Wednesday, 20 May 2015

Redefining retail banking

Yves Smith at Naked Capitalism takes issue with me over my attempt to derail the "Banking should be boring" bandwagon. She claims that new research by the IMF proves that banking should indeed be boring:
The IMF paper is generally in line with the argument that banking should be boring, meaning that complexity, opacity, and leverage typically work far more for the benefit of the financier and at the expense of customers and society at large. Frances Coppola tries to turn that argument on its head and say that banking should be fascinating. Hun?
I am astounded by this interpretation of the IMF paper. These are the paper's actual conclusions:
First, financial development is multi-faceted and should be measured by looking at many indicators. Second, financial development can be promoted by putting in place a strong business, regulatory, and supervisory environment. Of the 93 regulatory principles, the critical principles that matter for financial development and financial stability are essentially the same. This means that better—not more— regulation is what promotes financial stability and development. Third, since the weakening effect on growth at higher levels of financial development stems from financial deepening, raising access or efficiency at any level of financial development would be beneficial. Fourth, to mitigate economic and financial stability risks, as well as reduce the likelihood of a crisis, too fast a pace of financial development should be avoided. Finally, there is no “one-size-fits-all” in terms of sequencing the development of financial systems, but the relative benefits from institutions decline and those from markets increase over time. 
How on earth do you get from these to "banking should be boring"?

Yves' interpretation directly contradicts what the head of the IMF said about this research, too. At the INET conference in Washington DC on May 6 -  which I attended -  Christine Lagarde took issue with Elizabeth Warren for saying “banking should be boring”. Giving a heads-up on this research, Mme. Lagarde emphasised the crucial importance of deposit-taking, lending and payments services for economic development and human well-being. And like me, she questioned how providing financial services to the real economy could possibly be regarded as boring.

I was particularly struck by Mme. Lagarde's concern for those, especially women, who are directly disadvantaged by lack of access to banking services:
Financial systems around the world are quite sizeable, but they exclude many individuals and firms from financial services. For example, data released during this year’s IMF-World Bank Spring Meetings suggest that 2 billion adults worldwide remain without a bank account. That represents a 20 percent drop in the number of “unbanked” over the last three years, but it is still a massive number.
Moreover, financial exclusion is far from being solely a low-income country or emerging market issue. For example, even here in the United States, surveys find that some 8 percent of U.S. households are “unbanked” and some 20 percent are “underbanked”.
Studies show that broader access to the financial system can boost job creation, increase investments in education, and help people manage risk and absorb financial shocks. Our own analysis that will be released later in the fall finds that financial inclusion is particularly important for women, empowering them economically. Indeed, the numbers suggest much scope for improvement in this area.
Globally, a staggering 42 percent of women lack access to basic financial services, compared to 35 percent for men. This gap is even bigger if we consider the role of women in the provision of financial services. In a world-wide sample of banks, less than 20 percent of board members are women, and only 3 percent of bank CEOs are women. Clearly, we need to do better.
We do indeed. But how, in heaven's name, can we improve financial inclusion while we are doing our level best to put people off providing essential banking services by describing them as "boring"?

Mme. Lagarde's comments were written up approvingly by Rona Foroohar in TIME magazine:
I do think that Lagarde was spot on to disagree with the notion that “banking should be boring.” This CW is often thrown around to indicate the idea that banks should do “plain vanilla” lending rather than complex deals with sliced and diced securities. Fair enough. But as the IMF chief pointed out, “Why should lending to the real economy be boring?” The shifts that need to happen to bring finance back in service to the real economy are myriad and complex. They include changing tax policy that rewards short-term gains over longer-term ones, reforming corporate governance, increasing personal liability, changing the structure of banks themselves and making our system of shareholder capitalism more inclusive. But the original mission of banking — finding new innovations and funding them to create growth in society at large — is anything but boring. The regulatory and cultural journey back to that, which will no doubt take several more years, should be interesting too.
I couldn't agree more. Intrinsically, retail banking is NOT boring. It has become boring because we have made it so.

Yves' observation that retail banks have become “stores”, with de-skilled workers whose job is simply to move products, is correct, but I was way ahead of her. I have now been writing for over four years about the deep structural problems in retail banking.  The transformation of retail banks into shops is the theme of  the post "Supermarket Banking" that I wrote back in 2012. This post was based upon my own experience of working for Midland Bank while it was turning its branches into shops, the first UK bank to do so. You see, unlike Yves, I worked in retail banking. I really do know what it is like.

In pursuit of profits in a low-margin, cut-throat industry (yes, this is RETAIL banking I am talking about), retail banks systematically downgraded the skills of front-line retail staff, removing from them all real responsibility and virtually all need for engagement with their customers. They turned them into salespeople, giving them impossible sales targets with severe penalties for failure. The jobs of retail staff became boring, hard work and poorly paid. Talent drained from retail banking into the better-paid, more interesting and sexier investment banking.

