Showing posts with label Regulation. Show all posts
Showing posts with label Regulation. Show all posts

Friday, 30 January 2015

Why mobile isn't the digital answer for banks

Hardly a day goes by without another bank somewhere in the world announcing its new mobile app. For many bank executives it appears that when they are asked about what they are doing about digital they whip out their smartphone and point out their mobile app as if that is the answer; it isn’t. They really couldn’t be more wrong.

How many of these apps have come about often follows this scenario.

One of the banks executives may have been on a silicon valley tour where they have visited the likes of google, apple or one of many other digital native companies or they may have had a great dinner with other bankers who have been boasting about how advanced they are in digital. The next day they haul in one of their trusted executives – possibly the CIO but more likely to be the CMO and challenges them to demonstrate quickly that the bank is serious about digital. This executive in turns calls in one of his team and asks him/her to pull together a task force to create a mobile application. The team leader doesn’t want to be polluted by existing thinking so they create a team of young people who haven’t been at the bank for any length of time, adopt a new dress code to show they are different and work in a separate office away from those who could constrain their thinking. Because they have been told that the bank executive wants something quickly and because they have heard all the cool companies use them they use fail fast, agile/scrum methods to get the app out there. The result is a standalone app that is added to the thousands of other programmes that IT has to support.

As a recent detailed study has shown most of the banking apps out there are not simple to use and provide a poor customer experience, but even if that wasn’t the case the new customer interface is almost exclusively being served by legacy processes and systems.

This was similar to what happened with telephone banking when HSBC first launched First Direct. The customer got to speak over the phone to friendly, helpful and very enthusiastic call centre staff who were using green screen systems that had been designed in the 1960s details, print them out and then have to rekey them into green screen terminals. While First Direct may have been delighting their customers rather than reducing costs it was adding costs to the running of HSBC.

There are three critical business issues that banks across the globe face are regulation, going digital and reducing costs.

The way that most banks are going about mobile banking is paying lip service to digital and increasing short and long term costs and doing nothing to address the regulatory pressures.

Banks that go digital in a coherent and end-to-end way can address all three critical business issues and at the same time grow revenues. What this means is that when addressing their digital solutions they need to:

Redesign the end to end processes – a lot of the costs that banks incur today occur in the back office. By automating the processes not only will significant costs be taken out but the speed and the quality of the customer experience will improve and the compliance to regulation will be far easier to enforce

Design for omnichannel – rather than designing purely for the mobile channel recognise that customers may want to start in the mobile channel and during a process either concurrently or sequentially continue in other channels in a consistent and usable way. For instance they may wish to start a mortgage application on their smartphone, when they have a question launch a webchat, book an appointment online in a branch, have a meeting with a mortgage advisor and finish the application back on their smartphone. They should be able to do all of this with their mortgage application seamlessly progressing across the different channels.

Design for change – just because a process is executed one way today doesn’t mean that changes in the way customers want to do things or in regulation means that that is the way it will always be. Inevitably new technologies will come into common use.  Process need to be designed to be able to be adaptable.

Adopt a unified architecture – Many mobile applications have introduced new technologies and software into an over-crowded IT estate. Digital should be used as a catalyst for simplification and rationalisation. By spending time defining the bank architecture costs can be significantly reduced and agility greatly increased.
Mobile banking is increasingly important for customers as that is the way that many want to interact with their banks. However quickly getting a mobile banking app out there is not the answer. It is the equivalent of painting lipstick on the pig. Banks that want to be there for the long term for their customers and to retain, grow and engage with their customers while increasing their profits need to adapt a more strategic approach to digital.

Tuesday, 16 April 2013

RDR reducing access to advice for customers



The Retail Distribution Review (RDR) introduced by the UK Labour Government was aimed at improving the quality of advice provided to customers and the transparency around the charges for that advice.

