Tag Archives: banks

More bankers needed?

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“Half the world is unbanked,” is the title of an early chapter of a new book, [amazon_link id=”026201842X” target=”_blank” ]Banking the World[/amazon_link], edited by Robert Cull and others. Counterintuitive as it seems, for those of us living in countries with too much banking, too little banking is a big problem. For a long time the best, indeed one of the only, books on the issue of financial services for the truly poor has been [amazon_link id=”0691148198″ target=”_blank” ]Portfolios of the Poor,[/amazon_link] edited by Daryl Collins and others (see also the terrific Portfolios of the Poor website for additional material).

[amazon_image id=”026201842X” link=”true” target=”_blank” size=”medium” ]Banking the World: Empirical Foundations of Financial Inclusion[/amazon_image]

Collins has a chapter in this new book, on measuring what financial services poor people use. It starts with an example about how important basic financial services can be in helping people earn more – a study of fertilizer use in western Kenya, where the biggest barrier to using fertilizer is timing savings in order to have enough money available to buy the fertilizer at the right time. I think access to secure means of savings is fundamental – far more important than microcredit, which has been so much the focus of research and policy debate so far.

Although I’ve not yet read all the chapters in this book, it collects together a number of empirical studies piecing together the evidence that will be needed to help develop inclusive financial services. It includes a number of intriguing ones – such as using biometrics for identification and security purposes. This is interesting because – although the chapter doesn’t address this issue – global anti-money laundering and ‘know your customer’ regulations – are wholly paper-based, which excludes people with no fixed address, no bills addressed to them, few formal documents at all, and no access to photocopiers. It is worth asking whether alternative approaches ID schemes could offer adequate security to serve the real purposes of such regulations. (I think the digital money guru Dave Birch has written about this although I can’t track down the link at present.)

I also like it that the book has a section called ‘Cautionary Tales’, included as a warning against ‘silver bullet’ thinking (“All we need to do is X and we will end poverty”). Not all financial services boost growth or encourage entrepreneurship, and some can be harmful. The examples here are the disappointing effect of remittance flows into Vietnam and the damage done by easy access to mortgages in some of the lower income Eastern European economies.

The final chapter, by the editors, lists ten unanswered questions, the first of which is the need for much more evidence on whether and how access to financial services has a beneficial impact for people on low incomes; which financial services are most valuable; why do ‘micro’ services struggle to scale up; and does growing access to financial services increase the risk of financial instability? As this list indicates, there is much that we don’t know, and the answers are relevant to financial inclusion within the rich economies as well as in low income countries. However, this book is a welcome addition to our present state of knowledge and will be of great interest to people working on this aspect of development.

What will make banks care about their customers?

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Yesterday I gave evidence to the Parliamentary Commission on Banking Standards, on competition (lack of) in retail banking – alongside two distinguished former competition regulators, John Fingleton and Clare Spottiswoode. The transcript will be published later. My message was that banks are mistaken when they say they are competing vigorously with each other – just look at the cut-throat rates on offer in the ‘best buy’ comparison tables. My experience on the Competition Commission for eight years taught me that big firms always regard their competition as intense but they can’t distinguish their intense oligopolistic rivalry from a competitive market. That intense – often loss-leading – rivalry over a narrow range of goods for a small group of customers is cross-subsidised by high margins on other extensive areas of business. (Indeed, you can tell what the banks think of the small group of mobile customers they are competing over from the fact that the industry term for them is “rate tarts”.)

Most bank customers are inert. Switching banks is a huge hassle. If it goes wrong, the consequences are an even bigger hassle, causing enormous potential disruption to bill payments and so on. The only alternatives available will be just as poor in terms of service quality or rates offered. The lack of switching and the cross-subsidies between different groups of customers are clear signs that competition in retail (and SME) banking in the UK is inadequate.

Understandably, there has been a lot of focus since the crisis on tougher regulation. But regulation alone will not improve things for customers. If you rely on regulation to improve service standards, banks will focus on their regulators. It will take competition to get them to focus on their customers. Indeed, more and more regulation will make it harder to get new competitors into the market, and the regulators are not sufficiently focused on using competition as a tool to achieve their aim of improving consumer outcomes – after all, regulators regulate. Competition works indirectly but it is a powerful force for serving consumers, and in particular for innovating and anticipating customer needs.

There is a good example in the Competition Commission’s decision to break up the BAA airport monopoly. The counter-argument was that there are economies of scale, and it’s a complex business, with break-up disruptive and uncertain. But who would have predicted that after the divestment, Gatwick Airport proved able to clear the unexpected snow off its runways quickly and efficiently in December 2010, while Heathrow, still in the hands of the old monopolist, was paralyzed for days?

I’ve not quite finished Anat Admati’s and Martin Hellwig’s [amazon_link id=”0691156840″ target=”_blank” ]The Bankers’ New Clothes[/amazon_link]. It’s absolutely excellent at skewering the bogus claims the banking lobby makes about the consequences of increasing equity requirements and limiting bonuses. It addresses regulatory issues.

What it doesn’t do is consider the competition question. Indeed, in all I’ve read about the banks in recent years, competition issues have been overlooked. There is a misperception that “too much” competition contributed to the crisis, I think, but that’s to make the same mistake of confusing a competitive market with oligopolistic feuding in some areas. The empirical evidence is mixed but leans firmly towards indicating that more competitive banking systems are more stable – the banks tend to be smaller so the “too big to fail” problem is less acute, and smaller banks are simpler so regulators (and their boards) can monitor them more easily.

The Parliamentary Commission on Banking Standards was, though, clearly well aware of the importance of increasing competition and new entry. More power to their elbow.

[amazon_image id=”0691156840″ link=”true” target=”_blank” size=”medium” ]The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It[/amazon_image]