Monday, 9 July 2012

What’s to be done about retail banking?

Or to put it another way. What do you want from your bank?

Ed Miliband thinks he knows. He’s come up with a plan to restructure the banking industry. It’s a useful discussion point. Key to his plans are splitting up the banks, forcing the biggest five to sell off up to 1000 branches, to create a further two banks.

I don’t know whether I agree with him or not. Personally, I reckon making two new banks would just create another two problems for the future. He is absolutely correct, however, to suggest that the culture of banking needs to change, and from top to bottom. Investment banking got us into trouble, but retail banking is not currently experiencing it’s finest hour.

To go back to the original question. When I ask people what they want from their bank, I get various responses. More and more people are online banking, certainly people I know. They want a web presence, and a branch if they have a problem, or to pay in a cheque. Other people prefer face-to-face contact. However, they all say the same thing. They want their bank to look after their money.

The conflict arises when you ask people how they want the banks to do this. I’ve come to the conclusion that people want the following.

- Free banking

- Highest interest rates

- Lowest charges

- No-one trying to flog stuff to them.

The last one in particular is an odd one. When it come to money, people think, believe, that they know best. It’s their money and no-one is going to tell them what to do with it.

Well, sorry folks, but therein lies the problem. Banks are owned by shareholders. Shareholders need to make money, short-term. So banks need to make money. Additionally, branch networks and complex IT systems don’t pay to run themselves. Someone has to pay for them. This costs money. Therefore, the current business model for banking means that to pay for free banking, you will get charged when you mess up and you will be approached with new products. Think of it another way. You don’t contribute significantly to ITV, your licence fee pays for BBC, so ITV advertise and try and flog you stuff to pay for their programmes. People get this. When the bank tries to do it, people moan.

Personally, I don’t subscribe to the free banking model. It ensures that the wealthiest will never pay for their account, which will be subsidised by the people who are struggling financially and pay loads of charges, the charges ensuring they will never get out out their predicament. It traps the poor into staying poor, and benefits people with money.They might argue that’s fair, and they shouldn’t have to subsidise people incapable of running their own financial affairs. I disagree strongly.

So, Ed, here’s my plan for the banks.

- The big 5 should, indeed, sell off branches. But, the new banks should, actually, be demutualised building societies. No shareholders. The destruction of the building society sector has been to the detriment of the industry as a whole. Building societies belong to the people who invest in them, not shareholders, so they are more accountable. This also means they can look longer term instead of having to provide short-term profits to keep shareholders happy.

- Free banking has to end. I’ve argued this with so many people, but the UK is unusual in having a perceived free banking sector. Banks raise revenue in other ways, not always transparent. I point to PPI mis-selling as an example of how trying to raise funds in a non-transparent way leads to problems. Charge for bank accounts, make money transparently, charge different amounts for services used, i.e.. an online only account will be cheaper than one with branch access. Different banks would, hopefully, have to offer diversity, this should mean people have an excuse to move around and finally, the banks would have to put customers first, not profits.

- Banks have to return to the old days, and become a service industry again, not a sales industry. Bonus-led sales of financial products is simply not sensible. It leads to mis-selling. It leads to dodgy practises. It leads to poor service. For example, if your bank makes money from insurance, and nothing from children's savings accounts, what do you reckon they’ll try and fill the diary with first?

I actually believe these three points would make a massive difference to the industry. The key is service and long-term, not quick bucks and short term profits. Banks must make money, all businesses must make money, but if that profit is sustainable and not bonus-led money grabbing, the industry as a whole will start back on the road to respectability. As it was in the old days. It’s what everyone wants, customers and staff alike.