Back in the 1950s, most people handled their basic banking via a Post Office account. It was a no-frills service, but most of us didn’t need anything different.
Over time, the financial services sector began to see the opportunity to offer a more sophisticated service. In came a range of current and savings accounts, cash machines and all the rest. Today, many of us still have a National Savings Account (UK citizens currently have £102bn-worth of investments in NS&I), but these don’t really interact with the commercial banking system.
In a profound, radical-conservative paper, Central Banking for All: a modest proposal for radical change, Australian economist Nicholas Gruen is proposing that central banks start to provide banking services direct to consumers. While Gruen rejects the idea that this is nationalisation of utility banking, it’s hard to see it otherwise. “Modern technology makes it possible to extend some important central banking services to individual Britons and British businesses,” he argues. “The internet enables the central banking system to wholesale directly to consumers”.
Speaking at an event hosted by Nesta (the National Endowment for Science, Technology and the Arts – pictured), Gruen starts from the idea that digital technology is disrupting banking in the same way that it has destroyed (albeit over a period of time) traditional retail, music and publishing. However, because the banks have to make money on their banking services (doh!), they continue to package up basic banking in ways that raise its costs to consumers. With digital technology inexorably reducing the costs of providing such banking services, this surely is the road to nowhere.
Disintermediation enables the central bank to interact directly with consumers, argues Gruen. Over time, he suggests, central banks (or, specifically, NS&I) will be best placed to sustain providing low-margin but useful banking services (in the same way that the state takes responsibility for providing routine law enforcement). So NS&I should allow direct access for account holders to pay each other within payment system and remove quantity restrictions.
The implications for our retail banks are clearly huge: central bank-delivered utility banking would pretty much wipe out the need for high-street banks and, interestingly, force them to shift to activities where they genuinely add value.
Gruen’s second proposal is that (stay with me here) the central banking system “should guarantee and lend against super-collateralised mortgages” (ie, super-safe assets, such as residential or commercial mortgages with highly favourable loan to valuation ratios). Such services would be contracted out to the private sector and could, suggests Gruen, supercharge the current Funding for Lending scheme which, as yet, has made little impact on businesses’ access to finance.
There is little doubt that a revolution is under way in banking. Real Business has covered in detail the emerging alternative lenders, which are unleashing finance in a host of ways – crowdsourcing unleashing private cash; MarketInvoice using digital technology to unlock SME invoices. Digital platforms (such as Wonga and Funding Circle) are speeding access to funds for individuals and businesses.
Against this backdrop, the traditional models (and operating costs) of our traditional banks look imperilled. By proposing a greater role for the central bank in delivering bog-standard banking, Gruen’s proposals may stimulate the kind of innovation that our banks need to stay relevant in the 21st century.
You can read Nicholas Gruen’s report, Central Banking for All: a modest proposal for radical change below
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