Category Archives: Financial

Don’t Bank On It

Next up, the ins and outs of the banking system.

It’s an easy target. Flawed, failing and despised, no-one likes banks. So what are their shortcomings and why have these come about?

Let’s start by looking at what a bank is, and what it isn’t.

What A Bank Is

A bank is a private enterprise for making money. There is some variation in how they do this and who they do it for. There are high street banks, online banks, building societies, investment banks. But, despite bailouts and state investment and ownership these are all profit-making businesses, not charities, community projects or services provided by the state.

This can be all to easy to forget when there is no price tag on the products. You can walk into banks, use their infrastructure, open and manage an account, get advice and other services, all seemingly for free. They even offer gifts and cash incentives for opening an account. But of course there is no such thing as a free lunch.

Banks make tens of billions of pounds in annual profits, even in a recession. Let’s look at how they do this:

How Banks Work

Banks make more money from debt than anything else. Their core business is overdrafts, credit cards, loans and mortgages. However, it is not simply a case of lending out to borrowers the cash left on deposit with them by savers. The two activities are independent and banks make money from both of them. Banks borrow from other banks and from central banks like the Bank of England and the European Central Bank and lend this money out to customers. Like any retail operation, they buy at wholesale prices, and add their mark-up to generate a profit margin. So in this case they borrow at lower interbank rates, and lend at higher retail rates.

Banks then also make money from savers. Even if you’ve never been overdrawn, the bank is making money out of you. The money you have in the bank provides them with a security so that they can invest in the market. Effectively, the bank use your money to buy assets. This is where the hated bonus-receiving, economy-crippling bankers reside. They can make infamous mistakes, but generally, on average, they generate consistent double digit annual returns for the bank. Who then pay a pittance in the interest that you receive on your savings.

Not to mention the negligible or zero interest you receive on your current account, where every penny you get paid will pass through your accounts, sitting on the banks books for days, weeks or months, making them more money.

On top of these two main activities, banks also make money in a number of other, somewhat more immediately apparent ways. These are: charges – for being overdrawn, or for bounced cheques or unauthorised payments, etc; premium-paying accounts; foreign exchange; and products such as investments, insurance policies and cash products.

Now, how do banks maximise their profits? There are a wide range of cunning techniques and procedures banks use, all designed to make them more money:

