20 September 2017

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If everyone dislikes a banker why do they continue to lend them their money for free?

19 September 2016  |  4075 views  |  4

‘Banker’. It’s difficult to think of any other job title that has been so universally vilified since the financial crisis in 2008. Roundly blamed for a ‘casino’ attitude to using other people’s money to line their own pockets, bankers have been the focus of demonstrations around the globe and, if Mark Carney is to be believed, an on going regulatory approach aiming to ensure that banks will never again require public funds in the event that they become insolvent. So, with all this public backlash, ill-feeling and general distrust towards bankers, why is it that a number of years on from the financial crisis, so many people continue to lend banks their
money for free and in many cases in order that those banks can use it and make a profit from it?

The inconvenient truth lies in the fact that inertia on the part of those very same people that profess to dislike bankers, provides part of the fuel that allows a bank to make the multi-million pound profits that they protest over. But to understand how we need a simplistic recap on the way a bank works. When I was growing up, one could be forgiven for thinking that the role of a bank was to keep all the money it was given in a big underground vault. It seemed it would give some back to customers who popped in to sit behind expansive desks and then spend the rest of its time trying to convince us that it was working hard on our behalf. In reality however, the vault of a modern bank isn’t stacked to the ceiling with used notes. Although a simplistic example, the role of the modern bank is to borrow money as cheaply as it can and then to lend that same money on to someone who wishes to borrow it at a higher price and keep the difference. And the person they borrow that money from as cheaply as possible? Well, that’s you actually.

Savings, deposits, your hard earned post taxed money, call it what you will but when you send it to the bank you are legally lending it to them and it’s not going in the vault, it is being multiplied and lent to people you don’t know on terms you won’t be party to and you trust you are going to get it back, or in the case where your deposit is less than £75k, you trust that the FSCS scheme is properly funded and working. To you, your deposits are your assets but ask a bank how they classify deposits and they will talk about their liabilities – the borrowings they have to pay back. And, when you think about your savings in terms of a loan you are giving to the bank it brings a few interesting thoughts to mind. Whom am I lending the money to? What is the risk in lending it to one bank over another? and, how much is the bank paying me to borrow my money? For many people who inertly leave their money sitting with the bank the answer to the last question is typically, not very much at all. After all, if you aren’t going to try and lend it elsewhere why would the bank try harder to pay you more for it?

So what to do? Well, there are definitely ways of making sure that you have more control over the risks you take with your money and the rewards you receive. In a climate with low returns you need to be aware of how to maximize your efforts without giving away too much of your valuable free-time in doing-so. We all spend hours reading the Sunday papers ‘best buy’ tables and scouring the web for the next top deal so maybe the answer is to find a tool which does this for you, rather than accepting what you are given and leaving the fate of your funds in the hands of someone else.

 

TagsRetail bankingInnovation

Comments: (7)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 19 September, 2016, 20:34

Even in the most egregious case of breach of trust by a bank - i.e. Wells Fargo example - the money that was unauthorizedly transferred from a customer's account was transferred to another account in the name of the same customer. That's a lot of things but it's not stealing. Whereas when PayPal freezes a merchant account, the merchant never gets back the fees charged by PayPal. That's what I call stealing.

Therefore, inertia is not the reason why people still lend their money to banks. Lack of equally trustworthy alternatives is. Even in the post Wells Fargo world.

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A Finextra member
A Finextra member | 19 September, 2016, 21:16

Good evening KS, thanks for your comments. May I respond with that I am not saying people lend their money to banks due to inertia, what I am trying to point out is that people suffer a suboptimal return on the money that they lend to banks due to inertia, not because of a lack of options to increase that return.



 

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Melvin Haskins
Melvin Haskins - Haston International Limited - | 20 September, 2016, 07:43

Sorry, but I agree with KS. There is a lack of trustworthy alternatives. My experience of pensions and investment management companies is that they are run for the benefit of shareholders and senior management, who receive their returns & pay and benefits regardless of the performance of thier investments. Investors are bottom of this pile. The UK stock market is lower today that on 1st January 2000, and very few pension / investment companies have beaten the market. Cash, on the other hand, has seen a 75-100% return during the same period - interest rates were much highe up until 2008.

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A Finextra member
A Finextra member | 20 September, 2016, 15:50

Good afternoon MH, thank you for your comments, much appreciated. Let me give you an example of what I mean and try and bring some clarity to what I am attempting to articulate. If I have £1 million at my HSBC account which pays me 0.10% p.a. in interest I will, over the course of a year, earn gross interest on that capital of £1000. If, however, I move my money to Nationwide Building Society and earn 1.00% p.a. in interest then over the course of that same year I would earn £10,000 p.a. of gross interest. Therefore, it is not the lack of available options (trustworthy or otherwise) that stop me from earning more money in this scenario, it is merely the fact that inertia and perceived hassle stop me opening a new bank account and transferring the cash. I hope this sheds some light on my thinking.

  

 

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 20 September, 2016, 20:09

@MelvinHaskins: I've had exactly the same experience with leading AMCs. 20+ pages of T&Cs for a consumer product, complex formulas to calculate NAV that can't be understood even by the AMC's own call center and branch staff. More in my blog post titled Puzzle Versus Mystery: Who’s To Blame For The Great Recession (hyperlink removed to comply with Finextra Community Rules but this post will appear on top of Google Search results when searched by the title)

@JeremyStevens:

TY for the clarification. I now get your point. What you call "inertia", I call "calculitis" - the inability to whip out a calculator to do even basic math. IME, it afflicts 90% of humankind. PFMs like Mint came into existence around 10 years ago with the promise of fixing this problem by doing the heavy duty lifting of calculations by themselves and presenting only the insights for consumers to take action easily. Sadly, the problem seems to continue even now. 

On a side note, I read once that RBS refused a deposit from a customer because it could get funds from some other source (BoE?) for much cheaper. Is that a factor in this discussion? In your example, if the customer moved their GBP 1M away from HSBC, is there a reasonable guarantee that Nationwide would accept it at 1% interest rate? What if 100 customers did that? 1000 customers? 1M customers?

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A Finextra member
A Finextra member | 21 September, 2016, 09:23

Good morning KS, thanks again for your interest. The market for deposit rates is fluid like any other and pricing is dictated by each banks individual funding requirements at any one time and the potential sources for that funding, of which retail deposits is one. Just like equities and bonds (or any other asset class for that matter) the price is driven by supply and demand. Using your example, but transferring it to equity markets by comparison, you could reasonably expect an equity price to stay the same if 1 person bought it, possibly the same if 1000 people bought it, but if 1m people buy the same equity it is likely to have an impact on the price. The same is true with deposit rates. The important point persists however, just because one bank reduces a rate it doesn't mean that there isn't value elsewhere in the market. Depositors have become conditioned to believing that 'all banks pay the same' or indeed have become just too lazy to look or do anything about it. Increasing your interest income 2-5x is perfectly achievable for the vast majority and easy with the right tools. 

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 21 September, 2016, 16:20

@JeremyStevens: TY for your reply. Like I hinted with Mint, tools might not work in a B2C environment. Assuming your company sells such tools, have you tried an outcome-based service enabled by your toolset? Going by the success of PMS, your toolset's ability to deliver 200-500% increase in interest income could make a blockbuster out of such a service.

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