The consequences of making retail banking "boring" have been terrible. Transforming banks into shops and their staff into salespeople led directly to the swathes of mis-selling and outright fraud that have plagued retail banking in recent decades. Mundane, tedious, poorly-paid retail banking is now not even respectable. No wonder talented people don't want to do it. As Mme Lagarde says, we must do better.

Somehow, we have to make lending, deposit-taking and payments services to ordinary people and ordinary businesses interesting again. There is excitement to be found in financing innovation that generates growth, and satisfaction in supporting people's financial needs through their lives. Describing this as “boring banking” does not in any way help to achieve this.


  1. > Frances

    What do you conclude is the meaning of the definition of capital in Basel III definition of capital , under the heading definition of capital.

  2. Re Frances’s last para, I’m baffled as to how “lending, deposit-taking and payments services to ordinary people and ordinary businesses” can be made “interesting again”.

    Take deposit taking. That consists of bank teller sitting behind counter accepting cheques, physical cash etc from customers and crediting their accounts. How can that possibly be made “exciting”? As for lending, most of that is for mortgages. Again, that is very routine: checking up on potential borrowers’ incomes, telling surveyors which house to survey, etc.

    Lots of jobs are boring. What of it?

    To put it mildly, this “boring versus exciting” argument does not have much to do with the basic problems of the bank sector.

    1. 1) What do you think banks do with the deposits they accept? What is their responsibility to their depositors?

      2) One of the biggest issues with retail banking is the dominance of mortgage lending. Small business lending is both more important and more interesting.

      3) I do not think you appreciate just how degraded formerly important and responsible local management jobs in retail banking have become. That is the core problem.

    2. Frances,

      1. Important question, I agree. My answer is to put the SYSTEMS IN PLACE which improve things in this area, rather than strain ourselves to make specific jobs in banks exciting rather than boring. As to how to improve the efficiency and responsibility with which deposit money is used, that’s almost the same as asking, “What’s the best bank system?”. And my answer to that (as you’re doubtless tired of being told) is full reserve banking.

      2. Re the possibility that too little is loaned to SMEs (a point where Positive Money agrees with you I think), SMEs fail to repay loans twice as often as with property loans. Thus it’s not clear that additional loans to SMEs will prove a bonanza for the UK. Plus I think you’re implying that because banks have loaned lots for property, that that somehow constrains their SME lending. That’s not correct for two reasons. First, banks will lend to ANY viable borrower. If banks don’t have the money to hand, they just create it out of thin air. Second, and as to matters macro, loans for EXISTING property have almost no effect on demand, GDP or inflation (as Positive Money keep pointing out). Thus if banks have recently loaned loads for property, that may exacerbate asset bubbles, but it won’t stop them lending to viable SME borrowers.

      3. Re the de-skilling of some bank jobs, if that’s what modern technology or other factors lead to, then market forces should reign supreme there I think. Technology has also de-skilled some plumbing jobs. I’m not bothered. Anyway, the staff at my High Steet bank all seem about as happy/miserable as people in other jobs.

      How many marks out of ten do I get for that?

    3. You don't get any marks from me for channelling Positive Money, I'm afraid.

      1) You have not considered what is the best way of investing deposited money. You may like to recall that Positive Money does NOT propose that all deposits should be fully reserved. What responsibility do banks bear towards those depositors who opt to place their money at risk?

      2) Yes, I'm aware that SME lending is considerably riskier than property lending. That is exactly why SME lending decisions need to be made by people who understand those businesses. Centralising lending decisions and insisting on hard collateral (most SME lending is also property-backed these days) is in my view abdication of banks' central responsibility to provide capital to businesses and manage risks professionally.

      The fact that SMEs fail is not a reason not to lend to them, and it does not mean that they do not create growth. Failure is a necessary part of innovation driving growth. Surely you've read Schumpeter?

      There is substantial evidence that property lending does crowd out real SME lending (as opposed to property lending disguised as SME lending), particularly when property prices are rising strongly. I also dispute Positive Money's assertion that lending against existing property makes no economic difference. There is significant evidence to the contrary (which I have to say they blithely ignore).

      3) It is not technology that has de-skilled bank jobs, it is reorganisation. The decision to turn banks into shops and bank clerks into salespeople had little to do with technology and much to do with moving from a relationship model to a product sales model in banking.

  3. We like boring as in, no bank holidays! (Bank holiday,what a description.)

    But, employees can go on holiday, of course.

  4. Frances,

    Thanks for driving home the message yet again that "Retail Banks" have screwed up by becoming "retail outlets', rather than banks. Obviously, notions about "boring banking" and indeed any kind of banking have become political hot potato's since the GFC with some calling for a more "narrow banking" retail sector, or "utility banking" - which, unlike you, I've also been keen on the notion of "utility" banking.

    However, never having worked in a banking environment, and certainly not being ideologically driven, one usually defers to the specialists on these issues. As such, I agree that retail banking as undertaken until the early 1990's certainly was not boring - many staff were highly qualified and trained extensively by the banks themselves, i.e., they actually invested in people and skills, rather than IT and box ticking.

