Dangerous Games – Why we need to take another look at the real purpose of Retail Banking

 (Health Warning:  This blog is a touch convoluted, but hang in there because it does all make sense eventually - promise)

Here's the thing.

Banking is a pretty simple game – Use our money to make us more money whilst managing the risk.  Simple yes – but the devil’s in the detail – let me try and explain.

When you ask the public why banks exist they come up with some pretty simple ideas: 

1) “Provide me with a free, safe, easy to access place to store my money”

2) “Provide me with a line of credit to help me improve my domestic or business situation”

3) “Provide me with a good rate of interest on my savings”

I'll call this Game B – Free Money - Use our (the customer’s) money to make us (the customers) more money whilst they (the Bank) carry the risk.

When you ask senior bank executives (in a non-threatening way) what their role is they will most likely tell you it is simply:

1)  “Improve the share price and provide a return on equity for the Bank and the investors”

I'll call this Game C – Big Money - Use our (our customer’s) money to make us (the senior executives and/or shareholders) more money whilst they (the customers) carry the risk.

Now without over romanticising or oversimplifying it both these Games (Free Money and Big Money) have their roots in same game.

I’ll call this Game A – Retail Banking – Use our (our customer’s and shareholder’s) money to provide us (the customer, executive and shareholder) with a fair and decent return on our investment whilst we (the customers, executives and shareholders) carry the risk.

Now whilst all three of these games are similar the semantic differences I have included in their definitions above makes all the difference in the world to the way the Banks have been/are run.  Over the last 30 years the economic conditions have been such that the variants of Game A, notably Game B and Game C have rapidly developed and moved away from their simple roots developing very different and now clearly toxic norms and rules in the process.  However, in an environment of global growth and expansion, these two games have happily co-existed on the same big pitch and neither has paid much attention to what the other was doing as getting a positive result for both games was relatively easy.  The outcome of Game B is happy customers and the Outcome of Game C is happy investors and happy (well paid) bankers.  So if one of the norms of Game B is free banking (a uniquely UK phenomenon) and one of the norms of Game C is big bonuses nobody really cares as everyone appears to get what they want. 

However, when the world and the pitch that Games B & C are being played on suddenly contracts, due to the global financial crisis, it throws into stark relief the difference in values and purposes of the two Games, highlighting the shortcomings of each code, as the key players get in each other’s way, followed by the inevitable recriminations and mud-slinging as each side justifies its own norms and values.  Suddenly all we see are the referees (regulators, ombudsman and politicians) who’d been having “a quiet game” for the last 30 years.

Today, due to lax ethics, controls and an overblown sense of entitlement the banks are being slammed with fines, greater regulation and social derision.  Many of their heroes have been sent off (Goodwin and Diamond) and Game C is on its knees.  So does that mean that Game B has benefitted?  Temporarily perhaps, but far from being “the beautiful game” Game B has its own problems.  Game B has created a customer mindset that believes it’s entitled to free banking, is happy to enter fraudulent miss-selling claims on an unprecedented scale and is happy to absolve themselves of any personal responsibility for over borrowing.  If there’s a problem (regardless of who created it) the banks must pay!  Game B has created a sense of entitlement that is deeply dangerous and reactionary.  Now whilst Game B may temporarily be in the ascendant this blogger can’t see how Game B can continue long-term as it seems equally as misguided and ethically questionable as Game C.

Hence the point of this blog – surely we (customers, shareholders, executives, politicians and regulators) have to go back to the future to agree a definition of Retail Banking that echoes that of good old Game A.  Only when we are all playing the same game will we be able to fight off the economic troubles that currently confront us.  Until that time comes Game B and Game C will continue to be played and borrowing a reference from a 1980’s pop group, “Banking will eat itself”