Money, banking & insurance

The true cost of money

Having money, especially lots of it, can change human behaviour, but how? Dacher Keltner, a psychologist at the University of California, Berkeley, explores the link between wealth and empathy, especially what he describes as: “the profound self-interest and social disconnect’ displayed by investment bankers, hedge fund managers and other professional money managers. But how do you test the link between wealth and empathy?

One test used to judge emotional intelligence shows photographs of human faces. Subjects are asked to judge another person's feelings based upon the photographs. Interestingly, subjects with prestigious jobs are generally poorer at rating how other people in the photographs are feeling, compared to people in lower ranking professions or roles.

In another experiment, students were asked to role-play job interviews, with one student playing the boss and the other playing job applicant. The students were then asked to rate feelings after the mock interview. Again, those from poorer backgrounds were better at judging the feelings of other participants.

Does this matter? Yes because, if you have an expanding global middle class - with lots more money - we may witness a worldwide decline of empathy and altruism. In other words, if you accept that empathy and a concern for others is a societal good, then we could be in serious trouble if more middle class people focus exclusively on themselves.

This could get very problematic because those with fewer financial resources not only face fewer opportunities and worse services, but they are more finely attuned mentally to the injustice, which could lead to a rise in violence or spikes in anxiety and mental illness.

Moreover, if you overlay any general tendency towards selfishness caused by economic factors with a decline in meaningful social interaction caused by digitalisation, virtualisation and automation, you have a recipe for serious trouble. This theory undermines the idea of trickle down economics, and suggests more governments and rich elites would shift rightwards in the future to protect their economic and social positions.

So what’s next? Overall, there does appear to be a selfish tendency displayed by the better off, although what needs to happen is real-life observation and experimentation rather than lab tests using university students. Moreover, it would perhaps be useful to know whether this linkage is recent, whether there are significant regional differences (East versus West for example), whether education levels influence outcomes or, indeed, whether old money versus new money makes a significant difference.

See Invitation to the post-liberal party, which shows that middle classes, for the first time, want benefits cut to the poor.

Wither the branch?

If you want to see the future of banking, start with a visit to Citibank located next to Orchard Road station in Singapore. Here vast screens entice passing commuters into the bank, which looks quite unlike many other local banks.

First, there appear to be no doors to the bank. Second, there are no staff hidden behind counters or security screens. The assistants, who look as though they would be happy working in an Apple store, wander around with tablet computers instead. Nothing new here then. Such layouts, especially those involving young assistants, coffee and iPads have been tried before.

What makes this bank interesting is the idea that what customers now want from a bank is not to physically put money in and take money out. They want information and ideas about money and wealth, even if they end up banking such information and ideas elsewhere.

Strangely, the more branches a bank has, the more it seems to attract new customers, even if the customers end up doing most of their banking at home or in the office. Perhaps this is one reason why, despite dire predictions to the contrary, the number of bank branches in most rich countries has increased, not fallen, over the last decade or so. Indeed, most observers cite a figure of 10-20% more banks than 10 years ago, with the US witnessing a 22% rise in the number of domestic bank branches since 2000.

Why, apart from the fight for new accounts, is this so? Perhaps people have focused too much on technology at the expense of psychology. In other words, branches continue to do well because money is special and people equate physical presence with physical safety – even if their money isn’t really inside the bank and they almost never set foot inside.

Add a dose of economic uncertainty and recession and, hey presto, it’s boom times for bank branches. In the rich world this means turning more banks into local cafes, whereas in the poorer world, this means turning more local shops into banks. But just because the trend has been towards more branches doesn’t mean there will be even more – or even the same number of bank branches - in the future.

The growth in profitability of western banks has fallen significantly since the global crash of 2008 and low interest rates and regulation have hit them hard too. If this continues, the future may be characterised more by cost-cutting than branch investment and we may see more bank closures than openings. A decline in profitability could also encourage more in-store automation and DIY transactional banking, even if this hits overall customer service and satisfaction. (See story this issue - We just don’t trust you).

The Future of banks?

A report by Boston Consulting suggests the banking sector faces a cloudy future, largely due to weakness in the global economy and a rise in regulation. Furthermore, political pressure for regulation may increase still further due to the plethora of recent scandals ranging from Libor-rigging and interest rate swaps to fraudulent selling of payment protection and money laundering.

