Has Banking Become Too Complicated for the Good of the Industry
Updated: Dec 13, 2021
It must be stated that banking is an incredibly important industry which is based off a very simple concept people with more money than they know what to do with can keep it in a safe and secure institution which subsequently can then lend out money to people with good ideas who wish to start businesses but do not have the required capital. The bank then gives a small incentive to the depositors in the form of interest and then charge the same people a higher premium to the borrowers, thus making a profit for the service that they provide as a financial intermediary between all the parties involved. On such a scale we have today, this is very profitable, even more so with the system becoming more complex over time with things like fractional reserve banking and alternative capital sources. But if we strip all of that away we will find that the heart of banking is this simple mechanism for all of the hate that banks get they can do a lot of good in an economy to people who want a safe place to keep their money they offer an almost guarantee that the money left with them will still be there a day, a month, a century from when it was deposited. The bank also states that the money will be accessible online, over the phone or from a collection of numerous ATM's or in the form of debit cards.
To the people who want to borrow money, they are to go-to institution for a fair loan based on lending parameters developed on time. Many may dislike credit cards and employment checks that derive from modern banking, but this is why so many people are paying below 3% on their mortgages when it used to be a whopping 15% or higher. Banks have become masters of mitigating risk by making everything as uniform as possible, so uniform that home loans can be bought and sold like commodities in the financial markets. But even securitisation, which was the catalyst for the global financial crisis, is still not the reason modern banking is broken.
Banking is running into a problem today where it has become so consolidated that no one can effectively perform its role as a financial service to the everyday person. The 2008 financial crisis has broke banking so much that we may be at a point where we can no longer fix it.
The current issue in banking started in the mid 90's, back then computers were just beginning to start taking over decision making where as the majority was done through human interactions and reputations based on trust. Before this time, if you wanted a loan, most of it went through the local bank manager and your relationship with them. The manager would sit down with the potential applicant in their office and look over the basic numbers such as assets, liabilities and job, all the stuff banks look at today. Another thing is that the bank manager may ask a respected member of the community to vouch for them such as their parents or someone at their workplace, this vouch carried no legal basis of liability, however, it means if the same people wanted to get a loan themselves, they had to be brutally honest as their reputation may be damaged if they hid information or lied. This caused problems for the banks. Bank managers were expensive as staff with equal pay to a doctor or high end lawyer, where as bank managers now are just glorified HR and credit card salesmen. The next issue was scalability, if a bank wanted to expand into a new city, it would be without basic information such as reputation, meaning expansion was a risky venture. Someone with terrible financial conduct could walk into the new bank, pull a scam with some charm and walk out with a loan, never to be seen again. Thanks to computers and credit systems, these flaws were patched for banks.
Today, your credit score has replaced the relationship needed with the bank and they don't even know your name. They just read off your nationally available credit file and its too profitable to pool this data together, making obtaining a mortgage or a small loan very difficult. In the mid 90's, there were 20 or so large banks looking for market dominance but now there is only 4. Through a series of mergers and bankruptcies, banks have become very generic for the sake of self preservation. Even though this makes good business sense, it is not good for society at large. Some people have good credit scores, a stable income and some savings and still get declined for a loan due to the rigid parameters. If you live off tips for your income or royalties or work gig to gig or government allowances. With big banks, this supplementary income is not popular because it requires some critical thinking behind the computer code that is built for average 9-5 people. The irony is that these types of supplementary income can be more secure and consistent than a salary but because a computer does not understand that these incomes do not produce one income number per year, every year, it has to either deny the application or be extra conservative. Often these major banks will just reject these loans and the applicants will have to go with smaller lenders who have higher interest rates. Interestingly enough, this will be the same bank who provide these non-prime loans. This stunts a lot of people from growing out their business and are forced to either shut down or get a 9-5 job like most of the population. Even though the backbone of any economy is small business, banks are now unwilling to loan to small businesses in favour of large businesses with many assets.
In summary, the fundamental banking system is important to the prosperity of humanity and has been for thousands of years, however, in recent times it must be questioned if these new rigid computerised rules are really for the good of everything or just a way to play it safe for a business.