Last year I spent a month on holiday in the UK, which was the first time I’d travelled overseas since 2019.
Although I paid for my airfares and accommodation before I left, I still needed to sort out a convenient and cost effective way of having access to spending money in one of the world’s most expensive cities.
When I visited the bank to discuss my options I was surprised to learn that they no longer offered foreign exchange services, something most banks seem to have stopped offering in the wake of Covid travel restrictions, and I was wary of using my New Zealand debit or credit cards on my travels because of the apparently high fees they would charge.
A colleague suggested I get a Wise card. Plenty has been written about this service but if you haven’t heard about it here’s a link.
I duly signed up for one over the internet, waited for the card to arrive in the mail and transferred a princely sum of pounds sterling on to it.
Happily, it worked like a charm on my travels and at a very modest cost.
I used it just like any other credit or debit card and if I needed to withdraw cash, I just headed to the nearest ATM, which duly dispensed the cash, invariably without charging fees.
One of the things I noticed about ATMs in the UK was how common they were, much more common than they are here, but hardly any of them were operated by banks.
Most were operated by the major grocery chains under their own livery, who installed them in the convenience stores that are nearly as ubiquitous in the UK as local pubs.
On my return to New Zealand I reflected that I had conducted the entire journey without once having to have any direct contact with a bank or a bank issued product, apart from the initial transfer of money from my account to the Wise card.
Then I noticed something else.
Local ATMs in this country that only a short while ago were emblazoned with bank livery, were no longer being operated by the banks, but by a third party.
This struck me as part of a trend where the banks are progressively withdrawing from arrangements that bring them into direct contact with their customers.
Closing branches, ceasing to provide foreign exchange, selling mortgages through brokers and no longer operating ATMs are all examples of this.
So it set me to wondering if we need banks at all.
There is no shortage of non-bank organisations that will provide you with a credit card or a small loan, or maybe even a larger one.
So could we eventually see the day when we, the great unwashed public with our hard-earned pittances and modest credit requirements, don’t have any direct contact with banks at all?
I think we could.
Because the thing that still ties us to banks is the clearance system they operate that allows us to manage our finances through the various accounts the banks provide.
But that’s not how they make their money, not most of it anyway, even though they charge squillions in fees each year.
Banks make their money by selling debt, lots and lots of debt.
It may be packaged up as mortgages or personal loans, or revolving credit accounts or whatever fancy sounding names they can come up with, but it’s all debt.
And they shovel billions and billions of dollars of it out the door then rake back in an appropriate and extremely well-deserved amount of profit in return.
Imagine how annoying it must be for them to then have to spend so much time and money managing that pesky clearance system that keeps track of all our pennies, or to pay for those call centres that suck up vast sums of money just to help Mrs Thingamejig who has lost her credit card, not to mention the zillions they spend on an army of marketers and spin doctors who work so tirelessly to make sure we understand what fine, caring, upstanding and indeed essential, pillars of our society the banks are.
Wouldn’t it be better if all of that could be palmed off on to third parties, to leave the banks doing what they are really good at, which is peddling debt.
After all, banking is just another form of retailing, which is the expensive part of our current banking ecosystem.
I think it would probably suit them better if they flogged off the public-facing part of their business to concentrate on being the wholesale suppliers behind the scenes, delivering truckloads of fresh debt daily to the new retail banks, who would then bear the cost of packaging it up, advertising it and selling it on to us, the public, and dealing with our pesky complaints and inquiries.
Eventually a bank, as we know it, may be little more than a screen in a corner of a supermarket operating under a trusted brand name we all know and love – a Pam’s Bank perhaps.
The banks we currently know would still be there, but behind the scenes, out of sight and mysteriously pulling the financial strings that govern our lives.
Come to think of it, that’s what they do now, so not much would change.
Whether such a situation develops or not will of course depend entirely on whether or not that’s what the banks themselves want to do.
After all, if there’s one thing they’re good it, it’s getting their own way.
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20 Comments
Also in NZ they are stopping the cashing of foreign cheques.
They are ripe for bigtime disruption in the next 10 years
In New Zealand, even local cheques have been abolished by the Banks.
Yes, which is really annoying for those of us who get dividend cheques from foreign companies. Now have to go through the labourious process of dealing with a third party fx entity who will then charge you $5 to receive your funds.
So will one of those FX outfits cash a foreign cheque?
The government is always the monetary sovereign and can regulate the banks in any way that it chooses to, but it often feels as though it is the banks who run the show.
Agreed.
Is it because politicians are wondering what they'll do next? I expect that most politicians - even the really dumb ones - eventually wise up to where the real power lies.
Banks' revolving doors may play a role.
FinTech is eating banks breakfast on user experience. Retail investing and investment funds are providing better returns. Traditional banks are shying away from business loan lending. All that is left appears to be mortgaging, and even that market is starting to slip into shadow banking.
It seems that banks today exist as institutions for the purpose of regulation and due-diligence, more like the executive arm to central banks legislative decisions. I would love to see central banks open up to tech disruption and trying to lower the barrier between them and consumers.
Currently I don't see how big banks aren't becoming more and more economic inefficiencies in our system...
SKF
Great article, Greg.
I came to similar view while working with banks in Europe about 25 years ago. That view was confirmed by senior people I was working with at the time. Which I suspect is one of the reasons the UK is like it is now.
Aggregating lots of small amounts (yes, a 100,000 GBP mortgage to them is small) is extremely costly (and they were massively inefficient at doing it) and they'd much prefer to have a very small number of people managing the aggregated amounts as the costs are low and the profits are enormous. I.e. similar to another market - can't think which one though. ;-)
Great article.
In answer to the heading:
No; we don't need banks. They are 100% parasitic, and where we're going, we won't be able to carry them.
