Tag Archives: banking

BarCampBank: Reinventing Finance?

Ten years ago or so, I did a university course on finance and banking; as a final flourish to my presentation, I held up my mobile phone and predicted that in the future we’d be using our phones as electronic wallets. The other day, Barclay’s launched a smart phone app that can be used to transfer money from one person’s account to another. It has taken a decade, but that future seems to be moving closer…

A couple of weeks ago, I went to BarCampBank London (#5, I think), which was full of such talk: how could banks and banking be re-engineered? What is the future of banking? Most of all, what IS a bank?

That question was debated a lot – I think it cropped up in every session – and there wasn’t really a satisfactory answer. Maybe a bank is simply an organisation with a banking licence – or one that the banking regulators deem to be worthy of regulation. (It sounds like the regulators are somewhat more active now than they were six or seven years ago…)

An unconference – albeit one that had a bit more structure than most I have attended – BarCampBank had multiple sessions running concurrently. Some concentrated on technical issues; I attended those that dealt with behavioural and human side of the industry.

The first session I attended was provocatively titled “Is Banking A Human Right?” Whilst possibly quickly consigned to the category of “QTWTAIN”, the discussion was engaging, focussing on customers and their needs rather than the institutions that serve them. “Banking” provides access to many more services than just banking: the unbanked of the world can suffer injustice that those more privileged – that’ll be me – find it hard to conceive. (There are between 600,000 and 1.2 million households without access to the banking system in the UK alone [pdf] figures for 2009.)

The basic bank account promoted by the last Labour government in the UK has done little to plug the gap. (The government likes people to use bank accounts because it may help reduce fraud.) In India, the inability of people to identify themselves has denied them access to banking – one of the drivers for the Indian ID scheme. (An anathema to many BarCampers who can be fierce privacy advocates…)

The next session had a similarly provocative title, “Do social media change anything or everything in finance?” – this time answered with a resounding YES. And, erm, NO.

Banking is clearly social – we use banks to make payments to each other, in all sorts of combinations. (I would maintain that actually any business is social, but that is a different post…) Social networks can be thriving economies – Second Life apparently has a huge economy mediated by “Linden dollars”; eBay a larger one using real dollars exchanged by PayPal; and Facebook credits are the social network’s currency. Dutch law recognises virtual assets within World of Warcraft as real as far as property rights are concerned.

But do social media change anything or are they just a new channel or platform for existing services or organisations providing them? The ease with which some people who have grown up with the service place their trust in Facebook – probably greater than their trust is stolid institutions like banks which they have just seen come crashing to the ground – suggest there might be an opening. But why would Facebook – or Twitter, or Google, or … – want to become a bank? Maybe to use a multi-billion dollar cash pile, though a similar argument was used in the 1990s to predict that Microsoft might become the first virtual bank, which it failed to do. (Observers still discuss the possibility.) Regulators may well determine this – Microsoft had enough problems with regulators without involving more of them, and Google and Facebook look like they may be facing similar regulatory issues in the future.

The need to transfer money cheaply around the world – meeting the needs of the increasing, and increasingly connected, diaspora – may be one driver: a social media bank that could build on existing trust and reputation relationships to leverage scale might succeed.

Similarly, banks are becoming more aware of online trust and reputation. MovenBank is specifically using applicants’ social graph as one of their criteria in lending decisions. Existing online services such as Zopa (who I believe were represented at BarCampBank), Kiva, PayPal and Wonga perform near-banking functions, and some at least have a social aspect to them. Crowd-sourcing and crowd-funding platforms like Kickstarter and Indiegogo (which were also covered by sessions I didn’t attend – next time, I must remember to take my clone…) could morph into banks.

The session “How Could the Finance Sector Work Differently?” was perhaps the least satisfactory – if only because we were instructed to think positively! Bankers of course come in many different types; those manning the local branches of retail banks probably don’t need an injunction to “be humble” and “engage with your community” – because they are deep within it already; those who still believe they are the masters of the universe and wish the rest of us would go away and let them celebrate their riches may however benefit from considering their role in society.

The idea of personalisation of products cropped up, but I am not sure this is necessarily positive – at least from the customers’ point of view. One of the reasons banks were created was the pooling of risk – I could lend money directly to an enterprise, but if I lend it to an intermediary – a bank – who lends to many enterprises, the risk of any one failing to repay my loan is greatly reduced. Excessive personalisation may reduce this – particularly with insurance products: if insurance companies personalise their products to a great degree, those who need insurance may become uninsurable, and those who don’t – well, they don’t need insurance!

This lead onto debate about mutuality. In the wake of the credit crunch and the “global financial crisis” (or GFC as it is known to its friends), mutuality seems to be making a comeback. Apparently, credit unions are more popular, and people feel safer with building societies than banks. This may just be anecdotal, but these institutions feel more local – more community-centric. Surprising since the community – all of in the UK – now own two banks and have a significant interest in others.

