Guest blog from Tony Greenham, New Economics Foundation
Sixty-three million people, 4.9 million businesses, hundreds of languages, dozens of religions, 86 counties, 66 cities. The UK is a vibrant and diverse country. So why should our banking system be any different? Our high streets are dominated by a small handful of giant national banks that essentially all operate the same business model and have identical ownership and governance structures.
In a new short film from The Finance Innovation Lab, called Transforming Finance, this analysis, which has been promoted by the New Economics Foundation for a number of years, is backed up by the testimony of academics, policymakers and financial innovators. Watch the trailer here. The film is part of a wider critique of the whole finance system, and an emerging vision of a future where the system can serve the interests of society, the environment and the wider economy. As Andy Haldane puts it in the film, Britain’s regulators confused ‘diversification’ with ‘diversity’ in the banking sector and that now needs to be put right.
Perhaps this narrow banking sector arose in the UK from a tension between two core functions of retail banks: the provision of payment services and the provision of credit. The former is a commodity business, easily standardised and operated more efficiently at scale. But when the provision of credit is treated as a commodity business to be remotely operated by computers, the job will be badly done.
Particularly for small businesses operating in local markets and without sophisticated financial information at their fingertips, the information required by banks to make successful lending decisions has to be gathered at source. This ‘soft’ information relies on knowledge of local economies and local people. Number-crunching with computers can certainly help decision-making, but cannot replace it.
Similarly, different industries can have very different characteristics. To truly understand the credit needs of a firm, you will need deep knowledge of its global industry and the nature of its supply chain, its seasonality and growth prospects.
Finally, individuals and communities can have very different credit needs. Community finance institutions in the USA and UK have proved that you can successfully lend to people without formal credit histories, but not by applying the one-size-fits-all approach of the major high street banks.
Our banking industry lacks diversity, and diversity is what is needed to ensure that all the profitable and socially useful opportunities across all the communities and economic sectors of the UK get the finance they need. To realise our full potential as a nation requires nothing less.
Research shows that more diverse banking systems perform better on SME lending, regional economic development, branch coverage, access to banking to the financially marginalised and support for social enterprises too. They even improve the stability of financial system by adopting more prudent approaches to funding and risk, and produce a more stable flow of profits.
Other counties fare much better than the UK. The USA has thousands of local commercial banks and a vibrant community finance sector that serves more difficult to lend to groups, often in partnership with large national banks who realise they lack the specialist skills and local knowledge. The US even has a state-owned public bank in North Dakota. Local banks account for over half of banking assets in Japan, one third in the USA, two thirds in Germany but only 3% in the UK. Co-operative banks are widespread and operate the genuine co-operative structure that UK banking regulation has prevented in this country. Savings banks that combine commercial success with explicit public benefit goals are present in many countries, most notably in Germany.
Britain is still banking in black and white while the rest of the world enjoys 3D technicolour with surround sound.
But now for some good news. Britain is also home to exciting financial innovation – the socially useful kind. The rise of crowd-funding models is shaking up the market, providing competition to banks as well as filling in some of the gaps. Tentatively, new regional and community banks are seeking to enter the market. Progress has been made on lowering regulatory and monopolistic barriers to entry. A number of progressive credit unions are creating viable financial institutions that can compete for business with banks while maintaining their strong social values.
This is a step in the right direction, but on a long and winding road. We need to hurry up if vibrant and diverse Britain is to get a banking system to match.