SOUTH African banks are in good shape. Profits are running ahead of inflation, loan books are growing, bad debts are apparently declining and returns on investments look attractive. The recent spurt of results relate to the year gone by, which is most likely a better year than the one ahead of us. Our banks are well-capitalised, but times are changing in financial services.
Offshore, things aren’t going as well for all banks. There seems to be an ever-widening divergence between the performance and asset mix among the major players in different geographies — are the Americans moving with the times, are the Europeans not, or is it just different economies? There are also differing opinions over where to invest. Emerging market investment has reversed in the past few years, driven by declining oil and commodity prices, the slowdown in China and volatile political climates.
In truth, emerging market equities have produced only about half the returns (in dollar terms — don’t we know it) of those in the developed world.
If you’re looking for safe places to lend money at reasonable returns, your world is surely shrinking. Shrinking markets sharpen pencils and force the pace of change. Adapt or die may be more relevant to the future of traditional banking now, more than ever before.
A sea change that I’m trying to get my head around is negative interest rates. Can economies simply continue to operate as they always have done? European Central Bank (ECB) president Mario Draghi made it clear that, if he has anything to do with it, "rates will stay low, very low, for a long time". The ECB lowered rates and increased its asset purchase programme, again, although curiously this time to include corporate debt. The corporates will be opportunistic, believe me. The money will not all be going into the risk-growth assets for which it is intended.
When will central banks learn not to write put options to the private sector? This negative-cost money will circulate among the same small asset bubble community that it has been in since the start of quantitative easing. Silly.
What does it tell you about expectations if you are able to raise negative-cost money now? When you pay a bank to look after your money (rather than it paying you to use it) what does that do to the other side of the balance sheet? Low interest rate environments are not good for bank margins. At a retail consumer level, there is no motivation to spend now (in case prices go up) when you could defer the purchase and store your cash under your proverbial mattress and "earn" a return (zero) greater than the return (negative) offered by your bank.
All of these macro-economic forces are only part of the story. The future of banking will be affected most by technology — changes in technology that empower individuals through real-time information flows that inform choice. For so long it has been the absence of choice and ignorance of alternatives that has determined the cost of or yield on money for individuals. Fintech — that’s the new game in town. In financial services, in the flows of cash and capital, it is those who have embraced technology as a strategic partner (rather than a disruptor) that will prevail. It is not true only for the financial services sector, it’s just that it hasn’t taken hold there yet. Not so long ago, a taxi could charge a premium for an (almost) bespoke journey — no more.
Putting on one side, for the moment, those specific functions of risk matching performed by insurance companies and investment houses, banks are still at the epicentre of all money flows. That enables them to determine the price at which supply meets demand, at which money clears. At some level, if not at all levels, banks essentially match information, at a margin. Your confidential need is paired up with my confidential excess and a deal is struck. They are not obliged to tell you what they are going to do with your money, but you need to explain what you are going to do with theirs, and prove that you can pay it back. Banks sell money, we buy it, that’s the deal — except that we have to do the convincing and now they are charging to store our cash.
The problem is that we can’t lend money directly to corporates or mortgages or project finance, or can we?
My hypothesis: however little of that direct lending stuff you can do now, you’re going to be able to as much of it as you like, soon enough. The democratisation of lending is on its way.
I’m not sure how many servers the transaction goes through to get from my Mastercard to my cellphone, but every time I pay at Woolies, the money has already left my account and whizzed into theirs well before the till slip has finished printing. So, there goes the need for a transactional bank intermediary. I know, for now, the bank has the information necessary to verify the deal, but it’s just a computer, right? Far more impact will be felt in intermediation. The opportunity is no longer simply to find a way around the banks, the plan is to deal directly with the ultimate counterparty — both ways.
You want high yield, unicorn debt convertibles exposure? Get it on the internet! You want safe as houses? Choose the particular house or area you like and invest. Make it your neighbour’s house, if you like. Want to know what people your age, in your profession are investing in? Find the group, in the ether, and then join them, or not. Follow your gynae — see where he’s investing your cash.
Crowdfunding is already out there; retail bonds are a reality — it’s only a matter of time before the risk matrices and check points and legalities are sufficiently developed for you to lend money over your cellphone. These arguments apply equally to investing in shares or cashing in loyalty programmes … but those have been solved already. You can already get rid of your post-Argus old bicycle on Gumtree: why not trade everything, financial instruments are easier to value anyway. Risk selection is already online — you do so many hours in a gym and you pay less for medical aid cover.
Of course, this is not all upside. Once your life (even your DNA) is mapped in detail and publicly available, you will no longer benefit from group rates, derived from the expected average experience of the selected population, if you are on the wrong side of the risk-price divide.
The vibrant informal market don’t use banks, don’t need banks, per se. Their access to and application of capital, as a collective, may become even more efficient in a person-to-person, cellphone-to-cellphone, world.
So, what will the banks do?
The big stuff, the complicated stuff, and investment banking, which isn’t really banking. The clever ones will morph into or partner with fintech groups, retain their own clients and steal some from their competitors.
• Barnes is South African Post Office CEO