Money, banking & insurance

The end of cheques

Users of cheques might not be surprised to learn that cheques are losing their cache and, according to a survey of UK companies this year, one-third expect to stop using them in the next 12 months. Some 1.4 billion cheques were cashed last year compared to 2.25 billion in 2003. There has been a 10% drop in business cheques, with the use of personal cheques dropping much more sharply.

The reason for their decline is, predictably, because they are time-consuming and a security risk. The Payments Council wants to phase them out in the UK by 2018 but that may be ambitious. Not everyone sings the praises of electronic transfer because, while it offers direct control, it also offers direct mistakes, eg, hitting the “pay” key more than once. There is also the fear of fraud, which still dogs electronic payments often enough to make some people nervous.

With many Asian countries already using mobile phones to make small payments, and the more humble use of electronic funds transfer in most shops everywhere, it seems likely that even cash is going to go out of style. The days of the humble cheque are certainly numbered. Write the next one carefully – it may be your last.

Time for old banks to retire?

Most companies on our stock exchanges seem to disappear eventually, or are swallowed up by larger fish. General Electric, for example, is the only US industrial company still in the Dow Jones index since its inception in 1896. In spite of this, the UK banks go on, and on. Barclays has been going since the 1600s, Lloyds since 1765 and Royal Bank of Scotland since 1727. The question to ask is why? Longevity bestows mystique and sense of entitlement – but what is in it for consumers?

When the banking crisis hit America, both Citigroup and Bank of America assured the public the government was lending them money and nobody should worry because they were still profitable. When taxpayers’ money is going into the banks, they might well wonder if it is money well spent. Of course, it has always been their money, whether as taxpayers, employees, customers, or shareholders. But banks seem to have taken it all for granted and allowed themselves to take massive risks with little downside for them. The question is: is there anyone better equipped to do the job?

Some have said the Post Office could do it. Others say Richard Branson, who investigated taking over Northern Rock, or even Tesco. But surely someone should do it, otherwise the big four UK banks will keep going as they always have. Many people think they can manage their money themselves, while others indulge in black-box investing, where someone else or a computer program, makes the decisions. Nobody knew how Bernie Madoff’s system worked, until he was found out for the crook he was. Banking remains an industry where there is little choice because all banks look the same. As hard as they try to differentiate themselves, they are all singing the same tune about being warm, friendly and customer-focused. Perhaps the time is right for a banking upstart waiting in the wings, ready to eat the big fish.

When everyone is a bank

In response to the financial crisis, US legislators are proposing to crack down on retailers and manufacturers that provide customers with loans for purchases. While banking has always been more tightly regulated, so-called industrial loan companies (ILCs) have not been subject to the same rigour. ILCs are regulated by the States and are based mainly in Utah, where they take in federally insured deposits, make loans, and issue credit cards. Target, BMW, Pitney Bowes and UnitedHealth have all set up ILCs for the benefit of their customers and to their own benefit, because they are less regulated than full banks. There is no evidence so far that ILCs contributed in any way to the financial collapse.

Strong lobbying from the banks and from General Electric will ensure that the legislation is properly explored. General Electric, for example, has GE Capital, which the US administration might consider to be a “Tier 1” bank, restricting its activities. GE claims that, because of its manufacturing activities, it had a much stronger cash flow than standalone finance firms, which have found it harder to raise money. But GE still had to get money from Warren Buffet in October last year. Some shareholders are pressuring GE to get out of finance completely, and others, to reduce its influence on the health of the parent company. Wal-Mart also suffered a setback when banks protested vigorously against the idea of it getting an ILC licence. It sounds as if Wal-Mart was seen as a genuine and threatening competitor to the old guard. Once again, the banks will not easily give up their sense of entitlement. For more of the same, see the story above, Time for the old banks to retire?

Flash fatigue

Even the wealthy are changing their habits now, as the recession begins to bite. The Harrison Group says that 78% of the wealthy are waiting for the sales before they buy and 77% are buying fewer big-ticket items. Meanwhile, Bain Consulting says the luxury goods market grew by only 1% in 2008 and the first half of 2009 is not any better. Many of the luxury brands are feeling the pinch but they are more willing to suffer lower sales than lower margins.

Bulgari saw a 17% drop in jewellery sales and Tiffany’s said sales in America fell 35% at the end of last year. Saks Fifth Avenue cut prices on designer clothes by up to 70% before the start of the holiday season. Occupancy rates in hotels are also suffering, particularly corporate bookings. This is known as the “AIG effect” after the “spa” debacle when the government had to rescue AIG soon after it spent $US440,000 on a spa retreat for salesmen. While one might expect that the wealthy would want to drown their sorrows, Champagne exports fell by 4.8% last year.

The two main reasons why the wealthy are cutting their spending is because they have lost money on shares and property (and might still lose more), and because they are tiring of conspicuous consumption. There is even a spike in sales of second-hand luxury cars. (See also ‘The French embrace “new modesty”’ in issue 22.) The wealthy, like the rest of us, may also be using the Internet for sales, especially those who feel uncomfortable entering luxury goods stores. But Internet shopping for luxury brands also carries the risk of counterfeiting. Ledbury Research says that the wealthy may decide to buy less but continue to look for true craftsmanship rather than simply “bling”: even a recession will not dent their good taste.

Austerity for the rich

While nobody really feels sorry for the rich, they may be facing the same feeling of austerity as the rest of us. After all, they are the main owners of the equities and properties that have dropped so rapidly in value. Some may have lost a quarter of their wealth: the number of billionaires globally fell to 793 from 1,125 last year. The gap between rich and poor is even narrowing, after 30 years of getting wider. The question is whether this is a structural change or simply the result of the global financial crisis.

A strategist at Mirae Asset Management claims that the existence of a wide gap between rich and poor is a result of six factors: capitalist-friendly governments and tax regimes; financial complexity, innovation and deregulation; the paramount rule of law; globalisation; technology changes; and patent protection. The recession has already dented the power of some of these, through tighter regulations, and the so-called “rule of man” rather than law. The term, “plutonomy” applies to an economy dominated by the spending of the rich, but it might well be that the tide is turning against it. According to Harrison Group, 78% of the wealthy said their sense of security had been undermined by the crisis and only 46% felt positive about the future, compared to 93% in 2005.

Unfortunately, while our pity might be scarce, the rich are the ones who make decisions that affect the rest of us and make massive investments in new ideas and keep people employed. Even so, one British survey found 82% thought that senior bank staff should have their pay capped (surprise, surprise). It is nothing new to revolt against the perceived powers of the rich and favoured. But as The Economist notes, there are likely to be fewer rich in coming years but the “wealth of those that remain will be more soundly based”. That has to be better for everyone.