Part 2 of Suman Oak's review of BankRUPT

Written by Ashwin Rattan Tuesday, 09 October 2012 15:13
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About Suman Oak

suman oak

Suman was previously a lecturer in SNDT University and is currently associated with two major NGOs in Maharashtra and with the International Humanist and Ethical Union (IHEU).

She was active in the Radical Humanist Movement started by M.N Roy, until 2000. She works with ANiS (Andhashraddha Nirmoolan Samiti) a progressive rationalist movement where she is involved in the translation of books, speeches, reports and letters from Hindi and Marathi into English, and vice versa.

So far she has translated more than a dozen books and a huge number of articles, speeches, letters etc for this and other movements. 

To read part one, click here.

The second pillar of decay is the number, the amount and the complexity of fees that the banks slap on their customers. A checking account (Saving account in India) customer is charged 49 different fees. When a small account holder looks at his account after a few months, all his savings are gone in various fees and at times even penalties are slapped on him. The checking accounts come with a linked saving account into which a small amount from his checking account is automatically transferred. But here is the catch. Even if there is not enough money in the checking account, the bank keeps on transferring money into savings account, charging the customer with overdraft penalties. The bank does not bother to inform or warn the customer or put his account in hibernation.

                The third pillar of decay is the bank's role in the present financial crisis. The enormous and aggressive subprime lending pumped up the economy and when the bubble burst a meltdown occurred in late 2007 as everyone knows. 1.2 million jobs were lost. People were unable to pay back their high interest loans and the number of foreclosures skyrocketed wiping out entire neighbourhoods. The reckless mortgage lending had raised housing prices enormously. The big banks had insured against losses; but the insurance companies had not maintained reserves to protect against unforeseen losses and the whole house of cards collapsed. This surely was not a natural disaster but the result of high-risk, complex financial products; undisclosed conflicts of interests; failure of regulators, credit rating agencies, and the market itself that did not rein in the excesses of Wall-Street. Interestingly enough the local banks remained untouched by the crisis because they had enough sense, integrity and commitment towards their customers. They steered clear of the subprime bubble also because they were not greedy. The greedy big bankers are there not to offer banking services but to make themselves rich. This became obvious when the bailout was utilized not for avoiding foreclosures but to give themselves handsome bonuses.

                Recovery from the great recession is the fourth pillar.  The TARP programme introduced by President Bush in October 2008 was seen by the bankers as a 'Windfall' with no strings attached, to be used for strategic acquisition for the future, as opportunity capital, for buying smaller banks at bargain prices, for lobbying and campaign contributions and compensating top executives. In short, 'Wall Street saved itself leaving the Main Street to wither.'

                The GM too plummeted due to the recession. Butthis Detroit Automaker restructured itself by shedding its fat and toughening itself and served its customers. The companies that don't become competitive, like GM go out of business; but not the big banks!

                To discover what ails today's big banks, the author analyzes the forces that prevent progress and promote status quo. She briefly traces the development of the bank from colonial days. In those days saving banks maintained only deposits for individual use. There were competing resources; county banks, insurance companies and trusts loaned money; merchants, brokers, commercial banks conducted currency exchanges. With the growth in trade and manufacturing, a number of commercial banks came into existence and by 1880 New England became one of the most heavily banked areas in the world.

                 By 1913, according to the Pujo Committee's report banking power concentrated into the hands of three men- J.P. Morgan, George F. Baker and James Silliman who controlled $ 1.2 billion, manipulated New York Stock Exchange and attempted to evade interstate commerce laws.

                Gram Leach Act in 1999 removed the barriers between financial institutions. Banks, brokers and insurance companies could now combine and share consumer transaction records. The Act also made it possible for big banks to avoid direct federal oversight; allowed foreign banks to purchase US banks and operate in the US.

                Today, America’s ten largest banks hold 54% of the nation's total financial assets. The number of banks declined from 12,500 to 8000. Deregulation of banking industry in the late 20thcentury enabled super banks to move away from the core business of deposits and lending into that of dubious financial products and risky investments. This combined with the congress' effort to expand opportunities of home ownership led to the housing bubble, accompanied by wild speculation and outright fraud.

                The Big banks are fragmented organizations, with different business units responsible for different products. That makes them hyper complex organizations with their own communication challenges and conflicting agendas. They depend heavily on technology and spend large amounts on building technical solutions, or on operating existing technical infrastructure. They have to co-ordinate with other businesses and banks and require technical integration and have to follow business rule agreement. In today's mobile world many good things like internet information are free. But the banks charge the customers for every service and keep on increasing and adding newer and newer fees.