With the annoucement first by Barclays in January 2011 and then by HSBC in May 2012 of their withdrawal from providing investment and Life & Pensions advice to the mass market, rather than help the customer, RDR has in fact reduced customer access to advice. Both banks have stated that the reason for their withdrawal has been that the business is no longer viable for them commercially. The additional cost of training their staff to meet the high standards laid down by RDR and, undoubtedly, the size of fines and the risks associated with mis-selling of these products, has made it unattractive for them to continue in this business.

RBS is neither fully exiting or getting behind branch-based mass market advice. Their announcement that they will be laying off 618 advice based staff is a reflection of the reality that if you move from what is perceived to be a free service (even though consumers are paying commission through the annual fees hidden in their investments) to one which is fee-based inevitably volumes will drop.

Lloyds Banking Group had been saying that they would continue to provide advice to mass market customers. However when they asked customers  about this what they  found "for the majority of our customers, demand for a fee-based financial planning advice service decreases when they have lower amounts to invest,". As a consequence they have announced that they will only be offering advice (for a fee) to those with more than £100,000 of investable assets. They will continue to offer a non-advised service through the Halifax, Bank of Scotland and Lloyds TSB branches. Around 1,000 branch staff will be impacted by this change and will be offered either a new role or redundancy. Given this move by Lloyds Banking Group the argument for selling off Scottish Widows becomes even stronger (see http://www.itsafinancialworld.net/2012/05/why-lloyds-shoudnt-dismiss-selling.html ).

Interestingly Santander is taking a contrary position and on hearing of the layoff of the HSBC staff allegedly approached HSBC with a view to hiring those laid off.

However even Santander is now reconsidering this position. In February 2013 they are being investigated for giving poor advice following mystery shopping by the FSA uncovering poor practices. Shortly before Christmas 800 advisers were suspended for retraining. A review of strategic options is now under way. In March 2013 this concluded with the withdrawal of face-to-face advice for new customers, putting at risk 874 jobs. A new team of 150 advisors will be deployed to serve existint customers.

In April 2013 Clydesdale, Yorkshire and Co-op announced the withdrawal of advice from their branches. In their case this was supplied by Axa. According to the Financial Times, Paul Evans, chief executive of Axa UK, said he was “very disappointed” that the division “must also now withdraw this service having not found a model which balanced the regulatory requirement that the service be profitable in its own right, whilst setting advice fees at an affordable level.”

The exit is not only being seen amongst the big players in the market. The building societies are also withdrawing from the market. In early 2011 Norwich  & Peterborough Building Society sold their sales force to Aviva and withdrew from the market. There are also large numbers of IFAs (Independent Financial Advisors) who due to the cost of funding the training and the amount of studying are withdrawing from the industry, again reducing accessability to advice for the lower to middle income customers.

This is creating a very serious problem. With all of us living for longer and the cost of living, particularly in the later years rising, with the reduction in employer provided pensions benefits, there is an increasing need for individuals to save for the longer term, to invest in individual pensions and to provide for their loved ones through life assurance. With the options complex and becoming more complex there is an increasing need for advice, however what RDR has done is reduce access to that advice.

With the availability of advice for investment products being reduced the current UK Government is now putting in plans to reduce the accessibility of advice for mortgage products. Similar to RDR the Mortgage Market Review (MMR) set out to protect customers but is fact making it far more difficult to get advice. For instance should a customer phone up a bank such as First Direct and ask about mortgage products the bank employee will not be able to talk about the difference between a fixed-rate mortgage versus a variable rate mortgage since that would be seen as advice and without completing a fact find that will no longer be possible. This could once again, see mortgage advisors and brokers withdrawing from the market.

Not all banks are withdrawing from either the investment market or the mortgage market. There are those who are considering the commercials and rather than quitting are looking at innovative ways of improving productivity of their advisors. Both Bank of America and Bank of Moscow have pilots out using videoconferencing to bring the advisors virtually to the branches. With the increasing acceptance of videoconferencing through the likes of Apple's Facetime or Skype, the availability on devices such as the iPad, then those organisations with the imagination may still be able to find ways to commercially provide advice to the mass market.

Of course videoconferencing does not overcome the requirement to have fully trained and qualified advisors, since selling through videcconferencing is no less regulated than through branches or contact centres. What it does mean though is that through the higher productivity brought about by the advisors being able to support multiple branches less advisors are needed and the cost of providing advice is therefore reduced.

