Monday, 14 March 2011

Financial service providers must go back to their roots

Consumers International's Jami Solli argues the world needs a return to client-centred financial services if consumers are to ever get a fair deal.
As consumer groups gather to campaign for fair financial services on World Consumer Rights Day, it’s worth remembering that banks have not always been seen as the bad guys
Community financial institutions, such as member owned cooperatives, thrift societies, and savings & credit associations flourished in Europe in the late 18th and early 19th centuries. Examples include the Raiffeisen rural credit associations in the 1860’s in Germany; the Irish loan funds of the 1720’s through the 1820’s; and the thriving Mondregone cooperative in Spain, founded in the 1800’s by a Catholic priest which still exists today. These institutions grew through organic growth; they reinvested savings aggregated from the primarily agricultural communities, and issued credits to farmers as well as non farm businesses.
Savings were prioritized, and the intermediation of the communities’ savings were critical to the survival of these financial institutions. Ultimately, a financial institution’s longevity was inextricably bound to the long range success of the small enterprises and households that they served. Thus, there was a strong incentive for financial institutions not only to know their clients, but also to understand their clients’ business models and cycles, including financial services needs.
Those days are gone.
Ironically, in the hyper FATF era (Financial Action Task Force) of anti money laundering measures and protecting against the financing of terrorism, bankers are unlikely to actually know their clients by name or to have any face to face contact with customers. In fact, banks seem to prefer that clients use automated tellers and internet banking, rather than human bank tellers so as to keep operational costs to a minimum.
Commercial banking has morphed into a system of maximizing client charges for things like not maintaining a minimum balance, receiving a balance statement and frequenting a human teller, not to mention the high penalties for overdrafts etc. All the while, banks are engaging in speculative investment behavior whereby they are no longer interested in investing in people or brick and mortar small and medium businesses, but are afflicted by the Gold Rush phenomena of every, alternative energy, real estate and other sector bubbles destined to burst.
However, burst bubbles do not cause banking losses, thanks to governments which cushion the impact of bank losses with funds (a very recent example is the US Troubled Assets Relief Program). Thus, thanks to governments, the risk of speculative banking has been eliminated, and this new, lucrative banking business model has become the norm. Savings, and the intermediation of community deposits are virtually unheard of, and interest paid on savings accounts even less so.
In fact, in our era financial institutions would probably prefer that their clients stay out of banks entirely, and dedicate themselves solely to the art of buying on credit, paying only the minimum balance please.
And, wrongly, governments are actively encouraging the consumption-on-credit growth model versus savings, organic growth and responsible investing.
Per government, the consumer has a patriotic duty to spend, and in fact to over spend; sacrificing himself if necessary to the flames of over indebtedness so that the almighty economy will recover. Ultimately, by spending, the consumer will save his own job; or so the logic goes.
Or, so the logic went anyway. Rising levels of unemployment in the USA and throughout Europe, and the growing abyss between the very rich and the poor in many developing countries indicate that charging the consumer to spend more is not actually solving our collective economic woes, but it is aggravating them. Over indebtedness is at an all time high thanks to the plethora of consumer lending from non bank financial institutions (lending at 30% APR and up); credit card lending: the pay day lenders; the rent to own companies; and the variety of ‘have it today, pay tomorrow’ entities.
All these get cash now companies are not at all interested in establishing a fiduciary relationship with customers as were the Raiffheisens and credit cooperatives of the 18th and 19th centuries. They are simply parasites living off the host for as long as that is possible.
Thus, if we the consumers would like to change the credit-drunk-no-interest incentives economy into at new economy built on respect and partnership with the consumer, then the time is now to close our electronic wallets; put down our credit card(s), log off and reflect before one-click purchasing.
Do we really need a new Mac computer financed by Barclays’ new Apple loan product (and paid for over the next 3 years)? Is it a good idea to pay for my Spring vacation and related apparel with my Visa or MasterCard so that I can amortize the costs throughout the year? Do I really need a new car this year just because there is a 0% down offer, or a cash for clunkers programme?
As my father is famous for saying to my somewhat shopaholic mother heading off to the department store sales: if you do not buy anything, then it is a 100% discount.
So, fellow consumers, the time has come for us to edify our governments that upon much reflection about the importance of our role in the global economy, we believe that savings products must be prioritized as well as incentivized.
Further, we the consumers also request that our governments should cease with the bail outs and government aid for all non-performing financial institutions (after all this is our, consumer tax dollars, euro, yen and rupee at issue).
Non-performing financial institutions are those that do nothing to aid the consumer, the community or economic growth, but rather are institutions which:
1) Make no effort to know their clients: knowing your clients can be accomplished by conducting a simple interview and constructing a household (or business) budget together to assess the clients’ actual financial situation, and jointly making a determination as to whether the financial services being offered are suitable for the clients’ needs (this is different and more intensive than merely assessing the client’s repayment capacity);
2) Puts its own profit-generating interests before the best interests of its clients, often applying disproportionately high fees for the relatively small value of the services provided, as opposed to acting as a fiduciary or business partner of the client;
3) Does not invest in the community in which it operates, avoiding in particular to do its part to invest in disadvantaged geographical areas and marginalized populations; and
4) Does not pay an adequate interest rate on savings deposits, such that the customer loses money in a savings account (because inflation rises more rapidly than the interest rate paid); and
5) Engages in speculative business practices and loses money; takes government bail out money, and then does not change its bad behavior (ie non performing recidivists).
It is time for government do its part to force non-performing financial institutions to evolve into performing institutions that treat clients and communities as partners in economic growth, like the Raiffeissens of long ago.
It is also time for consumers to do our part: to start saving more and demanding quality savings products and incentives from financial institutions.
It is also time for the consumer organisations globally to mobilise; to share information on non-performing financial institutions with consumers, as well as to report on those institutions which do offer high quality service to the consumer.
And, if there are not enough high performing institutions in existence, nothing is standing in the way of consumer organisations from establishing community owned cooperatives, thrifts and savings & credit associations.
Sometimes, there is nothing wrong with reinventing the wheel; or the bank.
Jami Solli is a senior consultant working on consumer protection and financial inclusion for Consumers International. A lawyer by training, Jami specialises in microfinance and law from a developing country perspective.

1 comment:

  1. Dear Jami, I think that the "Community Financial institutions" you mention in the fourth phrase did not re-invest their "savings" but the Profits they made, which is called retained earnings.

    As you rightly argue, retail financial services should be about making common sense, be based on deposits made by the general public.

    But as the Ice Save disaster (Iceland bank that attracted deposits from foreign depositors, many of whom British and Dutch) showed (which latter two governments bailed out greedy speculative citizens), consumers can equally be blamed for greed and speculation. Also a guy like Madoff could talk anybody out of a few bucks by promising mountains of gold and spending some profits on charity.

    As bankers are, also consumers are citizens of our current society that produced the trends you describe. Consumers should chose their financial institutions with understanding and care and not rip the services they want out of each other and have businesses compete against each other "to death".

    KYC is not just an acronym for AML-CFT but also just common sense of getting to know your customer, which is best done if a bank knows his/her deposit and transfer behavior.

    So let's get back to basics, build an alliance between customers, businesses and government that is based on understanding and a long-term multi-layered, transparent relationship.

    Best wishes of success, Peter