Executive Briefings

Are Old-School Banks in Danger of Becoming Extinct?

One could imagine European bankers emitting a collective sigh of relief over the latest election results in Greece, whose citizens last week gave a narrow edge to the conservative New Democracy party. In the process, they ratified the controversial $220bn bailout plan that is intended to keep Greece in the eurozone and avert economic disaster throughout the European Union.

The sigh might have been followed by a pat on the back, but the latter wouldn't be justified. As in the U.S., European banks have a lot to answer for, with regard to their actions in the years leading up to the latest crisis.

Hans Eysink Smeets is president and founder of Eysink Smeets, a consultancy specializing in retail and banking strategy. Notwithstanding the latest Greek election, he doesn't believe that banks have anything to celebrate. In fact, he suggests, their actions have led directly to the mess in which the EU is currently entangled.

Governments are culpable, too. Smeets says banking regulation has achieved "exactly the opposite of what [EU nations] wanted to achieve," which was more competition among lenders and a stop to consolidations. The new capital-requirements standard, known as Basel III, mandated the creation of a massive "safety net" to guard against bank failures. What it ended up doing was making money too scarce and expensive, especially for small to medium-sized businesses.

"The European crisis is especially a banking crisis," says Smeets, "where nobody knows what to do, and [everyone] is afraid to kick the banks in the shins."

In essence, he says, banks are using the new capital requirements as an excuse not to lend money. He doesn't object to the idea of shoring up struggling banks' solvency - in fact, that big safety net is entirely appropriate when it comes to dealing with big borrowers like real-estate investors, and the servicing of sovereign debt. But consumers and smaller businesses don't need that level of protection "because they are just walking on the ground," Smeets says. "Even if they fall, the only thing that could happen is a grazed knee."

Smeets's solution will sound familiar to anyone who lived under the 66-year rule of the Glass-Steagall Act, which erected a wall between U.S. commercial banks and securities firms. As a result, he says, retail bankers "were unable to sell anything risky," and stuck to their mission of lending money to responsible consumers and businesses in search of capital with which to grow and invest.

With the removal of Glass-Steagall restrictions in 1999 came rapid change - more rapid, in fact, than anyone could have imagined. The wild card, says Smeets, was the internet, which facilitated a flurry of activity and the creation of financial instruments that were unheard of in prior years.

"We didn't have a clue," he recalls. "We had just come off the telex machine." The speed of electronic transactions, coupled with a new wave of industry consolidation, sparked a revolution in global finance.

And a disaster, too. Smeets says banks today are too powerful to be challenged. Regulatory bodies "are ill-equipped to solve these problems. They're understaffed, underpaid and not up to the lobbying of the banks." In the Netherlands, he claims, the nation's financial authority includes just 10 individuals who are assigned to monitor the banks. "I fell out of my chair when I heard that."

Smeets wants to see a return to the system where corporate and investment banking is conducted separately from the consumer and small-business sector. In fact, he says, they ought to take a page from the playbook of other industries. He cites the Dutch supermarket giant Ahold, which expanded rapidly in the late 1990s through the acquisition of both retail outlets and wholesalers. When it stumbled in 2003, triggered by a devastating accounting scandal, Ahold's bankers required the company to get back to basics and split wholesaling from retail.

"If that is such a common sense thing to do," asks Smeets, "why would that not apply to banks?"

Assuming that such radical change is not going to happen anytime soon, banks could still alter their policies to better meet customer needs. Smeets says - with tongue only partly in cheek, I'm guessing - that they should follow the example of the adult film industry. Hence the name of his latest book: Porn for Bankers.

His point is that the porn industry has quickly adapted its business model to the birth of new media. Videos, DVDs and shops have been eclipsed by the internet as the primary means of delivering content. The same is happening, for that matter, in more above-ground industries such as music, movies, the post office and the travel business. Why, Smeets wonders, can't banking customers more easily get what they need, including a full range of financial services, over the internet? There are far too many brick-and-mortar branches, he argues, and far too few means of doing banking business electronically.

"Bankers," says Smeets, "are totally neglecting what's happening in other sectors."

For that matter, are banks even relevant anymore? During the Great Recession of 2008, they pretty much stopped lending altogether. Even now, they have yet to return to their previous level of activity, especially when it comes to the smaller lender. (In other words, the ones who really need the money. Big corporations are still hoarding cash, and many don't require the services of banks for their current capital needs.) So what good are banks today, anyway?

Smeets goes even further than that. He suggests banks could soon find themselves challenged by corporations that are big enough to begin offering financial services themselves. There's plenty of precedent for that - think of the automotive companies' financing arms. The Swedish home furnishings giant IKEA already has a banking license. So why not a cash-rich Apple? Or Google? Or Microsoft? "They know the information-technology rules and tools by heart," says Smeets. "It would be extremely easy for them to step in and sell financial services."

For global banks, current dominance won't necessarily translate into future hegemony. While they're busy wielding absolute power over bankrupt nations, they could find themselves shoved aside by entities who will do what the banks were supposed to be doing all along.