What RDR shows, once again, is that when governments with all good intentions create regulation for the Financial Services sector the effect on customers is often the opposite of what they intended. Governments should spend more time considering and discussing regulation with customers and the industry (and not instantly assume that whatever the banks say is wrong and out of self-interest) and resist the temptation to rush out populist regulation.

Thursday, 14 March 2013

How to make it easier to get new entrants into UK Banking

Let your customers through.

There are many complaints from politicians and consumer lobbyists that there is not enough competition in UK banking and in particular that there are not enough new entrants. Whilst seven business day switching will be introduced in September 2013 as discussed in http://www.itsafinancialworld.net/2013/02/why-faster-bank-switching-will-not-turn.html this alone is not enough.

There are five actions that need to be taken together to encourage new entrants into the market and allow them to compete. These are:
  1. Speed up the process of issuing banking licences
  2. Speed up the process of approving executives
  3. Reduce the  initial capital required
  4. Provide low cost access to the payments system
  5. Make current account switching easier
Looking at each of these in turn.

The process of applying for and being granted a banking licence is tortuous, time-consuming and very expensive with no guarantee of success. This alone is putting off banks, particularly where the new entrant is foreign. Without a banking licence new entrants are not able to take deposits a vital source of funding given the costs of wholesale funding. Vernon Hill, founder of  Metro Bank, the UK's most visible new entrant, has said  that if he knew then what he knows now about how difficult it would be to get a UK banking licence he wouldn't have started.

This is a major barrier to entry not only for consumer banking, but also corporate and commercial banking.

The process of approving executives by the FSA is typically taking nine to twelve months. This is not only effecting new entrants but also existing players. Even when an executive of one of the Big 5 banks changes role it is often necessary for them to be re-approved for their new role, which makes it difficult for banks to be agile in changing their organisations, which means that poor performing executives are left in place because it is too difficult to replace them. Whilst an executive is going through the approval process they are not allowed to perform their new role. If an executive was approved for a role in an existing bank they will need to be re-approved for the identical role in a new bank. For new entrants this can cause a significant delay in launching the new bank.

Currently when a new entrant wishes to launch a new bank they will need to present their 5 year plan and put aside  from day 1 the 9% capital that they will require when they achieve their 5 year plan. This clearly represents a significant cost to the new entrant and effectively means that the initial capital may represent not 9% but anywhere up to and over 100% of the assets that they will have by the end of the first year of  operating. Whilst the government has annouced that new entrants will in the future not have to put up the full 9% but rather 4.5% this does not go far enough. What is needed for new entrants is that the capital put aside is allowed to increase in line with the assets that they take on. Whilst the practicalities of doing this real time may be too difficult certainly doing it on a projected year by year with a true up at the end of each year would be a far more reasonable approach.

One of the recognised barriers to entry for new entrants is access to the payments infrastructure, both local and international. The cost of this is seen as prohibitive, but without it they will not be able to offer customers the essential ability to withdraw cash from ATMs, make direct debits and standing orders and international payments. The government has talked about making the payments infrastructure a national utility or forcing the Big 5 banks to offer new entrants low cost entry. This sounds eminently sensible, but it cannot and should not be at an incremental cost to the current volumes that go across the payments infrastructure. The reason for this, just like for traditional utilities such as gas, electricity and water, is that the companies that provide them have invested billions of pounds to build the high performing, resilient infrastructure and need to constantly upgrade and improve that infrastructure and those investments need to be paid for by the users of that infrastructure. So whilst the politicians may say that processing of an ATM transaction can be measured in pence and that that is the price the banks should be charging other banks, a  price based on a fair fully loaded cost, including future investment, needs to be calculated. One way to address this would be to get an independent assessment of the cost of providing and investing in maintaining and upgrading these services. This could a role that the proposed Payments Regulator could play.

Finally, as already mentioned, making current account switching is already in progress and is due to deliver in September 2013.

