Banking on Change

The Development and Future of Financial Services

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• Publisher: Wiley
• Year: 2019
• Print ISBN: 9781119609988
• eBook ISBN: 9781119610021
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

PRAISE FOR

Banking on Change

"In this 140th Anniversary celebration book, The London Institute of Banking and Finance stick to their core function of educating us all, but especially aspirant bankers, on the role and concerns of (retail and commercial) banking in the UK. They have assembled a well-chosen group of practitioners from a range of professions to write clear and easily assimilable essays, no technical expertise required, on a wide variety of current banking issues. If you want to learn about the current practices and problems of UK retail banking, this book must be essential reading."

—Charles Goodhart, emeritus professor of banking and finance at the London School of Economics

"In this important book, a line from Bill Allen's contribution is key: 'Nobody can predict the ferocity of the gale of creative destruction' that faces the financial services sector. True; but if you read the many and varied contributions, you'll have a pretty good idea. Moreover, you'll understand how we (that is, bankers) got here – and what we should do to make the industry more competitive, fairer and more genuinely useful. It is a soup-to-nuts look at banking – from the early days of the Institute of Banking, through the go-go years of ifs, to a present and future that are likely to be dominated by technology. It is well-worth a long read."

—Andrew Hilton, director, Centre for the Study of Financial Innovation

"If you were to imagine what a book celebrating 140 years of financial knowledge might contain, you could not come up with a better selection than this. As well as a historic sweep – from no-tech to fintech, the decline of trust and the rise of competition – today's hot subjects are addressed, including sustainable investing, cultural diversity and digital identity. The cradle-to-grave nature of the industry is captured in pieces about financial education and pensions. And it's well written, setting the scene nicely for the next era."

—Jane Fuller, Fellow of the Society of Investment Professionals

Financial services are undergoing rapid, and potentially dramatic, change. What will happen in payments, in sustainable finance and in fintech? How can the industry boost financial inclusion and ensure that its workforce has the skills it needs to meet regulatory requirements and to compete with new entrants? Can trade finance rise to the challenge of underpinning global trade for all and help the developing world avoid "financial abandonment"? What do financial services need to do to protect our digital identities?

Banking on Change provides insights by experts and influencers from across the financial services industry on these and other questions.

Published to mark the 140th anniversary of The London Institute of Banking & Finance, this book is intended to be of lasting value to both students and professionals.

CHAPTER 1
Banking, Finance and Society: What Keeps the Motor Running?

Peter Hahn

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Professor Peter Hahn examines why society underestimates the important social roles played by commercial banks and the value they provide in being trusted guarantors of privacy and data integrity.

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The banks are to blame' seems to be a reflex cry. There is, certainly, plenty of blame to go around – blame for a credit crunch, followed by a recession, then a number of grubby scandals. However, perhaps we should ask a few questions before we pass final judgement.

Banks lend too much to the wrong borrowers? Yes, they sometimes do, but maybe we should save a bit more and borrow less?

They don't lend enough to support the economy? Bank loans are important in boosting growth, but perhaps we could also work on how our unrealistic business plans could fit better into uncertain economic times?

Banks don't pay enough interest on deposits and savings? Yields are certainly low, but maybe our neighbours should pay more interest on their mortgages?

Banks follow political encouragement to keep greasing (or supporting) economic expansion, don't they? They sometimes do, but stoking housing booms does tend to boost a politician's chance of re-election – at least until the bubble bursts.

Well, banks were poorly overseen by understaffed regulators following ‘lite touch’ political agendas, but aren't they just too complex to be regulated anyway? Sure, banks are complex, but doesn't that mean regulators require more sophistication?

If banks are supposed to be so sophisticated, how come they're having trouble with new tech? That's a valid point – but how easy is it to operate old tech and implement new tech simultaneously?

Are you starting to wonder whether there might be a case for the defence after all? Just a little? Well, now we come to the item on the charge sheet that probably excites the largest number of people: banks pay top managers too much. Do they have to offer big bucks because the job is too complex, or are executives given too much because shareholders don't care about the money? Gosh, who are the shareholders? Hmmm – our pension funds seem to hold big stakes.