How Banks Squeeze Every Penny They Can Out Of Their Customers

  • They don’t care about their customers. Regardless of what the adverts say, they don’t provide anything resembling customer service, they’re utterly inflexible – falling back on “company policy” and “the computer says no”, and if it doesn’t make the bank money from day one – regardless of how helpful, important or appreciated it would be from your perspective – forget it.
  • They rely on the apathy, indifference and inertia of their customer base. They know that once they’ve hooked you in with one good rate, special offer or free gift, they’ve got you for life. They’ll give you a competitive rate for the first 12 months, and after that you won’t bother switching. They know that if they are competitive in one area you’ll assume they’re good in others, or you’ll just keep everything in one place for convenience. They make it such hard work to change anything or talk to someone that you just give up. They offer all sorts of added benefits, such as add-ons to your premier account, but they won’t go out of their way to help you take advantage of them – you have to do the legwork yourself. They won’t tell you the rate you’re on on your savings statement or your debts, because that would make it too easy for you to compare and switch. And they do everything to engender a sense that “they’re all as bad as each other” and it’s “better the devil you know than the devil you don’t”. However there’s no reward for loyalty, you’re just a number, and in fact more often than not the best deals go to new customers to win their business, increase market share, harm the competition and then push up prices.
  • Advertising, marketing, branding. Just as Apple’s success is down to their marketing rather than their technology. Just as MacDonalds’ success is about real estate, not food. Banks rely on their image and their ubiquity. Not that they have much of a reputation, but they have an omnipresent brand: the blanket advertising on tv, posters, billboards and in print, the voiceovers, slogans, backing music and graphics, the slick website and the high street presence. Not to mention the captive audience of account holders, bombarded with promotion of new products in branch, on our monthly statements and via our online banking portal. The marketing budget and ground rent for a high street bank must be absolutely mind-blowing. And yet it is money well spent, as they become ingrained in the popular consciousness. It also represents a form of conspicuous consumption. We all want a bank which is financially secure, and intuitively we believe that with all these bright, clean, new signs and signifiers they must have lots of cash to be so flash.
  • Having hooked us in, they then recoup the cost of all that advertising by charging a substantial premium on the products we take out. Either through bad rates or high charges, products from high street banks – mortgages, loans, savings, insurance and investments – are very rarely competitively priced. And the service you receive will certainly not justify paying a premium.
  • They misadvise. Inevitably when their culture is one of looking after themselves rather than their customers, they recommend, push and influence those products and behaviours which benefit the bank with scant regard for the account holders’ interests.
  • Rather than doing their best to keep to the rules and the spirit of regulation, they shoot first and ask questions later. They breach the regulations with reckless abandon and then pay the fines and compensation if and when they eventually get caught. And so one scandal follows another – rate-fixing, overcharging, PPI misselling, sub-prime lending… And they do everything to obstruct and delay the process of claims, complaints and cancellations.
  • They use deliberately confusing names. You think you’ve got the market-leading “premier gold” account, but really it’s the underperforming “gold premium” account. They call things “bonds” – a word that means at least four hugely different things in the investment world: corporate bonds, premium bonds, investment bonds and savings bonds are all very different things.
  • They don’t employ qualified advisers. To advise on investments and insurance you need to be suitably qualified. To talk about and sign people up to loans, credit cards, premium bank accounts and cash savings you don’t. Seeing as qualified people demand higher salaries, and investments and insurances take more time and resources, and the public don’t understand them or come looking for them, and there’s a bigger risk that you’ll have to pay compensation for misadvice, is it any surprise that banks aren’t employing qualified advisers?
  • They provide products, services and advice that are free at the point of contact. Wherever possible they want to maintain the illusion of “free banking” by making their money through hidden product charges. Customers are reluctant to pay upfront cash fees, but end up paying much more on the back end.
  • Mergers and acquisition. There is very limited competition in the banking industry due to the conglomeration of separate banks into monolithic banking groups. Often separate brands are retained, so you think that you’re comparing two separate companies when you’re not. Also if you’re a customer of a bank which is taken over, you’re likely to be left high and dry in a moribund account, not benefiting from the new products and customers service offered to customers of the new brand.

Bankers Bone Us

Incidentally, there has been much outrage about bankers’ bonuses. Outrage that those who have seemingly brought about the financial crisis are still picking up their rewards. However, I find it revealing that there is little uproar about bankers’ salaries or promotions. I think that the resentment is more about the pattern of remuneration than the amount. Most people live to the limit of their salary and so would love a windfall of extra cash every year.

And lastly, it seems that banks can do all this from a position of protection from the moral hazard of government intervention. Too big, or too important, to fail, they can make all the profit while we take all the risk.


The University of Life

Education, education, education. The education system has changed a great deal since I was subjected to it, but there are some abject shortcomings that are often overlooked.

Education is the key. It is vital for the functioning of society, especially a civilised democracy, and also for the development of the individual student. Perhaps it takes three distinct forms: structured education, passing on the acquired wisdom from the accumulated experience of humanity; normative education, teaching you how to function as a productive member of society, including vocational and ethical preparation; and personal education, the lessons you learn about your capacities and capabilities.

The formal education system does an incomplete job on all these fronts.

Firstly, there is the problem of relevance. You learn about fascinating things such as photosynthesis, trigonometry, conjugating French verbs, the socioeconomic impact of the Aswan high dam, the hierarchy of the Roman army and the assassination of the Archduke Franz Ferdinand, but you’re taught none of the knowledge and skills required to survive day-to-day or make something of yourself.

Secondly, employers complain about graduates who are unready for work. Despite sixteen years of education you have negligible vocational skills and some, despite three years in higher education, lack basic literacy, numeracy and IT skills.

Thirdly, part of the reason for the lack of basic skills is that the system pretty much forces you to specialise. You choose to drop the subjects you do badly in or don’t enjoy. And you focus on those that you’re already good at. Hence you don’t improve on what needs improving, and you invest precious resources in something you would happily have worked on in your own time.