                The author explains what 'the New York Bubble' is. Every bank executive wants to stay very close to New York leading to the concentration of largest banks in this city and creating a 'revolving door' between the 'Security and Exchange Commission' and the big banks, so that SEC enforcers and Wall Street executives become colleagues. Smart SEC enforcers are picked up to become Wall Street Executives.

                Preet Bharara is responsible for the first major crackdown on illegal insider trading at Wall Street. He prosecuted Raj Ratnam for insider trading but here too, the mortgage bankers and derivatives traders who are responsible for the financial crisis are left untouched.

                The banking industry in the US is regulated by a patch work of Federal and State agencies. A state regulator cannot touch a bank that is federally chartered and vice versa. The salaries of the bank CEOs is one more point for criticism. Even as their banks are in crisis they keep getting huge packages. Why shouldn't their bonus depend on customer satisfaction index or on lowering the number of foreclosures or helping customers save their homes? 'Banks need a Wall Street Steve Jobs' who worked on a salary of one dollar per year till the company turned round. The close relationship between super banks' boards and federal and state government agencies view any such disruptive change, as was made in Apple, as a distasteful alternative and prefer simply greasing the wheels to keep the rusty machine lumber ahead.

                Advance in communication and information technology, on which the banks spend billions of dollars, has changed banking dramatically. Butthe complex technology once put in place, cannot be easily changed. So the banks offer the same products and charge more complex fees. They have a proprietary and vertical approach limiting innovations to themselves. The television and the video, in contrast, have a horizontal approach and keep changing constantly and allow millions of other companies to add value to their network. Apple and Google can stride ahead of all others because they see themselves as platforms for third party applications. Instead of planning for maximum profit from the distributions of applications, Apple made distribution easy. But the banks start with a product and figure out how to get the customer to buy and use it, instead of starting with what the customers want to do with their money and create offerings to meet those needs. Google, in contrast, provides all sorts of free services.

                Such product centric approach to technology stifles innovations and makes it hard to focus on the customer, like the product centric approach to medicine by the rich countries that deprives the world's poor of much needed life saving drugs which can be cheaply produced elsewhere.

                For 'Reframing Banking' Ms. Realini hints to look at how financial services are provided in India and Africa where many people have no access to basic financial services that would empower their life and work. But in the US too millions suffer the same fate amidst a sea of ATMs, Bank branches, etc. They are not only underserved but are treated with disdain by the big banks. 'The inequitable spread of services and access across all income brackets is a serious issue in America.'

                As a result many Americans prefer to use old fashioned cash in their daily use although such cash does not earn any interest, can be lost or stolen, is dirty and also costs more to pay your bills. Simply because unlike the ATMs and debit cards cash is accepted wherever you shop; carries no risk of overdrafts, surprise fees or interest, has no possibility of error, has 100% surety of successful transaction and no risk of identity theft. Banking has to be reframed if these cash preferring people are to be served. Technology can help the banks provide small businesses and retail consumers with customized cash management services. But for this to happen the banks have to be more like 'Amazon' and less like big banks. The author cites the examples of people like Dickson Chu and others who are trying to reframe banking by specifically giving small businesses great financial services.

                 Banks' reach is enormous; as big as the social media. Their other asset is the huge data- debit, credit, mortgage and also information on payment of bills which can be used for targeted advertisements that can please both the customers and merchants. This can bring non-fee-based revenue for the banks. Such innovations will help banks reduce some of their insidious fees and make banking simpler. Fortunately some top managements seem to be moving in this direction, away from their 'not invented here culture'. They have become aware that super consumer centric companies like Google, Apple, Face Book and Amazon are eager to eclipse them.

                The USAA that services the members of US military and their families have just a few branches and rely heavily on a 'branchless approach'. They offer the customers remote deposit service, through picture of a check sent through a mobile, saving on time and cost of stamps.Pay Pal's 'Bill me later' is an online service that lets users pay without using credit cards. Wal-Mart's business model is built around the lowest possible price on a huge variety of products and services. Although not a bank, Wal-Mart through their commitment to service and everyday low prices has become a popular alternative to banks.

                But these are innovations at the edges. What is required is a disruptive innovation like the one that is in process in India and other parts of the world. These countries lack infrastructure, the manufacturing and financial services that are available in abundance in Western countries. 'However there is one area in which the digital divide is actually quite narrow.'

                Very soon nearly every human being on the planet will have access to the internet and the rich data services through mobile phones. When 85% of people on earth are connected through mobile phones only 20% have bank accounts; banking can piggybank the telecom facility to reach many more people and more remote areas.But the problem of the bankers is that they don't know how to make money from the small depositors and those living in remote areas or those who opt out of banks and prefer cash. There have been big shifts in other industries: hybrid cars running without petrol, the ubiquitous network, touch computers and many more. Things that seemed impossible till recently have become possible because of disruptive innovations. The old style banking resting on fifty different fees on a basic bank account has to change into banking for everybody, wherever he is, empowering his life and work.

