Tuesday, December 31, 2013

The end of year and maybe the end of banks?

Antony Jenkins, CEO of Barclays, thinks that banks lost their way by becoming too focused on short term profit and now need to reconnect with long termism. Perhaps banks did focus on short term profits but the fundamental problem  is their misunderstanding of their purpose and the environment the operate in. Consequently, in an individually empowered world, they are in danger of being bypassed.

I am a great fan of the BBC Radio 4 Today programme. It both infuriates and entertains me, but the now annual Yuletide happening of inviting in guest editors can be doubly interesting ( I cant wait for PJ Harvey on Thursday!). Today's Today editor was Anthony Jenkins CEO of Barclays and a man who, it seemed to me, was on a mission to try to present a human, reconstructed and penitent face of banking. Getting into the detail of how well that was achieved and how much it was heartfelt or so much  flummery would take too long so I won't begin to try here. However, in the course of the programme he introduced the idea that the primary issue with banks and, by extension, the root of the collapse of 2008 was an obsession with short term profit. This, he appeared to argue, blinded the banks to risk and incentivised immoral behavior - I paraphrase of course.

It’s a convenient and not unreasonable assertion, and one that is commonly advanced post crash. I am a constant critic of shortermism but on this occasion I think he has missed his mark.

Its not that I don't believe short termism was/is present and that it is very corrosive its just that, for me, the key underlying issue with banks is the decline in there understanding of what they are there to do. Banks are a service and they asses risk and this is a complex undertaking with a mutual power relationship between the banks and those they serve.

On a personal and business level I deposit my money with them and instruct them to disperse it as I see fit, when I see fit. For that they can, and should, charge me a fee. I use their service because, in theory, it frees me from having to guard my money personally, and it is convenient. I may also borrow and I pay for that too. These are mutually beneficial and supportive relationships but it is also a complex relationship.

Banks thought this was purely transactional and a simple or complicated relationship. They commoditised the transaction to drive down cost, used money to make money to no particular end (still do), and we each became a number - not a person. In commoditising the transactions they introduced unnecessary and new risk and the lack of autonomy for local decisions meant they had no ability to make sensible logical service driven exceptions. The relationship was broken and unequal.

I have little doubt that this approach was aggressively promoted by consultants who did binary sums showing how by systematising things they could strip out cost. The banks drank freely of the koolaid and bought all the hardware that the consultants could sell.

But as Peter Drucker and others have pointed out there is a world of difference between complex and complicated and ability to truly judge risk was gone, as was the visibility of the risk. We all know the outcome.

But the problem for the banks is that changing back takes a lot of time. The reintroduction of "relationship managers" does not change it. They have neither the necessary experience nor heuristics and they are lacking in autonomy being bound by the same system let strictures that have cost billions to put in place and cannot be undone by bankrupt banks.

No doubt the banks hope our appetite debt will hold us and buy them some time. I wont get into the issue with our relationship with debt at any length here but suffice to say whilst I accept that some debt is some circumstances may be necessary debt does make us slaves and both governments and banks encourage us to have it in order to pacify and chain us.

However, times are changing. The digital revolution is founded in the notion of empowerment for the individual and alternatives are emerging and some are already well established. Alternative payment schemes like Paypal, stripe, Google wallet and Bitcoin are operational and increasingly accepted. Alternative finance options exist with the emergence of crowdfunding in its various forms and particularly P2P lending.
Of course the institutions and vested interests will close ranks to defend their pals and endeavour to reign these innovations in, no doubt on the nefarious excuse that "criminals might use them". It’s a line harder to hold when not only have criminals both robbed and used banks, but all the more hollow when we know that some banks have been/still are operated by crooks!

But the global and virtual nature of the digital and crowd empowered economy, and the trust bonds that pervade it, means that a new generation is developing a taste for a world without retail or merchant banks, so hold onto your hat Antony - you might need that shipping forecast job after all.

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