The big money circus
by Charmele Ayadurai
The art of making money through meeting deposit outflows and loan demands have been no easy task for banks, especially during turbulent times. The world has witnessed reputable banks with many years of experience perfecting their craft come crashing down during the recent financial crisis.
Did the banks fail in their balancing act?
Banks have always been akin to tightrope balancing act performers, juggling multiple risks, fuelling modern capitalistic society through extending credit, and investing savings, while at the same time dancing to the rhythm of lawmakers.
Although it is a norm for companies to invest in high risk investment projects yielding high returns, bankers are forced to refrain from such temptations, which explains the humble returns on money market products.
As Authorised Deposit-taking Institutions (ADIs), banks are duty-bound to the public and the government to uphold the stability of the economy and thus the reputation of the country. In other words, banks are not allowed to take on unnecessary risk with the customers’ investments. Therefore, increasing gearing to increase returns on equity is forbidden in the banker’s book as leverage will increase the risk of liquidation.
Banks are religiously playing by the rules by constantly re-pricing their assets, matching maturities, and hedging with derivatives. Sadly, these measures alone are insufficient to take on the big bad world of globalisation. Banks have to get more creative than this to fight for survival and indeed, they are.
Mediterranean banks are taking in wines, olives, parma ham and barrels of cheeses as collateral for loans. Banks are offering micro credit to help the poor get on their feet in addition to using the pawn shop concept where customers can pawn their gold for credit.
To make up for an increased profit margin, banks have to resort to major product line overhauls. However, merely tweaking a few features and fees and expecting to be competitive will not do the trick. Banks are listening and becoming far more innovative.
JP Morgan Chase came up with a blueprint card platform which enables customers to pay in full for select purchases, split payments and track purchases, as well as create a plan to pay down the balance faster.
PNC’s virtual wallet online banking platform, on the other hand, provides a consolidated view of all accounts at the bank along with interfaces for activity between accounts. The platform is also available on iPhones.
The Citi Forward credit card from Citibank promotes responsible card use through such features as annual-percentage-rate reductions when customers stay under their credit lines and pay on time for three periods in a row.
Wells Fargo’s My Spending Report, meanwhile, is an automatic online display of customers’ transactions from all their accounts with Wells Fargo.
Another astonishing invention is the Bank of America’s Keep the Change programme. The programme rounds up purchases that are made with the Bank of America debit card or check card to the nearest dollar. It also takes the money from customers’ checking accounts and puts it into their savings accounts.
Relaxation of the Glass-Steagall Act restriction through deregulation has not only broadened the product lines of banks but also the banks’ powers and geographical restrictions.
However, banks are quick to realise that product diversification is just one of the many tricks that they can pull out of their hats to survive.
Banks are educating themselves to improve the effectiveness and efficiency of core functional areas. Royal Bank of Scotland’s ‘engine room’, which is a single back office for operating groups within the bank, enabled it to increase its efficiency tremendously and led to its offering the service as a white label service to other financial institutions.
Besides focusing on functional areas, banks are also getting creative in restructuring and extending their enterprises. One good example is Standard Bank of South Africa’s Mobile Money initiative. The bank is partnering with cell phone provider MTN to provide mobile accounts to customers. This has helped it expand its customer base to include under-banked customers that may not live in urban areas and have limited access to branches.
Another example is HSBC. The bank is an example of adaptation and localisation, gaining 125 million customers in 76 countries through its strategy of business model adaptation around the world. While it introduces the HSBC brand, standards and procedures to host countries, it maintains a flexible enough business model to adapt to local norms and ways of doing business.
Innovation requires large capital expenditures, however, which banks can ill afford. Here is why.
According to the regulatory requirements of BASEL 111, banks are required to strengthen their capital requirement. Tier-one capital requirements for all banks must be at least 7% of risk-weighted assets, while the biggest banks, including JP Morgan, have to achieve 9.5%.
In other words, if banks put more money aside to absorb unexpected losses, then there will be less money to make money with. This also means banks have to think of ways to make more money without jeopardising their prime customers, and at the same time, make a handsome profit while they are at it.
The new law has put the banks in a pickle jar. While some bankers try to quietly absorb the rationale others are lashing out. JP Morgan CEO Jamie Dimon accused the new capital rules as anti-American.
Banks are thus inclined to not only walk a tightrope but also keep a tight hold on the balancing pole if they want to prolong their legacies. Whether they slip up, or maintain their composure and survive the big money circus, it is purely down to the banks’ ingenuity.
Charmele Ayadurai is a Banking and Finance lecturer in Curtin Sarawak’s School of Business. She previously worked at Barclays Bank and Natwest Bank in the United Kingdom as a trainee associate, and having obtained her Masters degree, ventured out to work with UNISYS, an American insurance company as a lead verifier, and later on as a business development manager cum entrepreneur with TC Autos. In Malaysia, she has worked as a business development associate with OSK Investment Bank Berhad. Charmele can be contacted at +60 85 443 939 or by e-mail to firstname.lastname@example.org.