Comment on This Article


Keywords: international trade, supply chain services, supply chain risk management, retail supply chain, European Union, eurozone, international banking, banking crisis, Greek elections

The sigh might have been followed by a pat on the back, but the latter wouldn't be justified. As in the U.S., European banks have a lot to answer for, with regard to their actions in the years leading up to the latest crisis.

Hans Eysink Smeets is president and founder of Eysink Smeets, a consultancy specializing in retail and banking strategy. Notwithstanding the latest Greek election, he doesn't believe that banks have anything to celebrate. In fact, he suggests, their actions have led directly to the mess in which the EU is currently entangled.

Governments are culpable, too. Smeets says banking regulation has achieved "exactly the opposite of what [EU nations] wanted to achieve," which was more competition among lenders and a stop to consolidations. The new capital-requirements standard, known as Basel III, mandated the creation of a massive "safety net" to guard against bank failures. What it ended up doing was making money too scarce and expensive, especially for small to medium-sized businesses.

"The European crisis is especially a banking crisis," says Smeets, "where nobody knows what to do, and [everyone] is afraid to kick the banks in the shins."

In essence, he says, banks are using the new capital requirements as an excuse not to lend money. He doesn't object to the idea of shoring up struggling banks' solvency - in fact, that big safety net is entirely appropriate when it comes to dealing with big borrowers like real-estate investors, and the servicing of sovereign debt. But consumers and smaller businesses don't need that level of protection "because they are just walking on the ground," Smeets says. "Even if they fall, the only thing that could happen is a grazed knee."

Smeets's solution will sound familiar to anyone who lived under the 66-year rule of the Glass-Steagall Act, which erected a wall between U.S. commercial banks and securities firms. As a result, he says, retail bankers "were unable to sell anything risky," and stuck to their mission of lending money to responsible consumers and businesses in search of capital with which to grow and invest.

With the removal of Glass-Steagall restrictions in 1999 came rapid change - more rapid, in fact, than anyone could have imagined. The wild card, says Smeets, was the internet, which facilitated a flurry of activity and the creation of financial instruments that were unheard of in prior years.

"We didn't have a clue," he recalls. "We had just come off the telex machine." The speed of electronic transactions, coupled with a new wave of industry consolidation, sparked a revolution in global finance.

And a disaster, too. Smeets says banks today are too powerful to be challenged. Regulatory bodies "are ill-equipped to solve these problems. They're understaffed, underpaid and not up to the lobbying of the banks." In the Netherlands, he claims, the nation's financial authority includes just 10 individuals who are assigned to monitor the banks. "I fell out of my chair when I heard that."

Smeets wants to see a return to the system where corporate and investment banking is conducted separately from the consumer and small-business sector. In fact, he says, they ought to take a page from the playbook of other industries. He cites the Dutch supermarket giant Ahold, which expanded rapidly in the late 1990s through the acquisition of both retail outlets and wholesalers. When it stumbled in 2003, triggered by a devastating accounting scandal, Ahold's bankers required the company to get back to basics and split wholesaling from retail.

"If that is such a common sense thing to do," asks Smeets, "why would that not apply to banks?"

Assuming that such radical change is not going to happen anytime soon, banks could still alter their policies to better meet customer needs. Smeets says - with tongue only partly in cheek, I'm guessing - that they should follow the example of the adult film industry. Hence the name of his latest book: Porn for Bankers.

His point is that the porn industry has quickly adapted its business model to the birth of new media. Videos, DVDs and shops have been eclipsed by the internet as the primary means of delivering content. The same is happening, for that matter, in more above-ground industries such as music, movies, the post office and the travel business. Why, Smeets wonders, can't banking customers more easily get what they need, including a full range of financial services, over the internet? There are far too many brick-and-mortar branches, he argues, and far too few means of doing banking business electronically.

"Bankers," says Smeets, "are totally neglecting what's happening in other sectors."

For that matter, are banks even relevant anymore? During the Great Recession of 2008, they pretty much stopped lending altogether. Even now, they have yet to return to their previous level of activity, especially when it comes to the smaller lender. (In other words, the ones who really need the money. Big corporations are still hoarding cash, and many don't require the services of banks for their current capital needs.) So what good are banks today, anyway?

Smeets goes even further than that. He suggests banks could soon find themselves challenged by corporations that are big enough to begin offering financial services themselves. There's plenty of precedent for that - think of the automotive companies' financing arms. The Swedish home furnishings giant IKEA already has a banking license. So why not a cash-rich Apple? Or Google? Or Microsoft? "They know the information-technology rules and tools by heart," says Smeets. "It would be extremely easy for them to step in and sell financial services."

For global banks, current dominance won't necessarily translate into future hegemony. While they're busy wielding absolute power over bankrupt nations, they could find themselves shoved aside by entities who will do what the banks were supposed to be doing all along.

Comment on This Article


Keywords: international trade, supply chain services, supply chain risk management, retail supply chain, European Union, eurozone, international banking, banking crisis, Greek elections