25 JUL 2017

Disclaimers:

• I am not a disinterested commentator. At my company, we compete with the model of the banks.
• We are not anti-borrowing. People need to borrow to fund all sorts of things in their lives. Credit is useful and often a force for good. In moderation.
• I am pro-bank. Without the banks, there could be no economy, no prosperity, no future (and, indeed, no U).
• I am, however, strongly opposed to the banking model in which the banks are trapped. So, we do need NEW models, not a fudge by the incumbent banks.

A recent speech by a director of the Bank of England, Alex Brazier, warned against a new credit bubble. These kinds of warnings are issued and then forgotten on a regular basis. If you read websites such as DebtBombshell.com, you may just give up altogether. Don’t. But there really are some things we need to understand and address.

In the past year, household incomes have increased by just 1.5%, but personal loans (credit cards, cars, unsecured debt etc.) have grown by 10%. Um. Borrowing has gone up 6x faster than incomes. Mr Brazier pointed his finger at the High Street banks’ “spiral of complacency”.

But, as is so ever the case, there was no mention of the root cause. If you offer debt, people will consume it. If your business model is 100% dependent on lending, then of course you will lend as much as you can, regardless. Banks lend money, and thank goodness for that. They use deposits from current accounts to lend, but they also borrow on the money markets to lend, so they are clearly lending more than their deposits. (That creates a potential systemic weakness).

UK banks also use their current accounts to trap consumers. They offer “free” current accounts. These cost the banks up to £200 per year per customer, a total of £7bn annually. So, ask yourself, why do banks offer free accounts? How will they make this money back, and then, add profit on top? The answer is that they absolutely need to lend more and more, enticing users with free accounts, opening overdrafts and then moving their users into loans. Good for those with growing incomes, but really very bad for everyone else. It can create a debt spiral for many, leading to long-term financial and mental distress. It is a lending-based model that does no good for a huge chunk of society. (60%+ of people in the UK earn on average £400 per week in take-home pay, and, not surprisingly, more than 60% only have £500 or less in savings. That is not financial resilience by any measure.)

What is needed is not more of the same. What is needed is not more challenger banks, or increased digital lending. What is needed is a new model. Change is required and unless the banks lead, the UK lending bubble will burst. The economy will be undermined. And the losers, as ever, will be those with least financial resilience.