With the LIBOR storm raging around UK banks and with the likes of the formerly untouchable Bob Diamond being sacked and then grilled by MPs, many people I know are speculating on the future of banking as an industry. Calls for wholesale lynchings of everyone in a pinstripe suit and a Berlin wall-style separation between exciting sexy investment banks and dull, name badge-wearing retail banking abound. Campaigns like Move Your Money all but advocate for bank runs, aided and abetted by the Guardian running article after article about them.
Is it serious? Could banking as we know it disappear? After all, banks are under pressure not merely from public disgruntlement, but also from international regulation, including fiendishly complex nonsense like the Basel III international regulatory framework. They are also being challenged by new technology.
As someone with a background in publicising alternatives to banks, I have to tell you that yes, banks will still be here in ten years. But that’s not to say the nature of banking won’t change: it will. The current situation, in which five high street banks control something like 85 per cent of both personal and business banking, is rightly seen as not only undesirable but unsustainable.
Businesses need better access to working capital and credit; consumers are sick of banks letting them down them all the time. Commercial pressure and the disruptive impact of new technology will crack the market wide open.
Here’s what I think will happen. First of all, technology has already unleashed a wave of non-bank competitors, all specialising in individual products, raising and deploying capital in clever ways and beating the banks at their old game by using algorithms and data more effectively. Businesses like the one I work for, MarketInvoice (a new model of invoice finance) and our fellows, such as Funding Circle (online peer to peer business loans) and Crowdcube (crowdsourced start-up equity), are growing quickly, reaping a bonus from the current round of bank-bashing.
Freed from a costly branch network, and concentrating on one specific area, in ten years, these challengers will be huge players in their respective markets.
Secondly, shrunken universal banks will be shorn of their investment arms, which will have to get leaner and faster to stay alive. Already, competitors like Aldermore are giving the old, tarnished high street banks a run for their money. Indeed, as price comparison sites increasingly create a near perfect market in personal loans and other products, the competition will become more fierce. A business version of moneysupermarket.com can’t be far away. It is the nightmare of the big fives’ small business managers.
Organisations like Virgin and the Co-Op are champing at the bit to get into the high street and small business markets. They will offer cheap products, more perks and best in the market rates to entice borrowers in. These challengers, not weighed down by 1980s legacy technology, and with a better understanding of how to attract the average high street consumer, will really put the screws on the big banks.
Sooner or later, we’ll see someone introduce a workable, easy to apply bank account switching system, enabling consumers to switch banks as easily as they now switch phone or electricity company. At that point, all bets are off. My guess is that, by 2022, you’ll see ten to twelve mid-sized retail banks in ferocious competition, which can only be better for the consumer.
Thirdly, you’ll see what I’ll call “simplified banks”. Currently, Metrobank is leading the way in this field. These banks will go after unsophisticated customers, by offering really good customer service, simplicity and convenience as their selling point. They will use technology that already exists, like the Kenyan phone payment system M-Pesa, which lets even the most unsophisticated Nokia brick transfer money along with the sort of instant payment systems common in the USA that mean cheques will clear instantly, while offering worse rates on accounts and higher rates on loans to pay for the improved service.
Of course, for some people, instant access to a 24 hour bank you can trust is worth the 1 per cent off or on your interest rate; just ask anyone who was frozen out of their account by the RBS payment debacle.
Finally, there will be banks which emerge to focus on the high-end customer. By “high-end customer”, I’m not talking about yacht-toting oligarchs, but about a person with a spotless credit record who earns £50,000 or more. This is status symbol banking and these banks will be as much concierge service as traditional financial hub.
They will design their organisation around building relationships with a relatively small number of high-value clients, rather than taking in the volume of full-service universal banking. These banks will use all kinds of social metrics to decide who to let in: already, firms are using Klout to decide the order customer service inquiries are dealt with.
So, in short, the future of banking is not annihilation, but technology-driven change. It’s a brave new world, and one in which I’ll be exploring in future columns for The Kernel.