Megatrend 9 – Broken Banking
A zero interest rate policy, QE type money printing and central bank bond buying has helped the banks to recover by giving them a business model that even George Osborne could understand – borrow money for nout and lend it out for six to twelve per cent. Somehow they still struggle to make money even with this gift from the government. Their European and Japanese counterparts on the commercial side are now struggling with the negative interest rates imposed by their central banks, so it actually costs them to place funds on deposit. This is meant to be a penalty that encourages them to lend the money rather than hoarding it.
But it doesn’t seem to be working. I believe the High Street banks have some deeply entrenched problems that leave them ripe for extinction. They have expensive branch networks carrying out mainly low value transactions. They have ancient IT systems, some dating back to the nineteen sixties that have been bodged and band-aided but rarely completely replaced. They have deeply entrenched cultural issues that make it impossible for them to treat their customers properly. And they have a truly terrible PR image that they have made no inroads to improving.
I’ve talked before about the concept of disintermediation, cutting out the middle man. Two developments in the last five years make this a reality. One, cloud based applications that bring mainframe computing power to the smart phone in your pocket. And two, a preference among millennials for more flexible approaches to finance through crowdfunding, asset sharing and settling for renting over buying their main home. Alternative banks have sprung up with no physical presence. Many of my generation are still nervous about buying stuff or paying bills ‘on the internet’ versus going into a brick and mortar shop or the local bank.
Futurist Daniel Priestley suggests that twenty fifteen was the year when we finally stopped making a distinction between being ‘online’ and being ‘offline’. Basically, instant broadband access everywhere makes it no different to breathing or walking. It’s just something that’s always there that we take for granted and fully integrate into our lives. So it will be with banking and investing. Crowdcube’s Luke Lang tells of the guy who invested a million pounds in a new company on the UK’s leading crowdfunding platform – from his I-phone, at five past midnight.
We’re now seeing the rise of robot financial advisers – I know, they can’t be much worse than the human ones. And we’re seeing challenger banks on the High Street like Metro where customers face the shocking experience of a bank clerk smiling at them and offering them a drink of water. We’ve even got Handelsbanken appointing local managers empowered to make lending decisions by getting to know the customers and business owners who live near the branch! Are you listening Barclays, HSBC, Lloyds or Nat West? No, I thought not. And then we’ve got the whole area of crypto-currencies, with Bitcoin very much in the vanguard. If you haven’t already read Dominic Frisby’s definitive book Bitcoin – The Future of Money, I’d urge you to do so. Dominic is investing heavily in the block-chain technology that underpins Bitcoin and I think it could prove to be as transformational as the internet. Even the Bank Of England is looking at it.
For investors, I want to finish with three key points to remember from all this. First, a reminder that money you deposit in the bank is no longer yours, its theirs. Hence they can refuse to give you access to it as happened with Northern Rock, Greece and Cyprus.
Second, how long before retail current accounts have the same negative interest rates as the commercial banks are experiencing? Mark Carney has already talked of lowering UK rates towards zero, which I’m sure will be the trigger for either charges on current accounts or negative rates.
And thirdly, as Tim Price has made us all aware, we can expect a war on cash. If you keep it under the mattress you’ll soon be getting a better return than in the bank, so the powers that be won’t stand for that. It’s already impossible to move anything above trivial amounts of cash without getting the special drug dealer service. They could ban it altogether or stamp it with a valid until date so that it’s no longer legal tender when you dig it up out of the garden.
Here at Elite Investor Club it’s our aim to keep you up to speed on these developments so you can stay one step ahead of the politicians, the bankers and the mediocre majority. If you haven’t already joined, the interesting times ahead in the banking sector might just be the incentive to do so.
Thanks for watching!