Brave question or one that has some foundation? I think it could be the latter.
In 2007/8 the economic world changed. We saw runs on banks, banks struggling to stay afloat and a sudden drop in customer confidence of what was always the bastion of stability and trust. The media, never slow to pounce and follow public opinion, turned on the banks. The following years have seen media pressure and a general ‘bank bashing’. Deserved or not, the media is influential.
What happened next was that the regulators looked at what had happened and decided to act to stop it happening again. Knee jerk reaction or not, the focus shifted to those who were supposed to be overseeing the banking sector.
The regulator’s reaction was to insist on great capital to be held by the banks, for risk to be addressed and lending criteria to be tightened. In some cases the need to hold capital increased by 300% or 400%. Follow that with fines for breaking criteria or guidelines and it all gets difficult. If you think that the fines are a drop in the bankers ocean, then consider that in the US last year bank fines reached $65bn, that is almost Greek in size…
Move on to banker bonuses. Political pressure to control and reduce bonuses, pay, incentives. The list goes on.
The general point is that banks are under pressure from every angle. The more pressure, the more stringent the rules, the tighter the regulation, the more expensive the capital, it all adds up to one thing. That banks are finding it ever more difficult to do the one thing that governments want them to do, lend.
Why We May Not Need Banks
Take this as an example.
When was the last time you rummaged in the cupboard under the stairs for your Yellow pages because you wanted the number of your local plumber?
These days you will simply open your phone and Google a plumber. You may look at something like Check-a-trade or something similar. You are unlikely to look it up in a yellow book.
You get the idea, customer habits have changed in many sectors of life, banking is not really any different. You may think that banks have reacted to this by offering internet banking services, smartphone apps and everything else that comes with it.
But, for businesses and commercial customers (and personal customers) there hasn’t really been a change in how things are done. You still cannot borrow on-line, complete everything, get a quick decision, draw your loan, do it all electronically. I am sure banks would like to do this, but it goes back to the pressures they are under. It comes full circle back to cost of capital, regulatory concerns and a need to hold ever more capital in reserve.
The point is that maybe we don’t need banks as much as we think we do.
Banks Getting Weaker
There is a trend among banks in the UK to look at splitting and separating areas of their business. This has been seen to some degree with Barclays, a move toward separating investment banking from retail or commercial activities. Some of this is being led by political pressure, the public are demanding action to avoid another 2008.
Where this falls down is that as banks split activities the strength of their balance sheets is stretched, we go back to the cost of capital and the whole circle starts again. Regulation, Pressure, Cost, Lending…
The New Players
In 2013 the CSFI published a report written by Andy Davis, it looked at the new players in the finance lending market, since that time some of those players have gone by the wayside, there has been some consolidation but also a lot of growth.
The recent alternative finance report published by Cambridge University certainly proves the growth in new lenders and the increase in the size of the alternative finance market.
What this means is that the consumer, and in particular the business or SME, has more choice about where to borrow than ever before. What makes this choice more attractive is that generally the borrower can get a quicker decision and experience an easier application process. Especially when it comes to business lending, the cost of finance is a lot less important compared to other factors (see this video on cost of finance to explain).
But as we know, banks are not just about lending. Even if we could borrow whatever was required elsewhere we still need to use their money transmission services, or do we?
The new players in the marketplace are not just lenders. The easiest way to look at this is pick up your smartphone, it won’t take you long to find;
- Google Wallet
- Apple Pay
And many more… There is a lead being taken in the US where bank brokerages, credit unions and shadow banks are much more common, however consumer opinion is shifting in the UK. For most consumers the service offered by Paypal or Apple Pay is considered at least as good as the main banks. There is also the launch of payment via Gmail (as featured in The Telegraph this week).
The Point Is?
The point is that there is now more choice from more providers who have less baggage, less regulatory red tape and less public resistance.
If you were going to be brave you could say that there is enough evidence to suggest there is at least a serious challenge to mainstream banks, if not a case to say that maybe (just maybe) we are starting not to need them as much as we think.
By Dave Farmer
Dave Farmer is founder of the award winning business finance specialist Lime Consultancy.
If you have any comments about this article then please add them above, or contact Lime Consultancy direct.
This article is written to prompt discussion, whilst the narrative is supported by reference it’s purpose is to encourage discussion only.