So what’s next? According to Boston Consulting, banks will need to get even leaner and much smarter, especially in the way they interact with their customers. We can vouch for this after walking into several banks attempting to open a new business bank account recently.

One ‘global’ bank, for example, suggested we return in 10 days’ time because there was nobody in the branch until then who could deal with this request. Perhaps this problem would have been solved if the branch were a specialist business branch rather than a catch-all branch. Rather than a one-size-suits-all approach, banks should spend more time tailoring their services to the nature of the local community.

This would result in a greater range of branch formats ranging from shop-in-shop micro-branches to flagships for black-card carrying premium customers. Branch design, product range, staff type and even staff age could then be tailored within branches so a bank in a retirement area would operate very differently to one in an area dominated by small businesses or young families.

Technological changes are still likely to impact branch banking. Indeed, if regulatory change and global economics have wounded the majority of high street banks, then technological disruptions could kill a number of them off altogether: only the very large and smart and the small and trusted local remaining.

On the High Street and Main Street, more money will be spent developing online services, especially those that can be accessed via various mobile wallets. Whether or not people will consolidate all their spending into one electronic account or continue to spread things around as they do currently, is still unclear. Most industry experts predict people will eventually move to a single digital wallet, containing a number of electronic cards.

Overall, the picture is one of fewer branch visits, but more individual interactions with banks in whatever form they take. But we shouldn’t get too carried away with this.

As Bill Gates once said, “people often overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten’. While Square has increased the number of credit card readers in the US by almost a sixth in little more than a year, globally 90% of shopping still takes place in physical stores and in the US, 25% of payments involve cheques.

In summary, there will be more competition, greater complexity and more people becoming accustomed to doing high value transactions outside bank branches.

Borrowing without banks

This will be another great year for finance unless, gulp, you are a bank. Jacob Rothchild’s investment in UK peer-to-peer lending site Zopa at the end of last year is perhaps an indication of this. While traditional banks, especially in Europe, are under pressure from governments and regulators to change themselves into smaller, safer and perhaps more customer-friendly firms, other forms of non-bank finance are flourishing.

This is both good news and bad. The banks themselves are being moved away from riskier investments, but some of these investments will create new jobs and drive economic growth over the longer term. Meanwhile, numerous credit cowboys are rushing in to fill the gap created by the banks exiting areas such as short-term loans to individuals with higher-risk profiles.

Overall though, the exclusion of banks, together with pent-up demand, has been a payday for online peer-to-peer sites such as Zopa, Prosper (a US equivalent) and MarketInvoice, which do not used leveraged funds. The new landscape is also good news for non-bank lenders such as insurance companies and asset managers who are able to fund longer-term capital projects such as infrastructure.

Peer-to-peer lending sites are especially interesting, as are various forms of crowd-sourced funding such as CrowdCube, Symbid and Seeders. Could such developments make traditional banks obsolete? In theory, yes, although much will depend on government attitudes towards regulation and customer attitudes and behaviour related to trust - all influenced by the state of the economy.

In short, if the economy is healthy, people may be more inclined to experiment with relatively unknown lenders but, if things look bleak, they may prefer to stick with what and whom they know. A high profile scandal, bankruptcy or case of privacy intrusion or data theft could also move things backwards rather than forwards very quickly.

The end of UK 1P?

No, not the UK Independence Party (UKIP), but the one-penny coin (the UK 1P). Last year saw the final demise of the Canadian penny. It was killed off by a combination of inflation and high metal prices. The US cent and UK penny coin can’t be far behind, especially if the story that it costs more than one US cent to make one US cent are true.

The extinction of small coins also owes something to the rise of electronic money. We now have embedded money (eg, travel cards), online micro-payments (eg, PayPal), virtual currencies (eg, Linden dollars) and private currencies (eg, BA airmiles) at our fingertips. Small coins can also be dirty to use and heavy to carry around so dimes and five and ten pence pieces will probably go next.

Implications? First, fewer machines will use coins. They will use notes (and possibly not give change in the form of coins) or we’ll pay with plastic cards or phones, especially cards and phones with Near Field Communications (NFC). We could also see a shift in retail pricing, because 99 cent and 99 pence price-points are supposed to be psychologically tempting.