Would Total Transparency Kill Banking Competition?

George Osborne delivered his Mansion House speech last night. Unsurprisingly, how the government deals with Europe was the meat of the sandwich. But in the build up, he announced steps Britain would take with its own finances to pave the way for those EU renegotiations.

He was right to do so. How could a nation whose own banking sector is under such a shadow hope to dictate how others should run their finances?

He had the answers. Osborne’s strong stance on public finances, with the help of the Treasury and the Bank of England, will help right those wrongs. Or at least set the wheels in motion that show the rest of the world we’re cleaning up our act.

Privatisation begins in earnest

He’ll start by releasing government shares in Royal Mail (today), Lloyds and what looks like being a protracted sale of RBS to the private sector.

The Chancellor believes banks – and the individuals within – will accept more responsibility if its duties are to shareholders, not the taxpayer.

Sceptics may argue that this is a ploy. The Chancellor is simply shifting the accountability of banks who’ve brought shame on London away from Downing Street.

But the initial response on the stock exchange to the news has seen the heavily-indebted RBS share price rise. No, there’s no hint of inflating prices to get the best deal for the government’s stake.

What a difference a year makes

The Chancellor’s speech was very different from last year. Scotland was still to vote on independence. Libor rigging hung in the air above the 350 attendees as they chowed down into their soup. The Bank of England’s review into London’s money markets was also under starters orders.

The results of that review, the Fair and Effective Markets Review, are now in. Headlining are the deterrents. More financial shortcomings – crimes, in any other walk of life – will carry the threat of jail sentences.

Those sentences themselves will carry a longer maximum term, up from 7 to 10 years for those found guilty. Despite the guilt that continues to taint the market, the catalyst for the review, no single banker has yet been incarcerated for their actions.

But it’s other elements of the review that may impact the competitiveness of business banking. Namely, transparency and openness across the sector. James Quinn goes to lengths to present an example of how business banking rates may work in today’s Telegraph. But this is the essence of it.

Banks need a DCA and a USP, OK?

People who invest in the share index want the traders acting on their behalf to make them money. The more the better. Otherwise, why bother?

To do that effectively, like any business, those traders have to offer the customer a DCA – a dynamic competitive advantage, a unique selling point. What that USP is will differ from business to business.

Take, as an example, Amazon Prime. Members pay an annual fee and many of the items they buy come with free delivery and additional discount. Whilst the items’ retail price may be similar to the competition, it’s the added value of the Prime membership that keeps the customer loyal to Amazon.

Not all products qualify for Prime. The details of what does and doesn’t qualify are at the behest of the vendor. As a Prime member, it’s great when you get a discount. But you also accept that you’ll not benefit from everything on Amazon’s digital shelves with your membership.

It’s the same for banks. They have individual shareholders, customers who want (demand) preferential treatment. They also have individuals and teams working the trade floors, some of whom are better at what they do and get grander returns for their customers than others.

Thus, you have your DCA that makes a business profitable. This, in turn, leads to a long term relationship built upon a platform of better performance.

It’s clear: total transparency would kill the money-makers

If banks were forced into 100% transparency about the way they offer business loans, they’d lose that advantage. They’d simply publish a table of rates, highlight the rate above Libor they offer, the term of the loan and that would be that:

  • relationships gone;
  • banks in a Dutch auction to offer the lowest rate on their website;
  • the focus shifting to customer acquisition;
  • an inability to serve each customer as best they can for their individual need.

Business, especially in a recovering economy, needs strong relationships. Yes, transparency can go so far in garnering the trust that the financial sector has lost.

But to sacrifice its ongoing profitability to satisfy regulators based on the actions of a few who brought the industry into disrepute?

With regards to transparency, lending a phrase from Mr Osborne, “let’s be clear”: hanging all of the dirty linen (and clean, after its prewash) out in public is not what customers, staff or the UK economy needs right now.

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