[Dave Birch] I went along to a seminar, kindly hosted by Barclays, to take part in a discussion organised by the Centre for European Reform on the future of retail banking in Europe. David Shirreff, the Frankfurt business correspondent for The Economist, has written a pamphlet for the Centre called “European Retail Banking: Will there ever be a single market?” [PDF]. David’s key points are that in smaller countries markets have opened up, but in larger countries (eg, Germany) there has been resistance to change; that the Commission should use competition powers to take on vested interests but stick with a light touch; and, most controversially, that regulators should create a framework in which each business within a bank (and I guess this would include payments) should have its own capital and profit and loss account to increase the scope for cross-border mergers and acquisitions below the mega-merger level. I am absolutely not qualified to comment on whether this makes sense or not, but I thought that Digital Money Devotees might be interested in the discussions that followed (I’ve not attributed any of the comments, in case I misunderstood them in some way, and I’ve tried to focus down on relevant part of the discussion).

First of all, as a backdrop, it must be pointed out that over the past ten years, the largest European banks have doubled their cross-border business within Europe (from a sixth to a third) while their cross-border business outside Europe has remained static (at a quarter). So clearly, as per the Barclays – RBS – ABN Amro story, there is more competition in European banking than there used to be. But a general criticism of the current situation is that a free market in capital and labour needs pan-European solutions, but the operations of retail banks in different countries are not, in fact, connected (other than on the balance sheet), which makes the banking sector quite inefficient. Yet it has not been that easy for new entrants to set up in each other’s countries — for a whole variety of reasons — and share prices have been high so it’s been hard to “buy your way in”. In the case of British banks, they did try to become more pan-European a decade ago but that push didn’t generate huge results, so they focussed on expanding their domestic businesses instead.

The current supervisory structure is not geared up to managing pan-European banking structures. Now, setting aside the issue as to whether some, any or all banks should be pan-European — in the U.S. “single market” this is not the case — let’s assume that the goal is seamless pan-European service for customers and see how things are going. For most people (since most Danish consumers are not at this instant particularly clamouring to take out mortgages from Latvian banks) this comes to down to their day-to-day interface with the pan-European banking system: payments. Now payments, which are crucial to a single market, has already moved forward, because of SEPA and the PSD.

The focus on payments is good, because it directly affects businesses ability to operate across Europe, but it must be recognised that payments are not banking and that there are much wider banking issues that need to be address in order to get real pan-European competition. There was a interesting discussion, that didn’t really get going until the end, about what the goal of European policy is: one of the attendees put it rather well, asking whether consumers on the whole actually want cross-border banking or do they really just want more effective and efficient remittances? Having had time to reflect on this, I wonder if it isn’t a rather accurate summary of the requirements outside the finance world.

There was a discussion about capital requirements: Basel II has come to late to help in current circumstances. Although I can’t say I understood the nuances, there were some comments that there is a danger in this kind of framework because regulators become drawn into the process of risk management (see, ad nauseum, Northern Rock). Inevitably, because the discussion took place shortly after the news that a French barrow boy had done a Leeson, I was straining to understand the issues around the core of risk management because it links to our business in the more technology-centric risk analysis sense. This is where David’s suggestions about the separate P&L for the the “narrow banking” business and the wider investment banking business was discussed: I must report that there didn’t seem to be much enthusiasm for what sounded to me like an idea worth at least some consideration.

In his pamphlet, David says that

European lawmakers need to decide what types of business they want to be done by bank, and what types by non-bank competitors.

I agree wholeheartedly. In our space, payments, it seems transparently obvious that more competition — rather than more regulation — is the best way to drive innovation forward and deliver need services to the market. As was pointed out in the discussion, though, in modern business there is no best model that regulators could aim for, so their aim should to create the conditions for a more competitive environment, not to determine a priori what that more competitive environment might be then regulate it into existence. Just to tack on my own opinion: one of the speakers (it may have been Christine Farnish from Barclays) said that one the biggest barriers to overcome is actually the inertia of customers, and I’m sure this is true. People moan about banks all the time, but they don’t change their accounts: more movement at this level would surely be the way to open up new competitive spaces in the market.

Finally, what I thought was the most relevant part of the discussion to this blog was not part of the regulatory or SEPA discussion, but a point made in passing by one of the senior bankers present. He said that there’s a problem with a lack of innovation in retail banking because of opportunity costs: in other words, legal and regulatory change absorbs so much of European banks’ resources that they are (as one he put it) “off the pace” compared to the rest of the world (examples such a current account mortgages and mobile phone payments were used to illustrate the point). This is clearly correct, and needs to be added as a factor in future discussions about innovation.

Incidentally, I must declare a connection here: David Shireff’s father Donald was my economics teacher 30+ years ago, and one of the best teachers I ever had.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

1 comment

  1. Thanks for the on-site report!
    The difference between payments and banking should always be remembered. Payments is basically something that suffers from border-based regulation and therefore has been slow to take off. Banking on the other hand does not, as banking fundamentally is based on a strong relationship between the banker and the customer, so borders are not the issue.
    It’s curious that the senior bankers are asking permission for more innovation. There’s an easy way to get it, simply go to the regulators and hand back some franchises. Say “we want to compete, we don’t want all this protection, we want open borders to all comers…”

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