There is an argument around today that given banks have been the cause of so much economic grief over the past decade, we should curb their ability to operate, nationalise them or, more dramatically, simply close them down – presumably in favour of something else.
This article obviously does not apply to victims of fraud emanating from the banking sector – I believe only compulsory custodial sentences for negligent/deceptive/criminal management coupled with a mandatory prescribed increase to the banks’ tier 1 capital ratio will shake banks into action in these cases.
Just picture a bank’s board fronting their AGM having to explain why their ROE is lower than their competitors. The board will be removed by institutional investors – if not for the financial penalty imposed then for the prospect of having criminals at board level.
Readers of this weekly tome will know that I’m not a “besty” of the banks. However, I will be the first to defend their cornerstone role in any modern, developed economy. Here’s why.
Firstly, let’s explore what banks’ roles are in their respective economies. Some will argue that they are the lifeblood of any economy (I am in this camp). They provide a useful service in providing debt where there is a shortfall of equity to build, service or acquire something. Whether that is a family home, a car, an investment property, an iron ore mine, a power station, oil exploration, a road or bridge, ship etc.
In my career, I have dealt with mining magnates, TV station owners, institutional CEO’s, small and medium business owners, home owners, churches, charities and many others. One thing they all have in common is they all require the services of banks.
Indeed, I’ve had the pleasure of providing financial services to these people at a personal and professional level. Almost all the finance that I have ever provided has originated – either directly or indirectly – from a bank.
I’m currently working on providing funding to an invoice discounting/factoring financier. The client will be funded from a securitisation warehouse trust which he will then on-lend to his clients. The client asked me if the role of banks had diminished – as he was unable to source the funds himself from his bank. My response was “who do you think is funding the warehouse?” Yes, I know the ridiculousness of quoting myself but I’m grammatically challenged.
By the way, the warehouse is funded by foreign banks. The point is that at some point in the process there will be a bank involved. Don’t get me wrong, banks have changed dramatically over the last decade. You, as a customer, must comply to a checklist of conditions prior to being considered for a loan. We as brokers (intermediaries) try and un-complicate that for our clients and try and search for the loan that suits them the best – even the onus of compliance of that loan with the relevant Act has been shifted from the bank to us.
So, in effect, banks have adopted processes to allow them to eek out greater efficiencies from their white collar factories. Sure, this has really disenfranchised many customers – particularly those that remember dealing with a bank manager. Those days are gone. Banks have undergone a process of intermediation to bring down their costs. That means they employ less staff to sit around and wait for the phone to ring. They prefer to pay brokers a a fraction of 1% for loans that they actually originate. They do this because it’s cheaper. So no salaries, superannuation, holiday pay, payroll tax, rent, IT, …and so on.
In Australia, the percentage of loans originated by intermediaries is 52%. In the US it’s closer to 90%. So, you can see where we’re heading. Banks have now gone from being customer focused to being process focused. I have often bemoaned the loss of skills from adopting such a transformation but have come to the realisation that the less banks provide a service that I do the more work I have.
The above example of the Invoice Discounting/Factoring client is a case in point. The client went to a few banks before seeking assistance from his lawyer. His lawyer recommended that he contact us.
What about B2B lenders and Fintech companies? Well, the reality is that there have always been third parties out there that provided finance to those that banks didn’t. In the sixties, seventies and eighties it was finance companies that were eventually acquired by the banks. In the nineties and noughties large scale brokers (with access to securitised balance sheets at cheaper rates) acquired a sizeable market share of the home loan market. All of them are now owned by the banks.
My point is that if B2B and Fintech become too big a threat, banks will move in. A couple of banks have already dipped their corporate toes in the murky water but not in a major way. It’s a just-in-case strategy. The next time you bemoan the role that banks play in your economy, try and think of countries that don’t have a transparent and sophisticated banking system and the state of their economies.
Would you like to live there? Now, stop your moaning (with apologies to victims of bank fraud).