The banks are too big to fail. Everyone says it and so it must be true. The last two decades have seen the rise and fall of the big bank concept. Take the ultimate global bank, the ‘Citi’ that never sleeps. It’s currently in 101 countries, has over 241,000 employees (down from around the 340,000 mark) and occupies over 10,000 properties. Could you imagine a government willing to take on the economic destruction by not bailing out a group of such significance? Well the US government couldn’t bring itself to either, with public money helping out Citi a number of times. So why did the banks grow so big that they could hold the leading nations to ransom?

The ‘jack-of-all-trades’ banks of old

The global bank adheres to the jack-of-all-trades model. Not content with their slice of the pie, the big banks (think Citi/HSBC types) chose to go global, looked to target every aspect of the financial markets, catered for every type of customer and, in a race to the top similar to every armament race in history, did every trick in the book to keep ahead of the following bank pack. In doing so the big banks chased after the multinational businesses. Their models were based on facilitating the multinational companies every whim. Being able to cater for conglomerates globally became the ultimate goal of every mid-level and above bank. Swiftly banks like RBS joined the race. They catastrophically chose to buy up ABN just before the banking bubble burst. Who would have known?

The noose is tightening

The typical big bank is bruised and battered, yet is still standing. Their yearly reports speak of tightening regulation, the vast need for holding increasing percentages of capital and the ever-falling returns on equity. So let us look closer at how many of the arguments for creating a global bank are in fact redundant. In all types of multinational companies, a key reason for investor support of a merger or acquisition is the belief of efficiency gains. Well let me tell you a secret. Efficiency gains are almost non-existent when it comes to the global banks. National regulators are increasingly demanding that local operations need to be ring-fenced. This limited ability to shift capital around the world negates nearly all-positive impacts of ‘efficiency’ drives.

But the real issue for the big banks is the ever regulation the must endure. The financial crisis 2007-08 ensured the regulators are increasing the amounts of regulation banks must comply with. A direct consequence of this is the need for the big banks to spend ever-increasing figures on compliance and building operating systems, which fit in with the regulators demands. For instance HSBC spent $2.4bn on compliance in 2014, a figure which was 50% higher than 2013 and is likely to continue to increase for the foreseeable future. Likely costs were in fact higher, and the fact remains the big banks profits are being squeezed.

Does being global actually work?

The real question is does the market even need global banks? The main reasons for being a global bank are to offer foreign-exchange trading and multinational crows-border banking services. Sounds exciting. But in truth these only really cater for around a quarter of the big banks revenue and that really is testimony to the broad idea that a concept on paper is rarely anywhere as good in reality. The idea that big banks make most of their money through cross border services is utterly false. HSBC, the global bank of today, was born servicing the British Empire in Asia. After creating a huge footprint in Europe, South America and America, guess what? HSBC still makes by a long way most of its money in Asia and is even looking at moving it's HQ back to Hong Kong.

Problems at the top

How do you defend companies, which are too big and unclean to not lurch from scandal to scandal? Awful PR is always around the corner. Just pick a topic and a big bank has been in the news recently for it. Money-laundering in Mexico, choose between HSBC & Citigroup. Ignoring sanctions, well there’s Standard Chartered & BNP Parabas. What about the big ‘no no’ atm - tax evasion. Well HSBC seems to have just been embroiled in a rather huge scandal in Switzerland for just that. Stick scandal alongside poor profits, pretty dismal returns on equity for investors and of course the huge fines imposed on the big banks across the world for their greedy profiteering and what are you left with – institutions that are still too big to fail.

What’s the future of the big banks?

The future is really unclear. There are few real alternative options to banks. No virtual bank has yet been created by a tech company yet, which enables a new direction. Banks are dysfunctional in every sense of the word. They stand for little, and if they were in any other type of business, would have reached their sell by date long ago. Everything that a new company delivers in, from working technology, excellent culture, constant teamwork, excellent revenue models, the bank utterly fails within. They are simply too big to change. Yet there are some banking models, which do work. See Wells Fargo in the US. They’re geographically based, excellent at what they do and a true market leader. Will see we them on the British high street soon? No chance. In the UK, Lloyds bank has shed its global ambitions and is showing signs of good recovery. Big banks need to downsize and become relative again.

Yet the rise of financial technology (fintech) start ups is starting to show an alternative option for users. Banks are becoming regulated pools of capital, with all these new fintech companies providing real service, real alternatives and real tech. And that is the future of the banking world. Who actually needs all the services a bank has to offer. As a retail customer, a multinational or even a SME, why wouldn’t you go to a quicker, more reliable, better customer experience giving and normally cheaper fintech start up. So that’s the future; all these little fintech start ups, slowly eating away at the big mechanical banks.