Fair Bankers, Unfair Model

16 Feb 2017

The news on the Co-op Bank’s future is rather depressing.

This great old bank with 4 million customers has already once been taken over by third parties who have now given up and put it up for sale again. Commentators are pessimistic about the outcome. Allegedly, not least because the bank has a remarkable set of business principles.

“Co-operative Bank’s core ethical mandate is expected to pose a major obstacle to a sale of the troubled lender to a rival firm, according to City sources.” Daily Telegraph 15th Feb 2017

O tempora, o mores! What kind of indictment is this on a 21st century banking industry? If you’re ethical, you’re no good? Really?

Whilst there appear to be many greater reasons than this not to acquire this troubled entity, such as increased capital requirements and probably low profitability, it suggests that if you want a good banking business, this can’t be compatible with good standards of behaviour. Ye Gods!

How ironic that on the same day as the Telegraph’s article, The Fairbanking Foundation charity has published its latest league table of “fair” practitioners and the sadly superficial media scribes lazily reported about how banks are really cleaning up their act and becoming more ethical.

READ THE 2017 FAIRBANKING RATINGS REPORT

Well you can’t have it both ways. Is being ethical and fair really a good thing or a bad thing if you are a bank?

Well the big 6 banks (who, to be clear, have 91% market share of the current account market), and setting aside exceptional and historic mistakes, seem to be led and staffed by well-intentioned people who are every bit as decent as the next person.

The problem is not the staff. It is more fundamental than this.

The bank product set and business model was never intended to serve such a diverse range of financial capabilities as you find in any Western economy.

The bank model is to lend to make money, and there is nothing wrong with that. But this model also depends increasingly on propping up free current account banking out of those lending profits; worse still it relies on charging people for errors and unplanned overdrafts, instead of charging them just for what they use. These charges can be as high as £100 per month.

The impact of this model is that those with less money in society are subsidising those with more money. That is a model that jeopardises customer relationships, damages brands, and is patently, grossly unfair. The Competition Markets Authority’s Aug 2016 report lets slip: of the 43m “free if in credit” current accounts, only 56% are actually free, and the other 44% attract charges. According to Moneyfacts, these charges average £55 per month. This affects 16m people. That is not a segment, it’s a massacre.

Something is badly wrong. The incumbent banks don’t like the model they have inherited, but their legacy operational and technological constraints make them about as manoeuvrable as a pod of beached whales. This model hurts their reputations and is commercially “difficult” among their lower-earning customers (as in up to 60% of their customers lose them money). It is rather like having a huge carbuncle on the nose – embarrassing and painful for all parties, and you just don’t know where to look.

So what the Telegraph really means by the Co-op’s ethical model being a problem in the sale process may actually not refer to the principle of being ethical and fair. Perhaps what is being fed through is something no-one actually dares to say publicly: the problem with the Co-op is the customers. The Co-op’s proud ethical heritage will have made it attractive to blue collar workers, many of whom are in the average to below average income bracket (that would be normal families to you and me). Low volume through the account, equally high service needs, low consumption of other high margin bank products simply all add up to one thing for the banks – a big minus sign. It is not impossible that half of those 4m customers are unprofitable. Aaargh. No wonder a sale might be hard yards.

So actually, “being ethical” seems to translate into “attracting the wrong sort of customer”. And yes, reprehensibly this is how most of the main banks, VCs and analysts do actually see it.

Given the practicalities of economics, if the model clearly doesn’t work, isn’t it time perhaps for a new model? Why not a model where people pay for what they use, and get tools to budget and manage their money as opposed to being relentlessly encouraged to borrow more and more? That supports a fair and sustainable model for current account provision. This is what fair banking needs to be about. But even if the banks wanted to provide this, their concrete technology boots prevent innovation on such a scale.

So that is precisely why we founded U. Also, I guess it is why the Fairbanking Foundation awarded U its top rating against all the banks at 94%. And that made U the only qualifier for the full 5 star Fairbanking Foundation award. Ethical and fair can be done. It must be done. And it is being done today.

It’s about YOU, not them.

Written By
The Unbanker

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