There was also a discussion about increased portability – being able to switch providers more easily. But should banks be concentrating on this rather than providing sufficiently good service that we don’t feel the need to move? It is said (though I can’t find any stats to support the assetion!) that we are more likely to get divorced than change our bank: maybe we just want banks to be more committed…

The final session I sat in on was perhaps the most creative: the group was asked to create a narrative for the future of finance – to pitch the movie “Banking 2.0”, if you like. At least, that was how we interpreted the task. The blind leading the visually impaired, we probably came up with as many narratives as there were contributors, despite some sterling facilitation. We tried to come up with a scenario in which banking was re-invented after a future financial crash: what would it look like?

Some envisaged mobile phone companies stepping into the breach left by the collapse of banking – they’d facilitate the transfers of cash between consenting handsets. Others saw bartering as an option. My take was much more apocalyptic, I’m afraid: in the wake of a catastrophic banking collapse – not just Lehman going, but the whole lot – I’m afraid I just saw a disaster movie. Phone companies wouldn’t provide credit, since they’d have no trust in us to pay (and vice versa) – indeed, they’d cancel our accounts when we couldn’t pay. With all our money tied up in failing banks, we couldn’t even buy energy to keep our phones charged. And with the financial system in meltdown, the oil-rich nations wouldn’t sell us the fossil fuel we need to keep the power stations running, so they’d be no electricity anyway.

What interests me is that it wasn’t a phone company which has innovated a banking app, but a bank. There may yet be life in these seemingly moribund institutions… (Though perhaps we should have conceived the movie as a zombie epic, the banks refusing to die…! And Umair Haque has written about the zombie economy.)

[Aden Davies has posted about his views of BarCampBank London 5, including information on some of the more technical aspects discussed.]

“Are Bankers Good or Bad for Society?”

Last week, Chris Skinner spoke at Gresham College, asking “Are Bankers Good or Bad for Society?”. (He was talking on the eve of the eightieth anniversary of the Wall Street crash…) Then today there is the news that the Government are considering splitting up RBS, Lloyds Banking Group and Northern Rock by selling off some old high street banking brands – Williams & Glyn from RBS, and TSB and Cheltenham & Gloucester from Lloyds. If not more bankers – it would seem this is more a sale-and-rebranding exercise – at least more banks. So we’d better get used to it.

Chris’ talk was interesting, though he seemed to conflate bankers, banks and money. His answer to his rhetorical question was generally “yes”, but within a moral, societal context. Regulation and competition have a role here, introducing a moral dimension – though Chris was sceptical of the effect of regulation (he thought regulators would always be trying to catch up with bankers, rather than leading the way).

Banks – and hence bankers – do perform some very useful roles for society, such as:

  • facilitating financial planning and management
  • enabling individuals and organisations to borrow and lend
  • spread the risk of lendinging
  • allocating capital within the economy
  • thereby enabling trade and projects that would otherwise not be undertaken
  • thereby promoting innovation

They do others things too, of course; at the moment they seem to provide society at large – and media and politicians in particular – with hate figures to mock and pillory. Of course, bankers are just a reflection of society: there are a few selfish, greedy bankers out there just as there as selfish, greedy people in all professions. It is just that the riches available to those working in banks can seem so wildly excessive and the people receiving can seem remote from the society they serve.

Over the past decade or so, they have also completely misjudged the risk of the business they were in. Chris quoted David Vinar of Goldman Sachs from 2007:

We are seeing things that were 25-standard deviation events, several days in a row

As Chris explained, a 25-standard deviation event should be expected once every 100,000 years – that is, they are pretty rare! – not several times in a week. That is a pretty big error to make, and resulted in severely flawed, highly complex business models based around derivatives – and the economic crisis we find ourselves in.

Chris then went on to talk about the future of banking and the role of competition to make bankers behave well. He could have been talking about the suggested split up of RBS, Lloyds and Northern Rock. I doubt this will introduce any more bank branches – we won’t have greater access to banks – rather, existing branches of these institutions will be relabelled with the revived banks’ brands. This probably won’t be too hard – I remember meeting an RBS bank manager in a branch in north west England that proudly proclaimed that it was a former “Willy Glyns” branch rather than RBS. It might be harder for customers – will customers be given a choice which bank they will go with? Customers are famously more likely to get divorced than change their banks, so will they really benefit from being moved wholescale from one bank to another, new one?

On the other hand, increasing the choice of high street (retail) banks for customers should provide them with more choice, and competition could lead to innovation of products and reduced costs.

Then again, it will lead to the loss of the economies of scale that lead to the banking mergers in the first place – so some costs may increase instead.

I guess we’ll just have to wait to find out!

Edit: John’s comment reminded me that Chris was concerned by the increase in moral hazard resulting from the nationalisation of banks. Mervyn King recently identified this as a critical issue. If banks believe that the Government will step in if things go wrong, they essentially become a one way bet: heads they win, tails the taxpayers lose.