[Dave Birch] The economist John Kay wrote an excellent, excellent piece in Prospect magazine at the turn of the year. In it, he says, amongst other things, that

The modern financial services industry is a casino attached to a utility. The utility is the payment system, which enables individuals and companies to manage their daily affairs… Modest levels of speculative activity may improve the operation of the utility

[From Essays: ‘Making banks boring again’ by John Kay | Prospect Magazine January 2009 issue 154]

His imagery is not only, as always, accurate and thought-provoking but also valuable because it gives us a context for thinking about the way to take the payment system forward.

John Kay’s argument is, and I’m obviously paraphrasing horribly, that the drive toward tighter regulation (inevitable as a response to the economic crisis) can never produce the desired result. The idea that you can make the stock market function as smoothly, efficiently and unexcitingly as, say, the supermarket is just plain wrong.

The primary objective of the regulation of financial services in the future should be that the casino should never again jeopardise the utility. Many people think that the best method of achieving this is close supervision of the casino. This is misconceived. Instability is endemic to financial markets.

[From Essays: ‘Making banks boring again’ by John Kay | Prospect Magazine January 2009 issue 154]

For one thing, there’s no reason to suspect that politicians and their appointees will be any better at assessing risk and making the right decisions than the bankers who got us into the mess in the first place and the knee-jerk calls for more regulation will not only have no effect but will in addition make many things worse — in particular, the payments marketplace, where we need more competition and less regulation to stimulate innovation — so that we just cycle back round to collapse in another generation. In fact,

The better response is to separate the utility from the casino. The purpose would be to restore “narrow banking”. Narrow banking requires little flair and imagination, rather the conscientius completion of millions of transactions a day with minimal error. While technology and innovation have changed the processes by which narrow banking is provided, the customer needs that are served have changed very little.

[From Essays: ‘Making banks boring again’ by John Kay | Prospect Magazine January 2009 issue 154]

Now this is a meme that surfaced some time ago on this blog.

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].

[From Digital Money Forum: Euros centric]

David’s pamphlet made broadly the same recommendation but I think John may have hit upon the right language to propagate the meme, and I’ll do my best to help for what it’s worth. The reason that I was thinking about John’s piece was that I happened to be working through some of the implications of PSD with one of our customers, and it occurred to me that while we tend to think of PSD an opportunity for new players to come into payments, it may have just a big an impact on existing banking players: this is because it may be an opportunity to create subsidiaries or joint-ventures as more lightly regulated PSD entities and separate them from other banking businesses.

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. Dave;
    Reflecting on your blog and endorsing it….and as an erstwhile banker still much involved with the business of banks….,
    I see banks as Risk Managers/Mitigators in three distinct areas both for their customers and for themselves:
    i) Credit Risk- Essentially the taking of deposits and the granting of loans.
    ii) Capital/Trading Risk- Where banks use their own capital and trading capabilities to deal on their own behalf- or indeed that of their clients.
    iii) Operational/Transactional Risk- which essentially is the management of multiple payments & settlements systems locally and worldwide.
    These are the three legs of a bank today; their current problems lie firmly in legs (i) and (ii).
    Leg(iii) grinds on regardless actually shifting value around the world economy 24×7 and by & large, doing it highly successfully- if it didn’t Society would rapidly descend into chaos.
    So in supporting your views, we should build on (iii); in doing so, particularly take note that the historic division/strict delineation between physical and financial supply chain infrastructures is a thing of the past- it is simply not sustainable….
    And ergo what do you need in order to underpin this “new order”…?
    Most fundamentally, and as the foundation building block, you need the assurance and trust that the counterparty really is who they say they are…. once you have that on a global scale where risk and liability are clearly apportioned and managed, then the Applications follow and the future really starts to unfold in an exciting and beneficial manner….
    Transaction Banking is the past, Transaction Management is the future….
    Best wishes as ever
    [Dave Birch] That’s an excellent slogan John, I grab a trademark before some management consultancy nicks it!

  2. The fundamental reason why payment systems are generally reserved as a pet for banks is: DEPOSITS. Banks need deposits to make their assets grow big so they can lend. Getting deposits is an essential part of the banks’ real business model, indeed it is part of the very definition.
    Once people deposit money in banks, they generally want to use it for something. The link to the payment system should be clear; if banks do not offer payment systems, or if they have to compete at a sector level, their deposit base is reduced.
    So, statically, this would be the end of banking. The saving grace is of course that we are seeing the end of banking anyway, as securitization has ended the need. Current events are as expected, just somewhat poignant.
    Banks no longer need the tight regulation / subsidy in order to function under the term-mismatch problem of banking. One day, someone in a central bank will figure out that the way to do it is to shut the doors (of the central bank). This will likely take a decade or two.
    Then, payments might free up and be able to compete and offer service to users. Not before, I suspect. (Heaven knows what the EU was thinking when they “reformed” the emoney directive!)

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