Fourthly, you’re encouraged to specialise in this way because you, your teachers and your school are all judged based on getting the highest grades, rather than what would actually be best for you. Not only in terms of the subjects you’re taught, but also the tendency to “teach the test” so you don’t even get a good understanding of those subjects, let alone a thorough, all round education.

Fifthly, you’re misled by the meritocratic nature of formal education. You do the work, you get the grades you need and you can progress to the next level and the appropriate role within that level. Unfortunately the real world doesn’t work like that. Rarely do you encounter real world scenarios that have such a clear cut structure of rewards going to those who deserve them. Unless you work in a performance-based occupation such as sport, music or acting, it’s usually an array of other factors that determine your career progression, your actual ability to do well least among them. In fact even in those professions that reward good work, luck and other externalities will have a far greater say in your overall success than they do in the rarefied and artificial world of academia.

Seventhly, and lastly, the education system has lost pace with the modern world. Technology has exploded, meaning not only do we all have calculators to do our arithmetic, we have encyclopedic knowledge at our very fingertips. The world of employment has changed profoundly and with the advent of cheap, ubiquitous computing, virtually no job is recognisable from what it was ten years ago. Not to mention new ways and means of working and recruitment and the fact that the most successful people in society are business owners and investors, not doctors, lawyers and accountants.

All of this leaves today’s graduate crucially stunted and ill-prepared for modern life.

The greatest learning experiences are not to be found in the classroom. For personal education it is life experience which really tells you what you need to know. Perversely it is in our failures, break-ups, disappointments and defeats that we really find out what we’re made of. And it is in those things that make us passionate, that we love and enjoy that we see what we’re truly capable of.

The most important and powerful learning experience comes from facing adversity. We also need to build up genuine working knowledge by operating in the real world, experimenting with ways to overcome challenges, observing and extrapolating, practicing and perfecting. To become well-rounded we need to work hard on development in areas where we are weak or lack a natural interest or ability. We need to be objective-focused and think about what we’re actually getting out of a learning experience. We need to be self-aware and analyse and frame our experiences and our reactions to those experiences to learn about ourselves and build up a better understanding of what drives us.

However these are lessons one must be prepared to learn, and the education system is not designed to enable us to achieve our maximum potential. By presenting us with an oversimplified microcosm of the world it limits our ambition and indoctrinates us into an institutional, hierarchical view of the world. While the real learning could be done in the extracurricular activities or in the playground, the underlying message from our schooling is to keep your head down, do what you’re told, play along with the system, lower your expectations and be a good little worker bee slaving away for the benefit of society.

So, despite it’s failings, the education system produces a ready supply of hard-working citizens. And it is the responsibility of those who believe they have something more or something other to give to teach themselves and others how it really works.

The Financial Animal

“You and me, baby, ain’t nothing but mammals…”

The human brain is a remarkable thing. We have evolved all manner of traits which set us apart from the rest of the animal kingdom: language, art, empathy, technology, philosophy, law, religion, music, virtue, war, entertainment, history, cookery, medicine, welfare, mathematics. It’s almost enough to fool us into thinking that we’re fundamentally different, made of something better than the organic mush the rest of nature is composed of. We certainly think of ourselves as logical, rational, objective thinking machines rather than primitive, animalistic beasts.

However there is one area where it is apparent to me that we are not half as clever as we think we are; another specific uniquely human characteristic: money.

We think that we make decisions, not just about money, but about life in general, based on the facts. We get a good understanding of the options, weigh up the pros and cons, and make sensible decisions. That’s what we tell ourselves, but it couldn’t be further from the truth. The reality is that we are far more short-sighted and reactionary than that. Ultimately, our decisions are entirely emotional rather than rational.

We struggle with the abstract, arbitrary nature of money. It’s not tangible. It’s counter-intuitive. We have no instinctive grasp of the workings of our financial lives. We’re also very bad at planning. Anything which involves delayed gratification produces a natural reluctance. We want it all, and we want it now. Not to mention the tide of emotions evoked by our relationship with money. Fear, insecurity, desire, self-esteem, vanity, aspiration, guilt, mistrust, excitement, laziness, regret, determination. These are our drivers, not the cold, hard facts and figures.

Hence our planning, decision-making and thinking are flawed and result in irrational and self-defeating behaviour, and this dictates our fortunes.