Redefining retail banking

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Yves Smith at Naked Capitalism takes issue with me over my attempt to derail the "Banking should be boring" bandwagon. She claims that new research by the IMF proves that banking should indeed be boring:

The IMF paper is generally in line with the argument that banking should be boring, meaning that complexity, opacity, and leverage typically work far more for the benefit of the financier and at the expense of customers and society at large. Frances Coppola tries to turn that argument on its head and say that banking should be fascinating. Hun?

I am astounded by this interpretation of the IMF paper. These are the paper's actual conclusions:

First, financial development is multi-faceted and should be measured by looking at many indicators. Second, financial development can be promoted by putting in place a strong business, regulatory, and supervisory environment. Of the 93 regulatory principles, the critical principles that matter for financial development and financial stability are essentially the same. This means that better—not more— regulation is what promotes financial stability and development. Third, since the weakening effect on growth at higher levels of financial development stems from financial deepening, raising access or efficiency at any level of financial development would be beneficial. Fourth, to mitigate economic and financial stability risks, as well as reduce the likelihood of a crisis, too fast a pace of financial development should be avoided. Finally, there is no “one-size-fits-all” in terms of sequencing the development of financial systems, but the relative benefits from institutions decline and those from markets increase over time. 

How on earth do you get from these to "banking should be boring"?

Yves' interpretation directly contradicts what the head of the IMF said about this research, too. At the INET conference in Washington DC on May 6 -  which I attended -  Christine Lagarde took issue with Elizabeth Warren for saying “banking should be boring”. Giving a heads-up on this research, Mme. Lagarde emphasised the crucial importance of deposit-taking, lending and payments services for economic development and human well-being. And like me, she questioned how providing financial services to the real economy could possibly be regarded as boring.

I was particularly struck by Mme. Lagarde's concern for those, especially women, who are directly disadvantaged by lack of access to banking services:

Financial systems around the world are quite sizeable, but they exclude many individuals and firms from financial services. For example, data released during this year’s IMF-World Bank Spring Meetings suggest that 2 billion adults worldwide remain without a bank account. That represents a 20 percent drop in the number of “unbanked” over the last three years, but it is still a massive number.

Moreover, financial exclusion is far from being solely a low-income country or emerging market issue. For example, even here in the United States, surveys find that some 8 percent of U.S. households are “unbanked” and some 20 percent are “underbanked”.

Studies show that broader access to the financial system can boost job creation, increase investments in education, and help people manage risk and absorb financial shocks. Our own analysis that will be released later in the fall finds that financial inclusion is particularly important for women, empowering them economically. Indeed, the numbers suggest much scope for improvement in this area.

Globally, a staggering 42 percent of women lack access to basic financial services, compared to 35 percent for men. This gap is even bigger if we consider the role of women in the provision of financial services. In a world-wide sample of banks, less than 20 percent of board members are women, and only 3 percent of bank CEOs are women. Clearly, we need to do better.

We do indeed. But how, in heaven's name, can we improve financial inclusion while we are doing our level best to put people off providing essential banking services by describing them as "boring"?

Mme. Lagarde's comments were written up approvingly by Rona Foroohar in TIME magazine:

I do think that Lagarde was spot on to disagree with the notion that “banking should be boring.” This CW is often thrown around to indicate the idea that banks should do “plain vanilla” lending rather than complex deals with sliced and diced securities. Fair enough. But as the IMF chief pointed out, “Why should lending to the real economy be boring?” The shifts that need to happen to bring finance back in service to the real economy are myriad and complex. They include changing tax policy that rewards short-term gains over longer-term ones, reforming corporate governance, increasing personal liability, changing the structure of banks themselves and making our system of shareholder capitalism more inclusive. But the original mission of banking — finding new innovations and funding them to create growth in society at large — is anything but boring. The regulatory and cultural journey back to that, which will no doubt take several more years, should be interesting too.

I couldn't agree more. Intrinsically, retail banking is NOT boring. It has become boring because we have made it so.

Yves' observation that retail banks have become “stores”, with de-skilled workers whose job is simply to move products, is correct, but I was way ahead of her. I have now been writing for over four years about the deep structural problems in retail banking.  The transformation of retail banks into shops is the theme of  the post "Supermarket Banking" that I wrote back in 2012. This post was based upon my own experience of working for Midland Bank while it was turning its branches into shops, the first UK bank to do so. You see, unlike Yves, I worked in retail banking. I really do know what it is like.

In pursuit of profits in a low-margin, cut-throat industry (yes, this is RETAIL banking I am talking about), retail banks systematically downgraded the skills of front-line retail staff, removing from them all real responsibility and virtually all need for engagement with their customers. They turned them into salespeople, giving them impossible sales targets with severe penalties for failure. The jobs of retail staff became boring, hard work and poorly paid. Talent drained from retail banking into the better-paid, more interesting and sexier investment banking.

The consequences of making retail banking "boring" have been terrible. Transforming banks into shops and their staff into salespeople led directly to the swathes of mis-selling and outright fraud that have plagued retail banking in recent decades. Mundane, tedious, poorly-paid retail banking is now not even respectable. No wonder talented people don't want to do it. As Mme Lagarde says, we must do better.

Somehow, we have to make lending, deposit-taking and payments services to ordinary people and ordinary businesses interesting again. There is excitement to be found in financing innovation that generates growth, and satisfaction in supporting people's financial needs through their lives. Describing this as “boring banking” does not in any way help to achieve this.