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Saturday, April 21, 2012

Bureaucracy Banking

Banking today is viewed upon by the customers it is designed to serve as sick. 

The causal factors for the Global Financial Crisis have been debated by many a soul and some blame our economic pain on feeble regulation, others on poor credit risk origination practices or asset bubble growth in a long only market. There is actually a whole array of factors that break banking greater than these three reasons alone I can assure you, but emphasis aside, nearly everyone I speak with will put the banking sector squarely and central to the debate of our economic woes.

What has gone wrong with banking then?

Have we lost the plot?
Theoretically we have lost the plot it seems but I am not sure we really ever had the plot to begin with and banking has always been structured for a different world, a yesterday world. As it is today, banking doesn't work and banking as a whole, perhaps all banks must have just busted somewhere in the past. Really, all banks just broke at once is a bit of a big leap of faith for me to believe, it really is.

So what has changed then, what has gone wrong?

One possibility why our financial sector is failing us is that perhaps banking has been standing still while the world around it has moved on.

The world truly has become global and globalization is a democracy enforced. A customers' voice may be trivial alone but as a community, it is a force not to be challenged. However, while banking remains a bureaucracy of processes, I believe the facility to financially transact will continue to disappoint.

This all sounds like rhetoric you have read before and so many times I know, but allow me the peanut gallery for a moment so that we can take a deeper look into all of this.

Let's start with the world of flow or trade flow to be precise. 

Direction of Trade Statistics | IMF

The size of the numbers and the direction of the trade chart above are actually irrelevant. A single unit can be billions or trillions and one mustn't be fooled by the trajectory of the numbers because they don't directly matter. However, what is vastly significant in these figures is the switch from 7.2 in 2002 to 13.4 in 2006. 

In effect, the world's trade flow nearly doubled in matter of four years. 

That is a very scary doubling-time number and it can be estimated by taking 72 over the rate of growth [more information here]. If we double like this again in four years, say eight years, let's double the doubling-time to be conservative but either way on a conservative estimate alone, we still have statistical significance and a problem. Most importantly, if we keep doubling anywhere near these kind of rates going forwards, we can nearly be sure that the world is going to run dry of resources in a matter of decades. This resource scarcity debate is nearly free of argument as it has been presented here and even more so when one considers we are a finite planet in the Milky Way Galaxy. Perhaps what we should be debating is what to do and how to manage our growth rate. 

None the less, I don't believe we have doubled our real physical growth in that time. So then, is the IMF wrong with their statistical measures ... No, I don't believe that either. So what is going on here?

The numbers and the balance of payment differentials are supporting a different phenomenon. The phenomenon we are experiencing is what it feels like to be globally banked. The outcome of cross border trade and banking has become "commoditised" in volume as a result of going "Glocal". This is fine but the average bank today is still generally being run like a bureaucracy of processes for a local market. The world on the other hand is no longer that, it is actually greater than Globalalised it is a Global-Local or a Glocal market.

So if the world has gone Glocal, it would follow that banking can't continue on with this rigid "localised" kind of thinking if it is to survive. So then, what do we need to change in banking to fix it?

Why we exist
Firstly we mustn't kid ourselves that we can solve all our banking problems with stronger regulation or even standardisation alone. Don't follow this path of thinking as it is a red hearing and why we exist isn't fundamentally supported by mandating it.

Actually, in my opinion the types of regulation we have witnessed of late are also from the same cursed ilk as Bureaucracy Banking and they also go against why we try to bank much of the time. We don't bank for regulation, what kind of madness is this. 

Years ago I had the pleasure of meeting a regulation fanatic with a strong conviction in Anti Money Laundering. So fervent was this individual's belief in AML that I quote his AML obsession as: 
"We need to make banking difficult and harder for our customers to catch those who run AML sweat shops in our streets". 
My response was "Dear sir, we are offering a service and we try as bankers, against all odds it seems, to make this experience easier for our customers. The last thing we need is cumbersome, convoluted and useless banking. Who would want that?"
But Bureaucracy Banking has become this, utterly useless and it isn't serving us today in a globally enabled banking world. Over the coming weeks ahead I am planning to list what is broken with trade finance, the cross currency swap business and so many other areas of transaction or hedge banking but today I want to put one idea forward and it is a simple idea.

Banks need to lean to sell into the "WHY" we exist, not the modus operandi of the "HOW" we bank. The "HOW" we bank is actually an instrument like the FX option or a bond but we don't invest in bonds because they are bonds and we don't use internet banking because it is less difficult than difficult was before it existed. That kind of thinking misses the "WHY" we invest or attempt to bank in the first place. 

The Genius Loci of a Counterparty (Click to enlarge)

My feelings on Banking Bureaucracies aren't new for what it's worth and I am not the only one out there banging on that banks need to evolve. Simon Sinek sums it up well and a successful business is about satisfying the "WHY" with their customers, not the "HOW" and a long way from the "WHAT".

I feel banking needs to do the same. It needs to focus on the "WHY" a client is in business and then how to serve their final goal of a merchant trade. At the moment we are kind of stuck trying to fit the counterparty into a rigid and broken model of Bureaucracy Banking.


  1. An interesting post and the type of banking you seem to be referring to here is merchant banking.

    Merchant banking isn't the only end of banking which is broken, retail banking also needs to transform.

    Have a look at this article http://www.finextra.com/community/fullblog.aspx?blogid=6437

  2. Looks like there are a lot of people with the opinion that banking is broken.

    Today in Forbes "Why Banking Is Broken - And How It Can Be Transformed"