The combination of these changes, announcements on which have either already been made or will shortly be made, will significantly reduce the barriers to entry for new players into the UK Banking sector, but what are the implications of these changes, have they been thought through sufficiently and will they be enough to shake up competition in banking?

Speeding up the issuing of banking licences should purely be about the efficiency of the FSA and its successor. It should not be about dropping the quality of the testing. It is clearly dependent upon the quality of the submission and this falls at the feet of the applying new entrant.

Simillarly speeding up the approval of executives needs to be about efficiency and re-thinking how this approval process is designed.  The current process is far too bureaucratic. There needs to be a distinction between whether the executive is new to the UK financial services sector, new to the role or simply performing the same role for a different bank. Questions need to be also asked as to whether the examiners know enough about the detail of the role to really evaluate the individual's suitability and fitness to hold the position. The current process requires executives to spend a considerable amount of time preparing answers to questions that go no way to deciding whether this person is fit to perform the role. However speeding up the process should not add risk to the banking sector.

Reducing the initial capital required for a new entrant undoubtedly does increase the risk should the new entrant fail. The question is whether that is an acceptable risk. Northern Rock was a retail business - it had no investment banking business. It was also not a large player. However it failed largely due to irresponsible lending. If Northern Rock had been permitted to hold lower amounts of capital the losses would have been even greater. In the rush to create disruption to the hold of the Big Five banks the regulators must get the balance right between making it easier for new entrants whilst still protecting customers from banks that are not as well established and who's balance sheets are not as well protected from changes in the market. Given the measures being taken to electrify the ring fence between retail and commercial banking that are being enforced on the large banks, the Big 5 banks will continue to be a safer option for customers than the new entrants following the introduction of lower capital requirements being proposed.

Forcing a reduction in the cost to use the payments infrastructure comes with the inherent risk that owning and managing the payments infrastructure will become increasingly unattractive to the current owners which could lead to a lack of investment which in turn could lead to a reduction in the resilience of the infrastructure which would in the long term be bad news for both customers and businesses. After 9/11 it was not the destruction of the Twin Towers that nearly brought the US to its knees, but the closure of the airspace which prevented the movement of cheques, which effectively stopped the payments structure working that was the biggest threat to the US economy. An economy cannot survive without an efficient and resilient payments infrastructure.

Faster switching will only encourage customers to move when there is a significant difference in the customer experience and value for the customer to make it worth their while.

As the government and the regulators look at the measures to create increase the number of new entrants coming into the banking sector rather than rushing these in to get good headlines thorough and considered analysis needs to be conducted to really understand the full implications of lowering the barriers to entry.

In the meantime the lack of competition in the UK banking sector should not be overstated. With the likes of Marks & Spencer, Tesco, Virgin Money, Metro Bank, Handlesbanken and Nationwide there has probably never been a time where there has been as much choice and competition in the sector.

Friday, 9 November 2012

Are the regulators being realistic about Retail Banking?

Andy Haldane, the Executive Director for Financial Stability told a UK Parliamentary Commission on Banking that the UK banks should create a common technology platform for Retail Banking that would act as a public utility and spur further competition in the sector. This he said would make it easier for customers to swap banks and make it easier for both new banks and existing ones that are currently held back by "antiquated" technology.

The theory would be that all the customer bank accounts along with their numbers could be on a common system so that when a customer wanted to change their bank they wouldn't have to change their bank account number all they would need to do is have that account number point to a different bank. Instant switching with no hassle, no direct debits going missing, no standing orders not paid, no missing salary payments - what more could customers want?

The underlying premise behind Mr Haldane's proposal is that retail banking is an undifferentiated commodity  service and that therefore having an industry common platform makes sense since the only basis of competition is price. Whilst it could be argued that retail payments processing is an undifferentiated service e.g. the transmission of payments using the Faster Payments scheme is standard for all the banks, is that really true for all aspects of retail banking? Certainly Svenska Handelsbanken could successfully argue that the customer centric, branch-based banking service that they operate is very different from the Big 5 banks and is reflected in their success in winning customers from the other banks. The ability of their branch managers to make lending decisions without referral to head office is clearly a differentiator. Equally First Direct customers would argue that the service that they receive from their bank is quite different to that from other banks.

