Understanding banking is a topic that many people struggle with. It could have something to do with mashed brain cells from all the jargon or blurred vision from all those pin-stripes. But fundamentally banking is a simple business. It is built on trust – mistakenly considered an outdated commodity by many. Trust that banks will pay a reasonable return on deposits; trust that banks will lend a measured proportion of those deposits to borrowers at a reasonable margin and trust that the profits generated from these activities will be paid back to shareholders as reasonable dividends. This simple narrative portrays an image of moral contractual arrangements that are far removed from the types of engagement that consumers and shareholders now have with banks. This dysfunction is set to get worse.
At its simplest banking is an intermediation process between borrowers and depositors; with the bank providing unseen but acknowledged trustworthiness between the parties. But why does this activity need to be carried on by a bank? Because out-dated financial regulations dictate that this activity should be controlled by a financial regulator – primarily to ensure that depositors are protected. And regulators worldwide have determined that this activity requires a banking licence. But in this context banking is merely a word. It doesn’t have to be a traditional bank that secures a regulatory banking licence.
MMPI believes that existing financial regulations are out-dated because they cannot keep pace with new technologies. More and more consumers are using digital devices to store; spend and borrow money without the need for a bank. Google Wallet allows subscribers to move debits and credits between themselves and to purchase and pay for goods and services in a couple of key strokes. It makes perfect sense that the least resistance to mobile banking activities is most obvious in rural Africa where there were never any banks in the first place. M-Pesa, a leading player in this area, is a subsidiary of Vodafone!
As with all things new it will take a little time to be broadly acceptable to the masses. And in keeping with such developments it may need a breakthrough moment. Could the onset of negative deposit interest rates for retail consumers be such a tipping point?
Retail banks are struggling to pay deposit rates greater than zero in the face of negative wholesale interest rates. When they begin deducting interest from consumer deposits – depositors will rebel. The banks’ only logical response will be to create product and service enhancements – in other words aggressively adopt the digital model.
The future of banking may not involve traditional banks and will certainly only involve those that migrate to new technologies and away from bricks and mortar. Banks have largely lost the trust of consumers; while the younger generation trusts new technologies – that’s where banks need to go to re-kindle consumer confidence. The future is bright but it will likely evolve at a pace that will desecrate established businesses that do not conform to the new realities.