                Such a revolution is happening in India. In 2006 there were one hundred million mobile phones in use in India; but by 2012 the number grew nine times, to 923 million. The traditional banks cannot afford to cater for the 700 million people living in remote rural areas and the micro businesses there cannot afford terminals for card payments. The rural Indians moreover prefer cash transactions and the local money lender to the banks. The bank accounts are used only to store money.

                But according to the author, India's economy is growing and inclusive growth requires inclusive banking in which poor people from rural and remote areas can participate and profit from it. Although India's big banks like those in the west are reluctant to cater to the farmers in remote areas, change is taking place.

                The Unique Identification (UID) project has been launched in India in the year 2009. It is called Aadhaar (a very apt word meaning support- support for the impoverished and unempowered). It is a twelve digit randomly generated identifying number allotted to every individual,giving no information regarding his/her race, caste, creed or gender. Aadhaar numbers are stored in a centralized database and are linked to demographic and biometric information about the individual. Two hundred million have already received AadhaarPatra (cards) and six hundred million more will receive them by 2014.

                Aadhaar is supposed to be a platform for many applications: banking, health care, government payments, small farm subsidies, payment for labour, etc. The system has been organized for scale, security and multiuse. (However unfortunately because of ignorance and lack of infrastructure, the Aadhaar cards issued to rural people have not brought any of these benefits to them so far.)

                With Aadhaar each Indian will be able to identify and authenticate himself and perform transactions securely. Aadhaar number includes authentication without any card and is hard to counterfeit. Ms. Realini predicts that, 'when this system is fully rolled out, it will be a generation or two ahead of the US Identity System.' It is like a State - of - the- Art interstate Road Project with invisible roads! An existing storefront or a mobile banker authorized by a bank will provide the last mile of banking, using a mobile phone. Businessesin India are regulated and have to be licensed and certified. The recent regulations allow them to be a multibank remote teller, a unique way of reaching remote customers that has no parallel in the world.

                Other innovative ideas practiced in India are:  plain basic banking without frills at affordable prices, telecom companies producing bills very cheaply, using UID for mobile and electronic disbursement, virtual ATMs for secure cash out points, etc. Indian innovators like Prism, Bill Desk and many others are working closely with big organizations like Airtel,  Reliance, ICICI, Visa and others. However convincing consumers and retailers to switch from cash to e-payment is extremely difficult and will require innovation in both the product and the business model.

                 The Reserve Bank of India (RBI) is revising regulations to embrace new models of payments. 'With a steady stream of regulations, RBI has created a clear set of e-money and branchless banking regulations'. The RBI helped create National Payments Corporation of India (NCPI) to consolidate and integratethe existing multiple systems into a nationwide, uniform and standard business process for all retail payment systems. It should create an affordable payment mechanism and help develop financial inclusion. 'Just as China is now a world leader in low cost manufacturing, India is poised to become a world leader in retail banking.'

                Today’s smart phone already has all it takes for mobile banking. Most importantly, it allows virtually unlimited applications to be downloaded. When combined with Cloud it will open a whole new world of banking innovations and consumer choice.  Banks should implement technologies like cloud, mobile, Big Data; build on trust relationship and encourage innovators to work with them. They ought to become consumer centric. This requires disruption- discontinuous change. If their size is hurting their ability because of diverse businesses, they should break them up. Consumers can break up with super banks and move to smaller ones to get better services and the personal touch. In the US, Main Street can disrupt the status quo by not doing business with the big banks. Another way of disruption is to eliminate cheques and cash.  Many benefits willaccrue: reduced use of paper, avoiding invisible transactions, increase in visible business bringing increased revenue and reduced cost.

                In America transferring of money nationally 41 state licenses are needed. It is necessary now to change to one regulator like the RBI in India. 'We should seek out and destroy anti-competitive parties.' Wal-Mart brought down the price of prepaid cards to three Dollars and others had to follow. If Wal-Mart are allowed to buy a bank, they will figure out how to offer basic banking services at affordable price. 'These disruptions can make the bankers uncomfortable; Wal-Mart buy a bank! Tell ATT how to manage SMS! National IDs and a government sponsored bank super highway! One Regulator!' All this is unavoidable for America has so much at stake-Global leadership in financial services, financial access for all and empowering entrepreneurship! All this is necessary, otherwise India and Kenya will leapfrog past USA.

                This extremely readable book has taught me - an illiterate as far as banking and money matters are concerned - a great deal about the 'Global Recession and financial meltdown.'

Last modified on Thursday, 11 October 2012 11:11

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