    Suffice to say, banking in those days was considered a decent job to be in and one's local branch bank manager was quite well respected by the local community - not anymore I'm afraid to say.

    For anyone with a keen interest in this subject matter they can do little better than read "Shredded" by Ian Fraser - Ian pulls no punches as to how "not" boring UK retail banking used to be and is quite brutal in his assessments, however, the travails of depositors and small businesses are well documented in his deconstruction of RBS - one of the best summaries we have of what's gone wrong.

  5. Gerard Stafleu21 May 2015 at 14:28

    Banking should be boring from the consumers' perspective, i.e. they shouldn't read "exciting" news about the latest greatest "innovations," trickery and fast money trading schemes all the time. In other words, less banking headlines. From the banker's perspective banking should of course be exciting, otherwise they will fall asleep or even leave for the golf course at 2.

  6. Heritage Stanley21 May 2015 at 19:49

    Banking is just one of a number of areas in which professional judgment and the exercise of discretion have been replaced by algorithms or rule-based decision-making. Is this is a good thing? No, to the extent that talented people are attracted elsewhere. Yes, to the extent that, when mistakes are made, they are probably on average less costly.

    1. If there is no longer any need for professional judgement and the exercise of discretion in banking, can someone explain to me how the extremely high salaries of bankers are justified? It looks to most of us like simple parasitic exploitation of the system -- that is, the keepers of the money find ways to embezzle more easily than those who do control money and investment.

    2. Xenos,

      The people working in retail banking do not have "extremely high salaries". They earn very ordinary amounts.

  7. Largarde speaks to your point.

    Smith missed it. The hammer and nail thing it seems.

    I think it’s about basic intellectual curiosity - interest in the world – superseding the notion of boredom, among other things. Banking penetrates deeply into real world experience.

    And it’s about banks as organizations of specialist individuals with interesting interactions that relate to that world.

    Of course, it helps to have some relevant experience to understand how this perspective may apply in context.

    The degree of interest in banking from the blogosphere tends to support the idea of externally driven curiosity about banking. That gets mirrored on the inside by those who are interested in doing their jobs well.

    As an indirectly related matter, it would be nice to see certain economists of repute make an adventurous journey into a bank branch for some revolutionary and intellectually amazing research – like what happens to the deposit side of bank when it makes a loan.

    To promote bank staff’s genuine empathy with their customer’s consideration should be given to the creation of a territorially based banking system to accommodate the regional and national development of finance in the UK. This would allow bank staff to identify with the material development of their communities rather than labour under the public’s perception of them as minions of an international bank intent on sucking as much money out of their communities as possible so the bank can invest it anywhere in the world except their region. The creation of regional bank licenses would address the democratic deficit in our present system which allows an international banking cartel to ‘hoover up’ the majority the nation’s wages and salaries denying people a market choice – to support their own local, regional or national economy rather than, by institutionalised default, subsidising wealthy individuals and corporations worldwide investments. “Of all the many ways of organising banking the worst is the one we have today” was the considered opinion of the last governor of the BOE Sir Mervyn King in 2010. Cue reform, don’t hold your breath bank employees, or anyone else for that matter.


    An area’s savings, wages, salaries and government disbursements form its primary financial resource. In the UK’s local economies the bulk of this money ends up in international plcs, they also dominate the local mortgage market (80% of house lending) leaving a rump for the building societies that once dominated this market. The creation of a three tier banking license by the government would reconfigure the banking system and provide for local and territorially restricted banking, licenses that restrict the area within which the bank can invest. Banks would purchase a license to trade within a LA area or areas or within the national territory or internationally but only those within the national area would have the ability to create money (and pay back any created [borrowed] money to the State as the borrower pays off the loan). Local SME’s and individuals would now have a source of credit independent of the international banking cartel as long as they put their money where their mouth is (those that complain about their lack of local finance ) by transferring their accounts to local or national banks (which would act as clearing banks for the territorial banks). This would assist development of the local economy and would not leave them at the mercy of international financial institutions that treat them as unpaid rent collectors.

    Every LA’s finance department accounts would have to be held in a territorial or national bank. All central government disbursements would likewise be made to territorial or national bank accounts. Any long-standing surpluses could be used to buy government debt but LA’s would be encouraged to invest them in the development of their area of territory or to lower tax rates for their taxpayers. LA bonds could be used to access outside investment. The population could bank locally (so the Scots, Welsh, Irish and the regions could have their own banks supervised by the BoE if there was a viable demand for them) or they could transfer their accounts to the international plc’s if they wish however those accounts may not seem so attractive since the requirement for the government bank deposit protection scheme (BDPS) would be limited to banks with a territorial or national license. This would mean International PLC bank’s, being deprived of their ability to create money in the national financial jurisdiction would have to rely on the confidence that institutions, corporations and high net worth individuals (from within or without the UK) had in them or by raising money from the global markets to finance themselves. They and their clients would have to go to the market to obtain protection for any of their deposits or investments.