To counter this it could be argued that competing banks could still differentiate their service by overlaying a different customer experience over the top of a common utility platform which would hold all the customer accounts. However the fundamental question is how practical would it be to build a common utility platform?

As Mr Haldane argues the incumbant banks have 'antiquated' systems. This has been very publicly seen by the recent problems that RBS has had. It has also been stated as the reason that Santander walked away from the acquisition of the 316 branches that RBS is compelled to sell.  For a long time it has been obvious that the banks need to replace their core systems in order to keep up with the demands of customers for real time, mobile, digitally enabled experiences. Despite this none of the UK banks has embarked on a wholesale change of their core banking systems. Why? Because replacing the core banking systems is like a full heart, lungs and liver transplant where every vein and artery has to be individually unpicked.

Lloyds Banking Group spent just under £4bn to migrate HBOS onto the Lloyds TSB platform. This was the cost of bringing two banks together onto one of those 'antiquated' systems that Mr Haldane referred to. It has now spent a further £660m on simplifying the systems with more to come.

Commonwealth Bank of Australia has to date spent Au$4bn (£2.6bn) on replacing its core banking platform. That was one bank that is smaller and less complex than any of the UK Big 5.

Even if it was feasible to get the Big 5 banks to agree the specification for a common retail banking platform the cost including migration would be measured in tens of billions of pounds and would take a minimum of 5 years to implement.

The parallels with the NHS IT project where all the NHS records were to be on one system which could be instantly accessible whichever hospital or doctor wherever in the country a patient is are uncanny. The NHS IT programme cost over £6bn. Effectively nothing has been implemented and the programme is seen as an abject failure.

The British Bankers' Association (BBA) responded to Mr Haldane's suggestion by pointing out that the banks have committed up to £850m to produce a system that will make switching bank accounts far easier. This has been underway for some time. This will operate more like a mail redirection service. Clearly this is a far lower cost and far more practical approach than Mr Haldane's proposal.

What is concerning is that such impractical recommendations are coming from such a senior executive with the responsibility for ensuring financial stability. It raises the fundamental question of whether the regulator has taken sufficient time to understand the reality of the current state of retail banking.  This is particularly concerning since this is not a one off. The Bank of England governor-designate, Mark Carney, has, according to the FT,  said of Mr Haldane's views on simpler regulation as 'not supported by a proper understanding of the facts', this doesn't bode well for Mr Haldane's future at the Bank.

Monday, 10 September 2012

Winners and losers if 'free banking' ends



With UK politicians appearing to see the end of so-called 'free banking' as a panacea for the woes of retail banking, bringing about more competition and a fairer deal for customers, who would the winners and losers be if the end of free banking came about?

If there is to be transparency about fees, which is the whole point of the end of free banking, then the charge will need to be related to the cost of providing that service.

Certainly those who use branches for transactions will be worse off. So the person who comes into the branch on the daily basis to have a chat with the teller and withdraw £10 (as I witnessed at my branch recently) is going to find that experience expensive. Some of the most vulnerable people in society who have low balances and see their branches as part of the community and a way to break the monotony of life will find that this will no longer be affordable to them.

As is already being seen for customers of RBS and Lloyds TSB with basic bank accounts (accounts where there is no overdraft facility and the most basic debit card)  who are already not being allowed to use ATMs which don't belong to the bank who their account is with. This is due to the charge each bank makes to other banks for allowing their customers to use their cash machines Come the end of free banking when charges for making a withdrawal from an ATM will kick in, as already exists in Australia, then those customers with basic bank accounts and low income earners who will be worse off.  Having a bank account will become for many of these people a luxury that they can't afford. The knock on effects will not be limited to the individual, but also government. Government relies on bank accounts to pay benefits into. By the number of people without bank accounts rising and the continued closure of post offices the cost of getting benefits to individuals will rise.
The knock on effect of not having a bank account for the individual is far more than the loss of banking services. The cost of  utilities - gas, water, telephone, etc rise if customers are not able to  have direct debits, since these attract discounts. This will drive low income households further into poverty.
Charges for transactions in branches will inevitably be higher than transacting online or via a call centre (due to the costs for banks being higher to provide these services). As a reuslt there is likely to be a drop in the number of transactions being carried out in branches, which will inevitably lead to branch closures. Many branches, particularly in rural areas, already struggle to be profitable because of the low volume of business transacted in them, so once again the vulnerable, particularly those without access to public or private transport, will be hit the hardest.

