The Bankwatch

Tracking the consumer evolution of financial services

What does recovery mean for Banks?

Banks are at the centre of the economy.  Business and consumers conduct their day to day business using money and they do this through banks.  Stating the obvious you may say?  This is why I study the economy so closely and try to understand how it will look in the future, because that has a direct relation to how banks will look in that future.

We are in a crisis of debt.  It is a debt crisis because consumers and businesses are over-leveraged.  Their debt is too high relative to todays asset values.  Asset values have decreased by 25 – 60% in the West, whereas debt has reduced only minimally.

So what do we see around us that offer substantive clues to our near term future for banks?

  • US economy reducing at annual rate of 6.1% – this has to be contrasted to growth rates of 2 – 3% pre crisis, so thats an almost 10% shift being experieinced
  • Lithuania today seeing a 12% reduction in its economy
  • Germany seeing 5% – 6% and talk of rioting on the streets, which of course will do no good except create panic
  • Citibank and Bank of America today finally wisening up to the reality that they cannot grow out of their leveraged position – they must contract out of it by selling stuff
  • corporate jets becoming an embarrassment rather than a status symbol
  • Allens & Overy (lawyers in the City) introducing a ‘cull’ of 10%
  • 80 – 100% growth in managerial and professional unemployment (UK)
  • General Motors in Canada cutting dealerships from 794 down to 400 – 400 within one year

These headlines are all point in one direction.  Less is the new reality.  No-one knows precisely where the new balance will level off, but it is certainly going to be at a level less thn we saw at the peak in 2007.

A smaller economic base results in less of many other things that probably still have to happen;  less restaurants, real estate agents, accountants, grocery stores, plumbers, construction workers, and of course bankers and banks.

Relevance to Bankwatch:

Operating in this new environement will require new thinking and recognition of new opportunities.  This will be the time (for banks) to not just accept internet but to insist on internet as a core component of the business to drive efficiencies.  It will require fresh looks at old ideas that were squandered away and hidden by the excesses of the good times, eg:

  • # of branches required?
  • style of branches required- which services will be offerred?
  • what is the the role of tellers in the new operating model?
  • is it time to eliminate cheques ?
  • is it time to bring commercial banking into the and up to the same degree of automation as consumer banking?
  • Why is business banking still being done by cheques and deposit books?
  • What is the role of Head Office?  How many are required to invent bank accounts, mortgages and loans?

In a smaller and more efficient world, new competitors will be prodding away at banks’ business model.  I watched many of the presentations yesterday at FinovateStartup09 and was struck by how they all in some way chipped away a part of banking from banks.  Whether it is Tempo and their de-coupled debit card, or Wesabe and Micronotes pro-actively helping consumers spend wisely, or Prosper and Lending Club introducing “Securitization 2.0′ (online secondary markets with clear line of sight between debtor and creditor),  the coming of Web 3.0 is imminent and in a form that banks may not expect nor be prepared for unless they act now.

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