Are There Alternatives to Basic Bank Accounts?

banksSince the global financial crisis, the future of banking has been rather uncertain, with regulators embarking on a programme of international regulatory reform concentrating on improving the resilience and safety of the banking system. This has led in turn to a widening of the gap between the regulated banks and other non-regulated financial institutions, with stricter rulings meaning that the regulated banks are not able to generate as much profit as the less regulated sector. The standard banking system as we know it is being challenged and today's modern banks must adapt in order to improve their prospects and retain sustainable economic development. Here, we look at the future of banking and possible reforms of the financial system which could serve to revitalise the sector.




Banks Under Siege: General Challenges

The banking sector today is not just facing increasing competition from other financial institutions, it also has other challenges to contend with including a low interest rate and stricter regulatory measures. It is possible that the payment services sector is one of the areas in which banks are likely to lose a large share of the market, and several other areas are also under threat including investment and savings management, direct project equity funding, peer to peer lending and online money management advice as countless independent financial organisation start ups are being set up across all of these areas. Another challenge facing today's banks is the uncertainty around the finalisation of some initiatives in the banking regulatory agenda, with the consequences of the draft measures not yet being known. The current environment of low interest rates all over the world is also posing a challenge to the banking sector as borrowing costs remain too high with correlated with the return on investments. This discourages consumption and investment, generating deflationary and recessionary pressures. With so many regulatory reforms in the banking sector, a lot of competition has emerged from new players in the financial arena, across a number of areas that have traditionally been dominated by banks. To ensure that the playing field remains level, a comprehensive regulatory framework is required for non-bank institutions.

The Alchemy of Banks, the Financial Crisis and Structural Reform Proposals

Historically, the intense regulation of banks was justified, however since new entities have emerged which engage in creating money this regulation is woefully inadequate as putting further demands on banks cannot address the other parts of the financial system that are outside the scope of traditional banking. Numerous proposals have been suggested to remove the alchemy of banks including the Chicago Plan which requires a 100% liquid reserve to be applied to every deposit and Limited Purpose Banking which proposed that all financial institutions be transformed into entities that would be entirely funded with equity, however none of the current proposals thoroughly address all the issues surrounding structural reform of the banking sector. It is impossible to eradicate banking as an activity when our economies are so dependent upon credit to grow and invest and therefore, it is unlikely that traditional banking could disappear any time soon.

European Banking Sector: Facts and Challenges

European banks are suffering from some particular challenges of their own in the current financial environment. Perhaps the biggest problem is the ongoing low profitability which persists in the European banking sector and shows little sign of an imminent recovery. This has impacted upon the banks' ability to increase their revenue and profitability. The legacy of non-performing assets paired with overcapacity in certain sectors has also hindered profitability and changes in the regulation framework has rendered some of the banks' previously profitable strategies less effective. The value of non-performing loans in European banking has also significantly impacted upon profitability with large parts of the assets failing to generate revenue. All of these factors point towards the banking sector in Europe shrinking in the near future and this raises the need for consolidation either by downsizing business activities or by mergers and acquisitions.

The Response by the Banks

The question raised is how banks should respond to today's challenges. There can be no single strategy that fits all financial institutions and therefore each individual bank must adopt its own unique business model. It is clear that banks must continue to increase the share of commissions' income and fees as well as expanding their non-interest income. They must also improve their cost efficiency by making the move towards using digital platforms for their banking services. Banks must also take advantage of central bank policy which incentivises lending by banks to the real economy in order to steer their way into the future of banking.