One of the arguments for the end of free banking is that charges will be fairer and, in particular overdraft charges will drop. However with the end of free banking interest on balances will need to be paid, and not at the paltry 0.1% banks had been paying prior to the financial crisis. With the wholesale markets expensive, attracting customer balances is a lower cost way of banks raising funds. This will be where competition may well come in as banks and new entrants compete for customers who have a high average balance from month to month. This could lead to a situation where rather than overdraft charges falling they may rise as the balance of the number of customers with large balances to fund those overdraft moves to the competition and  hence the cost of funding the overdrafts for the banks rise.

Another set of losers will, ironically, be those who manage their current account well. These are the people who maintain a low current account balance, don't go over drawn and use direct debits and standing orders to pay their bills. These are the customers who are currently subsidised by those who maintain high current account balances and those who regularly go overdrawn. These smart users of banking accounts, however only become profitable when they use other facilities such as mortgages, credit cards and loans. There is clearly an argument that these are precisely the people who should be paying a fair price for the services they use.

The fundamental challenge for any government who brings about the end of free banking is how to address the issue of the unbanked and the low earners. Certainly with the introduction of fees competition could increase, but it will be competition for the profitable customers, which does not represent the majority of the customer base of the big five banks. Without the economies of scale of a large customer base the big five banks will not be able to maintain the large branch networks they currently do.Compelling the big five banks to offer basic bank accounts and maintain a large branch network, but not compelling new entrants to do that, whilst populist, cannot be a long term strategy. Already the banks being forced to sell basic bank accounts are demonstrating that they are no longer prepared to do this at a signifcant loss.

The alternative is to take the unbanked and basic banking sector out of the commercial sector and have a state funded and run basic banking service. The level of investment required to set this up, particularly given the current economic climate, makes this option unlikely in the extreme.

So whilst the politicians can clamour for the end of free banking it is highly unlikely that anyone will be brave  (or foolish) enough to actually bring this about.

Tuesday, 28 August 2012

Is free banking holding back competition?



The UK Parliament review of the banking sector following a summer of scandals across the sector has, once again, raised the question of whether the end of the British system of so-called 'free banking' would introduce further competition into the sector. There are many who argue that free banking is a major barrier to entry for new competitors in the sector. However there is no evidence that this is the case.

In Australia, where there is the greatest transparency the cost of banking, where almost every transaction attracts a fee, the market is dominated by the so-called Four Pillars - ANZ, Westpac, Nab and Commonwealth Bank. There are smaller players such as Bendigo Bank, but despite the lack of free banking the split of the market is almost identical to that of the UK.

A number of new entrants already operate, or have announced that they will, exclusively non-free banking. Handelsbanken, the most successful of the new entrants with over 100 branches and the highest customer satisfaction of the UK banks (see http://www.itsafinancialworld.net/2012/01/customers-love-banks-who-charge-them.html), does not offer free banking. Marks & Spencer have announced that their current account will charge fees and even Virgin Money, the consumers' champion, has announced that its current account will charge a 'small fee'.

So whilst there is increasing competition in the UK retail banking sector why are the new entrants not able to make any more than a small dent in the share of the big five banks (Barclays, Lloyds Banking Group, RBS, HSBC and Santander)? One of the key reasons is the economies of scale required to be profitable in retail banking.

