After the Crisis, Banks Will Have to Become Relational
Economic recovery needs a new model of banking, rather than simply new banks. There's scant need for credit institutions to take refuge in tradition, as they have no other option than deleveraging and cuts in lending to firms.
There are three innovations in banking which are essential to overcome the current crisis: a complete re-foundation of the interbank market, based on traceability and services instead than on the exchange of documents; consolidation in corporate banking by focusing it on the entire business supply chain and not only on the individual firm; restoring trust in retail banking, evolving from transnational mono-logic to relational models of customer management.
On the first score, it is necessary to intervene in the root causes of the crisis: distrust in the interbank market has been abetted by a marketplace in which financial instruments were traded through paper contracts and messages, and were thus intentionally devoid of transparency and traceability. Implanting traceability and implementing interoperability would allow rapid identification of toxic assets. Also, the regulatory model cannot limit itself to ex ante constraints and ex post inspections, but it must be able to control interbank data in real time with tools of business intelligence in the hands of new regulatory authorities.
On the second point, the current model of corporate banking allows only individual companies to get financed, but not intercompany business processes, while lending decisions are based on a static valuation of asset risk rather than on a dynamic analysis looking at specific market contexts. For firms, bankingis a fundamental complement of business processes, which exceed the scope of a single firm. Lending cannot thus be only based on the credit worthiness of the individual company, since the latter participates in multiple economic flows, each with its own specific level of risk. Corporate banking has now to revolve around the so-called financial supply chain. Taking this perspective, innovative instruments of process financing can be developed, by analogy with the expansion of project financing. Banks will emerge that are specialized in the credit management of single processes, such as export cycles in the mechanical industry, or cash flow financing in the textile and garment industry.
Thirdly, retail banking will have to evolve beyond the focus on multichannel transactions and the maximization of sales of low-transparency financial products. Such evolution will have to lead toward multimodal, relational banking, based on the relations the bank has with individuals and groups. This must also take into account the signals coming from social networking and peer-to-peer lending platforms.The new model of retail banking will have to be based on dialogue and education, not on unilateral proposition or, worse, imposition of hard-to-understand financial instruments. It must be closer to the world of new media and less to the factory model behind the teller-based product marketing which has become widespread.
Summing up, the innovation in banking must be oriented toward systems (new standards of dialogue and interoperability), and toward the competitive production of intellectual property. In a market structurally reducing rate spreads benefiting banks, the extraction of value will have to focus away from the interest rate and toward the provision of services. Information technology, a fundamental lever of banking innovation, could well become a major source of intellectual property, until now almost completely absent in traditional banking. The new banks won't be those renationalized by governments: they'll end up looking more similar to Google and eBay than to the procedural bureaucracies of yesteryear.