Money, banking & insurance

Holding out a bank branch

People often seem to have an either/or mentality, rather than thinking two opposites can co-exist. For example, TV co-existed nicely with radio, DVDs co-exist with cable TV, and so on. The same is true for banking. People like to bank online for simple transactions, but they feel more comfortable going to a bank branch for something more complex. This is why Capital One has just paid $US9 billion for ING Direct and PNC, a US online bank, has paid $US3.5 billion for Royal Bank of Canada’s branches in six states (and since then, other branches from Flagstar).

Half of American households bank online and internet banks hold 7% of total deposits in money market accounts. Curiously, when interest rates are low (as they are), banks prefer online deposits. This is because traditional banks hold more deposits with low interest than direct banks and make less profit from investing them in wholesale markets. Low interest rates hurt them more than curbs against overdraft or credit card fees. For example, ING’s costs per dollar of deposit are below a traditional bank, leading one banker to say online banking is “an implicit bet rates won’t rise too far”.

Even so, the banks are having a bet both ways. Bank of America is closing 10% of branches and charging customers more than if they bank online. But it is hiring more specialists in mortgages, investments and small business banking. Another strategy is to open a mini-bank inside a grocery store (similar to Sainsbury’s, UK). In America, Huntington Bancshares will open 100 outlets in Giant Eagle grocery stores – these cost 85-90% less to build and 50% less to run than a normal branch.

While bank branches may be costly, it seems banks are moving towards high margin services to pay for them while keeping fees lower for people who don’t want those services. This story is similar to the one about travel agents (this issue). Book with a person again. At times there is no substitute for speaking to a person who knows about their products and services and can take time to listen to your requirements.

Time to reboot the American Dream

Stanford economist, Paul Romer, cleverly said: “A crisis is a terrible thing to waste”. In that light, the global financial collapse could be something valuable and transformative in the right hands. Richard Florida, a US professor, has written a book, The Great Reset, which draws on how earlier crises, like the Great Depression, sparked a new way of doing things. He claims the current recession provides that opportunity again.

During the 1880s, millions of people left their farms for the cities, creating new and vibrant industries. The Great Depression began a new American Dream of home ownership and the Second World War sparked off new suburban lifestyles, with the car, cheap petrol and shopping malls at their heart. Is it possible the recession will spark a return to more sustainable lifestyles, with less home ownership and less focus on the family car? If Florida is right, there will be more renting, more public transport, fewer housing loans and less bank power, and the price of petrol will rise. People will return to the cities or live and work in regional centres that are lively and communal. Is this a new American (Australian, British) Dream?

The US government seems glued to the old American Dream, by boosting the housing market, keeping petrol prices low and looking after the banks. But, did people ever look to governments for revolutionary change? Change is already happening on the fringes, where it always did, and younger people are less interested in becoming heavily mortgaged and living out in the suburbs. Meanwhile, Baby Boomers who have already had a taste of the old Dream are busy creating new Dreams of their own that are not unlike those of Richard Florida.

Wave and pay

If you are an Orange UK customer with a Barclaycard and a Samsung Tocco, you can now pay for transactions up to 150 pounds, using your phone. It’s the first milestone towards “contactless payments”, which are part of “near field communications “ (NFC). It means you no longer need to carry a wallet: your phone will do.

Barclaycard has been trialling these payments across the UK for several years now, for transactions up to 15 pounds. But South Korea and Japan already have NFC well established, so there is still a lot of catching up to do. The advantage of contactless payments is simplicity and security. Where a credit card can’t be authenticated without a PIN or signature, your mobile is already connected and can be authorised quickly. Customers can top up their “wave and pay” credit or debit account by up to 100 pounds, to a total of 150 pounds guaranteed by Barclaycard. So their exposure to overspending or fraud is limited.

This is the way of the future: O2, iPhone and Google are already working on similar plans. So get some use out of that nice leather wallet your mum just bought you before it’s too late.

The eurozone: two-speed politics

Europe is split down the middle by three indebted countries - Ireland, Portugal and Greece - and rich northern countries like Germany and France. Germany and France together make up nearly half of Euro zone GDP, and growth has outrun the US and Britain. Public debt in Greece is forecast to reach 158% of GDP and both Ireland and Portugal could pass the 100% mark, by the end of 2011. All this means, not only economic divergence, but intense political discomfort and social unrest.

Only 20% of Germans thought it was right to rescue Greece and 47% said it was wrong. At the same time, citizens of the indebted countries are being forced to swallow rescue packages they don’t necessarily want either. Even as Germany and other countries become stronger importers, they are more likely to import from central, rather than southern Europe. When the Euro is strong, the southern economies are less able to export to countries outside the Euro zone. They also have high unemployment. On top of this, Germany has been able to keep its labour costs down and may now increase interest rates.

The Economist says, if these countries realise their lifestyles will never catch up with the rich countries, they are less likely to put up with stiff austerity measures. In this case, it says: “will they be willing to swallow their nasty medicine?” Germany’s tabloid paper, Bild, may have the last word: “Sell your islands, you bankrupt Greeks – and the Acropolis too!”

Bankrupt yet?

It’s tempting to look at Greece and be grateful we’re better off. But a recent study of global debt uncovered some uncomfortable forecasts for government debt in the US, Europe, and Japan. It claims, with no change in tax rates, retirement or health programs, US government debt will be 155-302% of GDP in 2035. Japan would have similar high ratios, countries in the Euro zone would have lower ratios, and emerging economies, the lowest.

Jim Heskett, professor at Harvard University, asks if it’s time to declare a country bankrupt. And if it is, what does this mean? He imagines a Chapter 11 bankruptcy for Greece where Euro zone agencies and lawmakers, acting for bank lenders, would have to force the government to impose new laws and collect taxes. This would hurt democracy (ironically, a Greek concept and word) but show the rest of the world what can happen if you don’t manage debt responsibly. The current alternative is to restructure the debt (and debt is still debt).

Contributors to the debate point out the difficulty of placing responsibility – is it the lenders, the government, or the people who elected it? A large minority believed, as lending banks have contributed to potential bankruptcy, they should take the consequences. Other views are that bankruptcy would have too high a social cost and it would be better for countries to help each other, or sell national assets (the Acropolis?!), or defer commitments to give time for a work out. One suggested radical approach was forgiveness, which would lead to a fourth type of economy: “a developed economy which just turned into a developing one”. It sounds like a strong case of: lender or borrower beware, whoever they are.