Banking: The Story Continues

Our recent post on the next ten years in banking drew a couple of interesting comments. On Twitter, Esmee Wilcox asked:

"Thinking about notions of trust, re rural communities where this is more expected. What new models will emerge if metro bank not viable?"

Whilst in the comments section, Michael Spink commented:

"The successful will lead with purpose, not product. Engagement with the consumer base needs to extend into communities, demonstrating the value of an FI and its role in community...it will need to be about people, not profit. Think credit union on a grander scale."

Both of these are good points, and we rather feel that they tend to reinforce what we were saying. They certainly point towards what we see as the successful commercial banking business model in the years to come.

Before we continue, it is worth just outlining a bit of context. In the UK, and, I suspect to some extent in the US, the structure of rural communities has changed profoundly. The response to the financial crisis by the monetary authorities has been one of unconventional monetary policy - quantitative easing - which has served to pump liquidity into the financial system. Conventional economics would suggest that such an increase in liquidity would serve to be inflationary. This has not occurred with consumer prices, but is quite evident in the case of asset prices.

It is almost a truism that those who hold the most assets have seen the greatest increase in wealth. Residential property has enjoyed the best risk weighted return on capital for a number of years, and there is no reason to suggest that it will not continue to do so in the near future. The resultant rise in inequality has a bearing upon rural communities. Most of the increase in wealth has occurred in metropolitan areas, such as London and South East England. It has allowed the residents of these metropolitan areas to move out to the rural hinterland, to places such as East Anglia or South West England, either permanently or through the purchase of a second home.

The movement of people out of the metropolitan areas has bid up the property prices in the rural hinterland. However, prosperity has not spread that far. Those born in the rural hinterland are unable to purchase property in those areas because they lack sufficient income to buy a house. This has led to the withering of rural life. Within a village, the local school is usually the first to go, as local people start to have fewer children. Then the village shop, post office, and pub would close as the volume of trade becomes insufficient to support those businesses. This process has been occurring for decades, well before the financial crisis, but the financial crisis has given it a certain impetus. It is in this context that bank closures need to be viewed.

The strain placed upon the commercial banking business model has meant that the minimum size of the community which a branch bank can serve has increased. Looking at it the other way around, the pressure on the commercial banking business model has led to the commercial banks withdrawing from communities of an increasing size. Esmee was correct to point out that Metro Bank, the example of the new insurgent banks, is predominantly located in London and South East England. It is unlikely to locate in much smaller communities because it is not commercially viable to do so.

In some respects, this is a case of the people left behind, which will be the subject of a future post. In other respects this is a case of a tremendous commercial opportunity in the banking sector. The incumbent banks are delivering a service that is a poor fit with the desires of their customers. There is an opportunity for an insurgent bank that builds trust at a local level. That offers services at a human scale. Michael is right in directing us towards Credit Unions because they are community based, value driven, and people centred. At the moment, few banks offer this. And yet, it seems to me that this will be the key to success as we move forward.

We see the market wide open at present, it just needs a community focussed insurgent to fill the void!

Stephen Aguilar-Millan

© The European Futures Observatory 2017