Switzerland, followed. Like in the US, the early 20th century was a period of rapid growth in the safe deposit business in both the UK and Europe, almost exclusively in bank vaults.

Britain’s second non-bank facility was Chancery Lane Safe Deposit, which opened in 1876 to provide strong rooms for Londoners to safeguard their household silver. This was followed by the Harrods vault in 1896, St James’s Safe Deposit Company in Manchester in 1912, the London Safe Deposit Company in Lower Regent Street in 1931 (which was acquired by Metropolitan Safe Deposits in 2012), and Selfridges in its Oxford Street store in the 1930s. No private safe deposit vaults (of any significance) were built in the UK for the next 50 years. One notable, albeit minor, exception was a small vault built in the late 1940s in Hatton Garden, which was recently closed following a burglary. Then came a spate of new and modern private safe deposit centres in the 1980s in Belgravia (now closed), Knightsbridge (owned by Metropolitan), St John’s Wood (owned by Metropolitan), Park Lane (now closed), City Safe Deposit in Old Broad Street (now closed), Wembley (owned by Bank House), Edgware (acquired by Balthorne), Hampstead (acquired by Balthorne) and Birmingham (owned by Pertemps).

No new private safe deposit vault operators have established a significant presence in the UK since the 1980s. However, there has been a recent growth of private safe deposit start-ups in London, Birmingham, Manchester and other regional city centres. Most of these new vaults have focused on areas with high-density Asian communities, such as Southall and Hounslow in the western suburbs of London, and also reflect the continued withdrawal of banks from these locations. This revival of the independent safe deposit sector in the UK and the US is being mirrored in many countries around the world. New safe deposit centres have been established in Canada, Europe (Switzerland, Germany, Austria, the Netherlands, Spain, Finland and Czech Republic), Ireland, Dubai, India, Asia Pacific (Hong Kong, Singapore, Malaysia and Thailand), Australia, New Zealand, South Africa, Mexico, Panama and South America (Argentina, Paraguay and Uruguay).

Is safe custody of physical wealth in secular decline?

In most, if not all, countries, these start-up private safe deposit centres are few and far between, sometimes just one vault in a large country or city centre. Some will not survive (it generally takes a number of years for a new safe deposit vault to reach profitability). New ones will sprout up. Compared with the substantial number of bank branches that have discontinued their safe custody service, the re-emergence of private sector companies is almost inconsequential. The vast majority of customers being asked to withdraw their valuables from a bank have nowhere to go, except install a home safe. The question is whether history (in the last century) will repeat itself. Will the banks rekindle their interest and crowd out the emerging presence of independent vaults? There are no signs at present. In the UK, for example, two of the major banks (HSBC and Barclays) have already completely exited the business and the other major banks are reducing their involvement mainly through branch closures.

In many countries, especially in the US and UK, keeping cash in safe deposit boxes is discouraged by the authorities. This has not reduced the demand for boxes, which are generally used for the safekeeping of jewellery, gold bars, coins, stamps, artefects, works of art and important documents. A classic example of this continuing demand was the migration of thousands of HSBC and Barclays customers to independent safe deposit box providers in central London last year. These customers, both wealthy and average family households, were not keen to place their valuable collections and heirlooms in a home safe. It is the case that a small number of private safe deposit firms, notably in the US, allow customers to store anonymously, which raises legitimate concerns that the service is there to hide financial crime. That type of service is not permitted in countries, such as the UK, where private safe deposit companies are regulated by the authorities. This regulatory oversight is key to the future health of the safe deposit industry.

It is unlikely that the exiting banks will want to return to providing physical safe custody. With the advent of internet banking and self service facilities, the cost implications of running secure storage facilities have become increasingly acute. The banks can no longer justify the provision of what has become a heavily-subsidised service. In addition to the uneconomic pricing of safe custody offered by the banks, the modern branch no longer has the staff levels to cope with the service. Neither does the modern branch have, or wish to have, old-style bank vaults. Banks are also restricted to providing the service to bank opening hours. Furthermore, the situation has been exacerbated by the tough capital adequacy requirements of today’s banking industry, which has little interest in investing scarce resources on a low-priority, non-core service. This does not necessarily imply the imminent demise of the 150-year-old safe deposit box, but it will sadly become increasingly out of reach to the average family household.

Will domestic demand in Asia provide the future growth?

Much of the new demand for safe custody and, in particular, for safe deposit boxes in the last 30 years has emanated from the massive emigration of Asians to urban centres mainly in North America, Europe and the Middle East. A quarter of the world’s 27 million overseas Indians live in just 10 cities including 1.5 million in Dubai, nearly 1 million in Durban and over 500,000 each in New York, Toronto and London. Hundreds of thousands more non-resident Indians reside in cities such as Los Angeles and Vancouver. In a similar fashion, migration flows of overseas Chinese have moved to North America, notably New York (680,000), San Francisco (590,000), Toronto (540,000), Los Angeles (470,000) and Vancouver (440,000). In a smaller way, overseas Chinese have also settled in Australia – Sydney (165,000) and Melbourne (150,000) - and in UK/Europe, for example in London (125,000) and Paris (165,000). Smaller UK cities, such as Manchester, have significant pockets of Chinese, as evidenced by the fact that the Bank of East Asia (a Hong Kong bank) has built a safe deposit vault in the city.

A big question is whether the pattern of international migration will change as both China and India catch up with the developed world in terms of per capita income and economic development. Despite the many migrants who have moved to North America, Europe and the Middle East, the fact is that the vast majority of the world’s 50 million overseas Chinese already reside in Asian cities, in particular Bangkok (4.4 million), Singapore (3.9 million), Kuala Lumpur (1.8 million) and Jakarta (1.6 million). However, even those statistics pale into insignificance compared with the inhabitants of China and India, together comprising nearly 40% of the world’s population. With China’s new focus on stimulating consumer demand from its 1.4 billion people and with India experiencing economic resurgence for its 1.3 billion people, it would be a surprise if these two giants did not substantially increase the global population of safe deposit boxes. With a substantial potential market of affluent consumers combined with their propensity to buy gold and jewellery, the future of the safe deposit box could be secure for another 150 years.