Banks have always been easy to use as a whipping boy for problems that are about public policy and the wider culture as much as they are about financial services. I believe this has led to their societal contribution being overlooked. I'm going to gloss over much of the economic logic for banking, best known as intermediation – that is connecting those with excess financial resources and those who want to use those resources. Instead, I will point out that the root of societal conflict around banking is that savers fundamentally want their money back. To be able to repay savings, the bank must limit risk, but borrowers always want the bank to give them better terms, which means increasing risk. If half of society wants the bank to minimise risk and half of society wants the bank to take more risks, how can the whole of society be satisfied? Of course, our banking system exists to balance these contradictions – to enable our economy and society to function. Yet the very act of balancing means neither side achieves all their goals. And for banks this may be even more complicated as many, if not most, customers are both borrowers and savers – sometimes simultaneously. We are like drivers who want no red lights, no speed limits and, often, no brakes – together with a guarantee that we will always get home safely. That is why we are confused when it comes to our appreciation and consideration of banking.

Trusting That the Brakes Will Work

One of the problems we have in understanding the role of banks in society is that the concepts of trust and appreciation are not always clearly separated. Trust is much more about reliability, and that should be factual, while appreciation is much more about interpretation, and that is wrapped up in emotion.

I thought of starting this chapter with a question like ‘has anyone really ever loved their bank?’ I'm not sure that I have ever ‘loved’ any business, despite how well they may have served me, but there are few, if any, businesses that attract as much ire as banks. A UK consumer advocacy magazine recently rated airlines by customer satisfaction. The airline with the lowest rating also happened to be the most profitable. It offers some of the cheapest fares – and is often accused of being misleading – but customers flock to it. Is it loved? No. Respected? Of course. If people didn't think its planes were safe and going to get them from A to B, no one would fly with it. It isn't a business model I advocate – news reports often suggest large numbers of dislocated passengers – yet travellers sign up for more of the same even when there are alternatives. Few question the social utility of the airline, probably because it provides them with what they, as individuals, want. But though the social utility of banks is much greater, banks are neither respected nor highly rated.

This resentment of banks can go to dismaying extremes. Headlines like ‘criminal bankers’ that followed examination of the Libor rigging and forex fixing scandals were aimed at the whole industry – an industry in which 99.999% are not employed in the establishment of a subjective interbank rate, or in foreign exchange. A senior regulator said: ‘clearly it was not the case of a few bad apples, but something rotten in the entire barrel’. The barrel? There was some irony, and understandable schadenfreude, when the critical authority managed to find itself tainted by the same benchmark and foreign exchange manipulation scandals – and also have one of its most senior officials depart due to a serious conduct omission – all within a short period of time. We can ask perfection of our banks or their overseeing authorities, but they are staffed by people who live in the same culture and have the same flaws as other members of society.

What Have the Banks Ever Done For Us?

The development of business sectors is always unstructured, and many failings have to be continually ironed out along the way. It seems inconceivable now, for example, that cars were on UK roads for almost a century before seat belts became compulsory – and that thousands of people died before public attitudes changed. Similarly, no one set out to invent convenient, affordable passenger air transport. Planes were dropping bombs and having aerial dogfights long before they served the wealthy as a means of convenient transportation. The internet, too, was not set up to facilitate swapping pictures of kittens in hammocks, but to ensure reliable communications systems between big research centres. Sectors do not develop in a vacuum, but within specific cultures, both anticipating and responding to changes in society.

The word ‘bank’ comes from the Italian ‘banca’ – a wooden bench set up in the town square. In the early modern period in Europe, merchants who needed credit to trade were at the centre of financial intermediation, though it was not always banking in the sense that we understand it now. What is often overlooked is that those beginnings of trade finance and foreign exchange, of deposits and ‘bank money’ as opposed to cash, not only benefitted the merchant families involved, they also helped drive wider economic growth. And fundamental to all of these arrangements was trust.

A detailed examination of how the ingenuity that helped develop financial services led to modern-day banking would fill libraries. There is, however, one common theme: specialist providers have, over time, been amalgamated into more diverse institutions that wanted to widen their services and their customer base. In my banking career, many have predicted the survival of specialist institutions. Still, we have come to expect banking and finance firms to expand their services to society, and to everyone in society, and perhaps to offer services well beyond banking and finance.

Responsible Road-users: Society's Non-financial Needs

I opened my first bank account with pocket money and cash received from delivering newspapers. Apart from the money, to open the account I needed a government identification number. I was too young to ponder the bank's role back then in handing over my personal financial information to the government. Of course, that simple ‘reporting’ information eventually led to direct tax collection and the bank passing some of my interest to government.