Yes, they need us - that's what parasitism is all about.
Other cultures, addressing the problems of exponential growth, have outlawed usury - the charging of interest. We will do the same, albeit the banks will resist.
Banks make their money by selling debt, lots and lots of debt.
But from the point of view of the bank, it has acquired the security without giving up any cash; the counterpart, in its balance-sheet, is an increase in its liabilities. There is expansion, from its point of view, on each side of its balance-sheet. But from the point of view of the rest of the economy, the bank has ‘created’ money. This is not to be denied. Hicks (1989, 58)
We start with the idea of credit creation, specifically a swap of IOUs between a bank and myself involving a bank loan that is my IOU and a bank deposit that is the bank’s IOU. Nothing could be simpler, and yet the mind rebels, especially the well-trained economist’s mind, because this simple operation increases my purchasing power without decreasing anyone else’s. It seems like alchemy, or anyway a violation of some deep conservation law. Real productive resources are the same as they were before, and the swap doesn’t change that, does it?
Spending of the new purchasing power adds another layer of perplexity. If spending increases but real resources do not, then it seems logical that the increased spending must exhaust itself in higher prices—that is the intuitive appeal of the quantity theory of money. My purchasing power may increase, but everyone else’s decreases because their money balances buy less. From this point of view, the alchemy of banking seems like a kind of theft, something to be deplored in the name of economic science and if possible outlawed in the name of the general good. Link
I also obtained a wise card about 2 years ago for overseas travel. It seems their association with Visa is paying off. What I also find useful is you can load it with NZ dollars and use here as a debit card.
The bank forex cards and normal debit and credit cards were/are? a total rip off on exchange rates and fees. Don't think that has changed. Hopefully Wise doesn't become too greedy and slowly increase fees and give poor exchange rates over time.
They did and will do again
I had a mortgage with the Portman Building society, never met anyone or entered their buildings, arranged by a broker, transactional I banked at NatWest, not the easiest bank to deal with. This was all 1998-2002.
Credit is a commodity product... with simple price discovery. Small players lack the ability to tap the cheaper markets to provide said credit. Hard to compete when its all based on price.
Here is the thing you should not need to use a wise card or new third party services at all. I don't when trading in Sweden, Germany, the US, the UK, or Australia. You also don't need to visit a bank or go to an exchange and that is exactly the same as in NZ. Many people have not needed to go to a bank for decades (so it is odd you mention it here). You can withdraw cash from supermarkets perfectly fine. The main issue is the carrying of cash, or cards, or phones, or indeed anything on you is always at risk from physical theft, with phones and cards offering remote theft opportunities as well.
But the use of a Wise card is an additional step that is entirely not needed at all and adds extra layers of insecurity, fraud and risk. With a huge fricken hole grey area around legal responsibility and actions in cases of remote theft. Why would you go to expose yourself to heightened risk for no extra benefits over existing transactions. The exchange rate is not that significant and when adding it all up in the wash if you had to cover insurance of the risk you opened yourself up to it would even out.
The key reasons people do go to banks are:
1. Ability, personal desire for in person interactions for financial services, disability (grouped together for all you 'I want to talk through things but don't have a disability' people and the 'I can only get access to account services through people due to the design of existing services to be purposely inaccessible')
2. Severe faults with the online services which need to be corrected (often human interaction is needed to correct faults and this requires the humans in banks because no web or third party or account service is infallible)
3. Identity verification for new accounts since many countries cannot do online identity verification and KYC is vital without exceptionally failed and discriminatory facial recognition, (when JPs have existed for generations in NZ is pretty embarrassing),
4. Mortgage applications and discussing options with a mortgage advisor (don't see most people buying mortgage free anytime soon and people often need to talk through options, especially if they need to refinance). This can be done remotely but it is still a bank human to human interaction.
5. Investment & trading account setup and management (see account setup above with necessary documents that are hand delivered e.g. if looking to apply you may need to provide extra details like tax forms, if looking to withdrawal you may be forced to physical hand in documents like medical certificates as they refuse online submissions on even verified ones... which they then promptly photocopy).
6. Business banking taking all the cash traded and depositing it securely.
7. Loan applications (including business loans, hah obviously far down the list to mortgages).
etc
But sure next time you travel to the UK tell me how easy it is to get a mortgage without using a loan provider (i.e. bank or non bank lender) or tell us how easy it is to trade when legally blind and with low mobility.
We don't need to hear stories about how easy it is for an ablebodied person to use online services and card transactions. They have been able to do that since they were invented over 40years ago. It is like hearing someone exclaim water is wet. Oh you could go to any supermarket and get money out... yeah the 2000s called and they are terribly worried how you are doing after that coma.
You dont want to use your NZ bank issued credit or debit card overseas because (a) you get a terrible exchange rate so everything costs you more (b) you get charged foreign exchange conversion fees on top so everything costs more, and (c) cash advances on a credit card charge an extortionate rate of interest and its incurred as soon as you withdraw funds (there is no 55 days interest free).
So taking that I am saving not borrowing which non-bank do I trust with my dosh then?
I was told the other day by a Bank employee ( when i complained about their lack of Banking service) that they were +Advisors not Bankers .
Advisors need qualifications where are the Bank Advisors
Slowly, Banks are going back to their original purpose, just taking deposits and lending on security, mostly of immovable properties. All other innovations they had introduced, done and profited from in the last couple of centuries are now being taken over by other providers of such services. In the sense that common man needs a relatively safe place to put his surplus money, without too much risk, Stable and well capitalised and regulated Banks are necessary for any Economy.
the value of the banks are : transaction settlement and loans & debts.
no Fintech is replacing those two functions yet, and not likely to replace those functions.
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