Owning and operating the infrastructure (the ability to process standing orders, direct debits, transfer money, access to ATMs etc) required to process billions of transactions reliably requires very large amounts of capital. Whilst the recent issues that RBS recently had with processing transactions, the UK banking infrastructure is amongst the most reliable in the world. Returning to Australia, the banks there have had far more problems with their payments infrastructure than the UK, despite having far lower transaction volumes.

New entrants today are able to use the Big Five's infrastructure. Whilst they may argue that the cost they pay is unfair and has little transparency as to the basis of  the charge, it is certainly a lot cheaper than building their own. In itself these costs are not the reason that holds back their success against the Big Five.

The biggest scale advantage that the encumbents have is  operating capital. This was most recently illustrated by the competition for the Verde branches that Lloyds Banking Group had been forced by the EU to dispose of following the state bail-out after the acquisition of HBoS. Whilst there are a not insignificant number of players who would like to enter or grow their footprint in the UK banking market such as JC Flowers, Virgin, Metro Bank and NBNK, they either weren't able to or were unwilling to raise the amount of capital required to become a significant player in the market. This situation has become further exacerbated since 2008 with capital being even harder and more expensive to find. To make the situation worse the amount of capital required to be held has been raised higher following the banking crisis. Here the established banks have a distinct adavantage as the requirement for capital is lower for them than for new entrants to the market. This is clearly a major barrier to entry.

Another significant barrier to entry for new entrants is the increased scruitny and additional regulation as a result of the banking crisis. This means that it takes longer and is far more difficult for any new entrant to get a banking licence and to get its executives approved to run a bank. This was one of the major hurdles that has held up the launch of Tesco Bank.

It is very convenient for politicians to blame the lack of competition for the Big 5 on free banking, however those politicians need to reflect on their own role in making it more difficult for new competition. The UK government wants to have a safer banking sector and in so desiring and by its actions has made it more difficult for new entrants.

Tuesday, 21 August 2012

Free banking didn't cause misselling




With the UK Parliament about to launch a major review of standards in banking, there is much talk of free banking being one of the problems that led to poor behaviour by the lenders. However the two issues are quite separate and there is no evidence that shows the two items are related.

One of the primary reasons behind the PPI (Payments Protection Insurance) misselling scandal was that the banks began to believe that they were retailers. As a consequence they started hiring retailers into the banks, people who had no understanding of either banking or the essential values of banking. Many of these retailers came in from white goods retailers where the model is to sell a product, be it a fridge, a television or a camera, at a highly competitive, loss-making price and then make all the profit from selling them an extended warranty on the product at a very high price and with high confidence that the customer will never claim on the insurance because they'll either forget they have it, not understand how to claim on it or what happens to their product will not be covered by the insurance. In this retail model there is absolutely no need or desire to build a long term relationship with the customer.

This retail model was launched in retail banking whereby mortgages, personal loans and credit cards were 'sold' to customers as prices that the banks were not making any money on. This was because there was so much demand for credit that wholesale interest rates rose and so much competition for customers that retail prices fell. As a consequence if a bank wanted to be in the retail lending space they needed to find another way to make money and this is where the retailers told their 'not so smart' banking colleagues about the secret of their success - extended warranty. Of course no banker worth his salt could allow the customers to realise that banking is essentially a simple business, so a more obscure, erudite, confusing name for the product had to be created and hence PPI was born.

Getting rid of so-called free banking is not going to change the ways that bankers will look for new ways to make money; that has been a fundamental characteristic of banking since the industry began.

However there has been a recognition amongst most of the banks that trying to emulate the retailers was a failed experiment. Retail banking is not retailing. Mass retailing is anonymous and transactional, it is not about building a relationship, it is not about the long term. Gone are the coffee shops in banks, gone are the branches that look like retailers and gone, hopefully, is the pile 'em high, sell them cheap offers from the banks. What needs to be ensured is that culture does not return and that the leaders of the retail banks are led by people who have a deep foundation of retail banking and live the values required for long term relationships.

Monday, 7 February 2011

Why ring-fencing and holding more capital may not be the answer

An interesting background article by The Economist on Ring-fencing and holding more capital and why there is no simple answer to making tax payers safe from large global banks.

http://www.economist.com/node/18013923