There are differences of degree by country, but developed world banks moved permanently from only serving society's financial needs to becoming part of government tax implementation long ago. Collecting tax is necessary, of course, and what better way to gather it than ‘at source’. Today, banks not only report interest but also a range of deposits and withdrawals – particularly to support anti-money-laundering (AML) measures and to counter the financing of terrorism (CFT). I have always been surprised by the limited public debate on the way in which banks have been co-opted as an arm of law enforcement. What if car makers were required to place speed recording devices in cars that would report bad behaviour directly to the authorities? The reporting requirements and roles demanded of banks truly cross boundaries. The police are not expected to identify every criminal incident, but a bank is expected to flag up all potential transgressions. This goes further than many people might suspect. In many cases, banks must continue checks down to the level of the customer's customer and perhaps beyond. The bank becomes an intelligence network as it explores these paths to meet society's policing and political needs.

Acting as global police can mean that the economic work banks should do takes a back seat. Many Western banks, for example, have terminated longstanding correspondent banking relationships with developing markets in part because those counterparts cannot meet compliance requirements. In the UK, banks have been instructed by government to report on, and not offer services to, illegal aliens. That places banks in the front line of immigration law enforcement. I am not arguing for or against any of these requirements on banks, but they exist, are unlikely to go away, and are costly efforts that are not about providing banking and finance services. Over time, a digitised financial life integrated with a digitised currency will inevitably lead to society asking for an even wider non-financial role for banks – and banks are likely to be blamed if this doesn't work out smoothly.

Whenever I consider this wider societal role for banking and finance, I inevitably come back to considering who pays for it, financially. Computer capacity, software updates, compliance and management are real costs. Is some of the cost of banking now a form of indirect taxation? After all, if government were to undertake the above tasks without banks, taxpayers would have to fund it.

Pedal to the Metal

You might guess that I've always had a keen interest in the way cars work. Perhaps this is due to growing up in suburbia where my first real job, at age 16, required a car. That car was 14 years old, when cars were expected to last 7 years, and I often felt that I was working to keep the car running so that I could get to work after school. But the experience gave me a keen understanding of mechanics, systems and problem solving, as I did most of the repairs myself. When I hear a breezy comment on how ‘the car has barely changed in a century and most of us continue to drive vehicles with the same combustion engines’, I can only smile. Cars are now more efficient, more reliable, safer, faster, warmer, cooler, more comfortable, much more durable and also, in particular, cheaper. In large part, this is due to the automobile industry's adoption of technological improvements. Banking is no different. In automobiles, most of that technology is out of sight under the bonnet. In banks, it is out of sight in IT. Banks have a similar long history of leveraging technological developments to serve society.

Since the founding of The London Institute of Banking & Finance as The Institute of Bankers in 1879, technology has played a consistent part in expanding the contribution of banking and finance to society. The first commercial typewriter and Edison's patent for the electric light bulb arrived on the scene within a year of our founding and, along with them, a more productive banking work day. Imagine what it must have been like before. In 1884, Lewis Waterman came to market with the fountain pen – clerks could write sentences, paragraphs and pages without having to dip a nib in ink every few characters. It is easy to smile when thinking of the fountain pen as technology, but it meant bank clerks could spend more time serving customers more efficiently.

Facilitating better service is a consistent theme in the evolution of banking technology. Now, the transition from largely human to mechanical or digital extension of credit not only serves society, but arguably is changing society – hopefully creating a fairer world where banking decisions are based more o...

Table of contents

• Cover
• Table of Contents
• About the Editor
• About the Contributors
• Foreword
• About the Book
• Introduction
• CHAPTER 1: Banking, Finance and Society
• CHAPTER 2: Standing the Test of Time
• CHAPTER 3: What Happens When Nobody is Watching
• CHAPTER 4: It Takes an Ecosystem
• CHAPTER 5: A New Playbook for Banks
• CHAPTER 6: Sustainable Investment
• CHAPTER 7: Living ‘Off Income’
• CHAPTER 8: Power to the Customer
• CHAPTER 9: RIP Libor
• CHAPTER 10: Boosting UK Bank Competition
• CHAPTER 11: Changing the Face of Banking and Finance
• CHAPTER 12: Getting the Right Stuff
• CHAPTER 13: Financial Education
• CHAPTER 14: Banking on Identity
• CHAPTER 15: Going Over the Top
• CHAPTER 16: Banking Technology
• CHAPTER 17: The Future of Payments
• CHAPTER 18: Life Lessons
• Index
• End User License Agreement