The last few years have shown the fragility of a model that is more strongly mediated by capital markets. Banks, as institutions that match those with excess savings and those with demand for capital, and as intermediaries matching liquidity needs and risk profiles, will surely always have a role to play.
The crisis did not come about because "banks," in their traditional guise as integrated financial institutions, became too important. Rather, it was because they became increasingly disintegrated, relying on wholesale funding; because loans were "originated to be distributed," as opposed to being owned; and, as I have argued elsewhere, because the innovations in financial services favoured the reckless, until the entire system was brought to its knees.
The real question is what shape banks will take in the future. That's where things get interesting, especially as we're in the process of re-writing the rulebook of financial intermediation in real time. Despite the (expectedly fierce) lobbying of incumbent banks, it seems that we're heading to an implementation of the Volcker view, which foresees a partial breakup of banks, separating lending institutions that have some government support from those that use their balance sheet (and clients' money) for risk-taking by placing substantial bets.
The "rules and roles," the architecture of the financial services sector, will also change. "Traditional" banks will change their profile, and their strategies. First, they may need to rely more, not less, on their own capital and deposits. Second, if policymakers have their way, companies such as Goldman Sachs are more likely to re-orient themselves towards fee-earning advisory services, spinning off their in-house hedge funds.
More interesting, perhaps, we will see substantial change in the transaction-processing and retail side of the banking business. Banks have long benefited from the stickiness of customers. Research in the UK had shown that it was more likely for someone to be divorced than to close an account with the bank they chose as a student. These emotional links with banks are likely to wane as Generations Y and Z come of age. How many accounts have you closed in your lifetime? Surely fewer than your kids will.
Consider also the profitable or unbanked niches in developed countries, including immigrants, low-income earners, and those currently shunned by banks — the new "have-nots," many of them casualties of our recession. When they seek firms to serve them, banks will not be the prime candidates.
For all these reasons, banks will lose their near-monopoly status on the retail side. Payment services will increasingly be mediated by those who hold the bottlenecks in devices such as mobile phones — networks like Vodafone, device manufacturers like Apple or application developers. As mobile telephony revenues wane, and as mobile identification and certification technologies surpass those of credit cards, we should expect to see a redefinition of "who does what" and "who takes what" in retail finance. And, as part of this process, we should not rule out a return of community-based banking, in its micro-finance guise.
If you want to get some ideas about the future of retail payment and banking in the future, you should follow the advice of my fellow debate participants Jaideep Prabhu and Navi Radjou and look at Kenya and Bangladesh. Macro-economic problems such as fiscal imbalances, pension crises and healthcare provision costs in the developed world, along with population and income growth in developing countries, will ultimately create new needs for individuals, and a new state context to operate in. As I've recently argued in HBR, we're in the first stages of a change in the playscript in financial services.
So, do we need banks, and will we have banks in the future? You bet. Will they be as profitable? Doubtful. Will they look like they do today? Probably not. There will also be lots of furry mammals living alongside them in the financial services ecosystem, nibbling the food of the reformed dinosaurs. And, horror of horrors, banks may need to start thinking seriously about their strategy and re-invent their playscript if they want to survive in this brave new world. So stay tuned. The fun is about to begin.
The crisis did not come about because "banks," in their traditional guise as integrated financial institutions, became too important. Rather, it was because they became increasingly disintegrated, relying on wholesale funding; because loans were "originated to be distributed," as opposed to being owned; and, as I have argued elsewhere, because the innovations in financial services favoured the reckless, until the entire system was brought to its knees.
The real question is what shape banks will take in the future. That's where things get interesting, especially as we're in the process of re-writing the rulebook of financial intermediation in real time. Despite the (expectedly fierce) lobbying of incumbent banks, it seems that we're heading to an implementation of the Volcker view, which foresees a partial breakup of banks, separating lending institutions that have some government support from those that use their balance sheet (and clients' money) for risk-taking by placing substantial bets.
The "rules and roles," the architecture of the financial services sector, will also change. "Traditional" banks will change their profile, and their strategies. First, they may need to rely more, not less, on their own capital and deposits. Second, if policymakers have their way, companies such as Goldman Sachs are more likely to re-orient themselves towards fee-earning advisory services, spinning off their in-house hedge funds.
More interesting, perhaps, we will see substantial change in the transaction-processing and retail side of the banking business. Banks have long benefited from the stickiness of customers. Research in the UK had shown that it was more likely for someone to be divorced than to close an account with the bank they chose as a student. These emotional links with banks are likely to wane as Generations Y and Z come of age. How many accounts have you closed in your lifetime? Surely fewer than your kids will.
Consider also the profitable or unbanked niches in developed countries, including immigrants, low-income earners, and those currently shunned by banks — the new "have-nots," many of them casualties of our recession. When they seek firms to serve them, banks will not be the prime candidates.
For all these reasons, banks will lose their near-monopoly status on the retail side. Payment services will increasingly be mediated by those who hold the bottlenecks in devices such as mobile phones — networks like Vodafone, device manufacturers like Apple or application developers. As mobile telephony revenues wane, and as mobile identification and certification technologies surpass those of credit cards, we should expect to see a redefinition of "who does what" and "who takes what" in retail finance. And, as part of this process, we should not rule out a return of community-based banking, in its micro-finance guise.
If you want to get some ideas about the future of retail payment and banking in the future, you should follow the advice of my fellow debate participants Jaideep Prabhu and Navi Radjou and look at Kenya and Bangladesh. Macro-economic problems such as fiscal imbalances, pension crises and healthcare provision costs in the developed world, along with population and income growth in developing countries, will ultimately create new needs for individuals, and a new state context to operate in. As I've recently argued in HBR, we're in the first stages of a change in the playscript in financial services.
So, do we need banks, and will we have banks in the future? You bet. Will they be as profitable? Doubtful. Will they look like they do today? Probably not. There will also be lots of furry mammals living alongside them in the financial services ecosystem, nibbling the food of the reformed dinosaurs. And, horror of horrors, banks may need to start thinking seriously about their strategy and re-invent their playscript if they want to survive in this brave new world. So stay tuned. The fun is about to begin.
