What’s the Future of Banking?

One significant side-effect of the global financial crisis has to be a major overhaul of the world’s banking systems. They’ve been shown to be badly broken.

 After all, what is the current state of play with banks in general, when looking at their supposed core competencies?

  • Lending – very little lending activity going on, and only to those that don’t really need it (the very credit worthy);
  • Deposit-taking – although this continues, albeit at a lower rate due to the general economic woes, it’s done with caution and concern as the public no longer believes in the security of banks (the old adage about being as safe as a bank just doesn’t apply today);
  • Investment advice – does anyone trust the investment advice of banks any longer?

 And then there are peripheral activities such as credit cards – banks lowering limits, and now even looking at penalising the credit-worthy that pay up their credit card bills on time: surely a brilliant way to chase away customers…

Talking of customers: the issue of customer service is still something that few banks understand – they’re not open when customers want them to be, and are seldom found where they’re wanted. Fortunately, technology in the shape of Internet and Telephone banking is allowing us to work around these limitations.

And yet, the self-same group that precipitated the economic disaster of the past couple of years through the sale of very dubious investment instruments apparently repackaged to hide their source, believes that they continue to deserve multi-million dollar bonuses “to retain talent.”

What talent, and why should it be retained, considering the mess the world is in as a result of their activities?

Now that so many banks have been shown to have an extremely dubious business model, isn’t it time to relook the very essence of what they should be doing?   

Let’s see a complete separation of activities, so that banks focus on banking and investment houses focus on investment consulting – it’s clear that the “Chinese Walls” in financial institutions were full of holes.

Banking needs to be about rendering a service to the community – after all, a prosperous and stable community base is good for the bank’s business, and a prosperous and stable bank is good for the community. Banks need to focus on the business of taking deposits and making these funds available for loans to build businesses, put people in homes and generally provide a secure growth engine for the longer term. The short-term focus that we came to see in so many businesses (see: The Perils of Quarteritis) is just not acceptable.

And this model need not necessarily result in low returns for depositors – look at the success of microfinancing from Grameen Bank (and, now, others), both for the bank and the community. As with everything, there will be some elements that give lower returns, while others give higher returns. With careful, skilled management, depositors should be able to see appropriate returns while borrowers can secure appropriate loans.

It’s time for financial institutions to rebuild the trust that they’ve lost, and return to being of service to their communities again, rather than simply serving the bankers’ own interests.

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2 responses to “What’s the Future of Banking?

  1. The thing is, that while it’s widely accepted that banks should change, why on earth would they? Without a very strong incentive, I don’t see that they would give up their silly hours, ridiculous bonuses, and so forth. Since they’re generally structured similarly, it would take for one to break from the pack, and for the others to see massive defection to the rebel bank (or banks) in order to do so. But will such a rogue bank ever form? Hard to say, really…

  2. Agree. The reforms have to start on Wall Street and then the rest of the world. If Wall Street doesn’t change we will soon have another global crisis no matter what the rest of the world does.

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