Ever since Alexander Hamilton’s reforms unleashed the might of the financial services sector in the early 1790s, some Americans have complained that incumbent lenders, brokers, and insurers deny them access.

Free entry and competition, while never perfect solutions, worked wonders for two centuries before being ejected by powerful government regulators in the 1990s. A return to the tried and true method is in order.

Financial service providers must reject many applicants. Banks, brokerages, and insurers exist to serve their owners, be they stockholders in the case of joint-stock corporations, or approved customers in the case of mutuals. To stay in business, they need to carefully screen and monitor borrowers and insureds lest they fall victim to moral hazard and adverse selection, the natural tendency of lenders and insurers to attract the riskiest applicants. They cannot, and indeed should not, welcome all comers.

The necessity of turning away applicants, however, rendered financial services providers open to claims of discrimination, of rejecting the applications of members of some group X simply on the grounds of their ethnicity, gender, race, religion, sexual orientation, weight, or some other attribute not directly related to their creditworthiness or insurability.

Perfectly competitive markets reduce the incentives of businesses to make bigoted decisions by rewarding businesses that behave in a less bigoted manner. Unfortunately, financial service markets are rarely competitive, typically due to regulatory barriers to entry.

While tens of thousands of commercial banks once operated in the United States, for example, most were tiny unit banks that enjoyed considerable market power in their economically isolated communities. History shows that some denied loans to all Xs (e.g., blacks in the Deep South; Jews in St. Louis; women in Boston; Indians in South Dakota; mountain folk in Cleveland) because the banks faced little competitive pressure. In a quasi-monopoly environment, it was often more profitable to reject applicants based on their X-ness than to screen them properly.