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Moral decision-time for the Big Banks



So, imagine you are CEO of a major British bank. You’ve got a problem to wrestle to the ground.

Who do you really want to have as your customers?

It’s not as easy as saying “anyone”, (which is the response the Regulator and Treasury demand that you give). And it needs to be clearly understood that making any money from current (checking) account provision is near impossible in a low-interest-rate/high-service-cost environment. Each UK current account generates on average just £140 in total and that amount will fall… hmm… so, ideally you want more of the above-average-value accounts, and fewer of those below-average accounts.

As CEO, you start with your wish list:

  • Income of over £30k — about 9m people: Good customers who seem to bring in £200 a year. You probably break even at a true service cost but they provide lots of cash throughput for lending to others, which is better for the bank than having to borrow on the wholesale markets. You’ll make a bit on their deposits and their credit and debit cards bring in some useful interchange income. They are reliable overdraft customers, and defaults are low. They might also buy a mortgage and other high-margin products. Yes, that’s a big tick.
  • Income £20–30k — about 7m people: Marginal case with £140 income to the bank annually. Their cash flows are lower and their service demands are high. They are certainly loss-making but their deposits are useful. If they stay, fine; if they go, so be it.
  • Income £12–20k — about 10m people: Mostly: nope. Low income for the bank. Low throughputs and high service costs make them unattractive. Often default on overdrafts and may well have poor credit records. Need to be careful as some may be first-jobbers with a good future ahead, so some further segmentation work required. All considered: “sorry, it’s a ‘no’ from me”.
  • Income £8–12k — about 5m people: At face value, absolutely not, however… be careful as many may be part-time workers and part of a family household, which might be in the £30k plus region. By and large, no value.

Then you look at how you will have to charge in the very near future. That’s grim. The Competition and Markets Authority has put the squeeze on charging and the Regulator is going to put the boot in next, with a report due next spring. Those annoying people up at Lloyds Group, with 40% market share, have just further stuffed the entire market by trying to appease the Regulator, crushing bank charges still further. If you cling on to your current charging model, you’ll be at a competitive disadvantage and will lose market share, which won’t look good. And anyhow, you then might get clobbered by the Regulator next year too for charging too much! It’s a bind.

On top of this, there’s the painful truth that technology is leaving your bank behind and lots of new upstarts are chatting away about nibbling into your market share. And then there’s the Open Banking initiative coming in 2018, which will expose your soft underbelly to the same fintech upstarts by forcing you to let them see your customers’ data. Nightmare.

So what to do?

The new Lloyds model, which you will almost certainly need to copy, makes charges to customers 100% dependent on what they borrow. Yes, Mr. CEO can still make interest margin on deposits and some interchange, but direct charges to customers will come solely from the overdraft and loans book. Inevitably, you therefore need more of those high-earning, lower-risk users; you also want fewer higher-risk users from the lower-income segments. And where you already have low earners, you need to refuse them loans and hope that they go away, or else lend to them at a rate so high that it pays off. Yep. Sounds like the bones of a strategy?

You’ve got a worm in your brain, though, CEO.

Do you put the company first and really drive up margins by building your bank’s future around higher earners who present a lower risk? After all, what about the social responsibility regarding the other 60% of UK citizens: our teachers, nurses, firefighters and squeezed-income workers, to whom you owe a duty of service provision? Your model is to drive revenue through giving them an overdraft – but you know damn well they will struggle to ever pay the overdraft off. Is it right to put them into a spiral of debt? It seems that using a Big Bank like yours may actually be prejudicial to their financial well-being, so actually it’s best if they go elsewhere? What’s more, you’ll now be hell-bent on lending to the people whose only use to you is in providing deposits. That makes no sense.

They have to go. But it doesn’t quite feel right.

It’s a dilemma all right. Corporate well-being vs. customer well-being. Who’d be a bank CEO?




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