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I have been pondering whether banks have a future? Are we approaching a point when banks become unnecessary?


I don’t know about you but until recently when I thought of a bank I thought of a solid building, with an imposing entrance, with cashiers you could only talk to via small spaces between very thick glass, and which held a large safe in its midst. These days my bank looks like a web site, which I log into using several different passwords, including one that is generated from an external security device thing that looks a bit like a calculator. Time was when banks were built to impress. Now a lot of branches consist of machines in a wall, and a couple of helpers available if you get stuck. If banks are no longer defined (in our mind’s eye) by their network of branches, but rather by the functions they perform, does that not mean they lose something? They lose a psychological edge that used to guarantee them market share.

Then there is the issue of cash. We access our cash via ATMs, and to do this we need a bank account and ATM machines being as commonplace as possible. But supposing cash goes out of fashion. Supposing we start to make smaller payments using our mobile phones, for example. We won’t even need a bank for its ATM service.

A recent article in ‘Wired’ magazine asked a similar question. See: The Banks of Tomorrow: Think Google and Facebook 

It turns out that much of the online functioning of banks these days is powered by a company called Yodlee.

Okay, we need to know that our money is safe, and that it can be transferred from one place to another quickly and – more to the point – accurately. We just assume our banks do this, but I see this process as analogous to the provision of data over the internet and phone network. For me the provision of data and the key background functionality of banks is a form of commodity; it is virtually identical no matter who provides it.

If we need to borrow money we can do so from a peer to peer network. If we want a good interest rate on our savings, we lend it over the peer to peer network. If we want our money to be safe, we put it into government bonds.

Maybe there will be a need for banks in the background, doing all the back office stuff, facilitating the transfers, placing our digital money in bonds, but it is the front end that gives a bank its value, its market cap. Remove the branch network and all we are left with is a web site, which could be offered by Google, Facebook, Yahoo, Amazon or Apple, for example.

We can pay for our goods and services using PayPal at the moment. PayPal is inextricably linked to the banking system. We convert our money in our PayPal account to money sitting in our bank account. But might that change? Or there are Britcoins, digital money that does not require banks to be part of the transaction process at all.

Let me change the mood a little, and refer to a Swedish bank called Handelsbanken. Now here is bank, which is run by its branches. Each branch is given a fair degree of autonomy, and the branch managers largely determine head office policy. Employees hold shares in the banks, and the share price itself rose roughly 1. 9 million times since 1900, which is some return. (According to the ‘Telegraph’, £10 invested in 1900 would now be worth around £20 million.) The bank is slowly moving into the UK. In 2008 it had 60 branches; now it has 161 branches. The thing about Handelsbanken is that it is old school banking but in a more exaggerated form.

I can see how banks that put more emphasis on their branches, on their personal touch, might continue to offer an edge. And those which embrace digital banking at the expense of the old fashioned approach might find they can generate as much turnover from much lower overheads in the short term. As for the long term? Well, I am not sure they will have a future.

 

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


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