An Interesting Perspective On Financial Inclusion

Interesting speech from Frank Elderson, Executive Director of the Netherlands Bank, highlighting some of the risks attached to the digital revolution and the impact on potentially excluded households. For example, losing access to bank branches, or ATMs, the impact of big data and the complexity of banking products. This perspective is important.

We still face challenges here in the Netherlands. Although these challenges are of a very different order to those in many other parts of the world. That’s because in the Netherlands, a lot is already very well arranged. For example, we have a stable system of payments, and everyone has access to financial products and services, such as bank accounts, insurance and pensions. Over 99% of Dutch citizens have a bank account.

Plus, in the Netherlands, we also devote a lot of attention to financial education, another important aspect of financial inclusion. You also play a big role in this respect. These initiatives include the Money Week project for primary school pupils, the Money Wise platform, as well as the activities of Child and Youth Finance International.

Yet there’s another aspect of financial inclusion I’d like to see us pay more attention to in this country: resilience. We strive for financially resilient consumers in society. Consumers should, in order to be resilient, make prudent and sound decisions. That’s one aspect on which we still have much work to do in the Netherlands. It is apparent in several areas. Let me give you a few examples:

National issue #1: vulnerable groups

For one, the impact of innovation, and the widespread digitization of financial products and services. This development means that many more people are now able to gain access to, for instance, insurance and banking services for the very first time. It’s fantastic to see what innovation can deliver in this respect.

However, in the Netherlands we have seen how innovation has also led to certain sections of society becoming more financially vulnerable. This is due to banks closing more of their branches and reducing the number of ATMs. At the same time, the new products and services that FinTech companies offer are sometimes still inaccessible for certain groups. These include the elderly, the handicapped, and people with low digital literacy.
These days, innovative firms focus on specific or younger target groups.

The early adopters. This is a logical business strategy. However, during this transition we must also consider the needs of more vulnerable groups. After all, access to these products and services should be available to everyone. While we are dismantling old systems and introducing new ones, the vulnerable among us may not always be able to keep up.

They run a risk of becoming disenfranchised – a risk of being left out in the cold.

National issue #2: exclusion

The second development I’d like to call your attention to under the aegis of ‘financial resilience’ is the use of data analysis to make services more personalised. Again, we can see how this has had a very positive impact internationally. For example, if a financial service provider, based on data analysis, can see a customer is reliable, then such service provider is more likely to grant that person a loan to set up a small business.

But there is also another darker to this coin, also in The Netherlands. In addition to the potential violation of privacy, data analysis can also lead to the exclusion of some customers. They may, for example, be excluded from certain financial services, if, by shrewdly combining various databases, it becomes clear that they have a high risk profile, or low profit expectations.

National issue #3: understanding

The third and final aspect of financial resilience I’d like to discuss concerns people’s understanding of financial products. Getting a mortgage or choosing a pension is not an easy process. The information provided is often highly complex. If someone takes out a mortgage they can’t afford, or chooses the wrong pension, it can lead to serious financial problems.

The combination of honest communication and understandable products is an important concern in this respect.

‘Consider the vulnerable people’

I’m sure you’re familiar with these examples. But I’ve mentioned them for a very good reason. When you’re designing a product or a service, I urge you, as representatives of the financial sector, to please always stop and ask yourself the question: “have I considered the more vulnerable people
among us?”

CBA Reclassifies Loans

At 12:13 PM on Friday 29th September, before the long weekend, Commonwealth Bank of Australia (CBA) advised the ASX that following clarification of loan purpose reporting guidelines, certain statistical data have been reclassified as part of regulatory reporting obligations for Authorised Deposit-taking Institutions. It did not come through their normal press release channels.

The reclassification relates to mortgage-secured household lending data for the periods between October 2015 and July 2017. The approximate impacts of the reclassification as at 31 July 2017 include:

  • Restatement of Loans to Households: Housing: Owner-occupied from $278.4bn to $273.9bn;
  • Restatement of Loans to Households: Housing: Investment from $138.2bn to $134.8bn; and
  • Restatement of Loans to Households: Other from $10.1 bn to $18.0 bn

The reclassification is for statistical reporting purposes only and has no impact on customers, the security and serviceability arrangements for these loans or on CBA’s regulatory capital, risk appetite, risk-weighted assets or statutory financial statements.

The reclassification has minimal impact on CBA’s reported volumes relative to APRA’s industry benchmark for investor mortgage growth and limit for new interest-only mortgage lending.

This may go some way to explaining the weird APRA data which came out Friday, compared with the RBA data, which showed a net rise.  Here is the APRA portfolio movements in summary.

So it means CBA loans were switched from classified for property lending, to secured on property for other purposes.  The APRA guidance letter from March 2016 says:

In particular, non-housing loans that are secured by residential property mortgages should not be reported under item5.1.1.1 or, but reported under the relevant loan item elsewhere in ARF 320.0.

At very least this switching of loans is unhelpful when trying to understand the trajectory of home lending, including the $58 billion of loans reclassified according to the RBA.

Not having a trusty compass makes policy setting difficult – the recent media reports of macro-prudential biting may be overdone as a result. More reason to think the RBA may hike rates sooner.

Reclassification also masks loan portfolio growth, and also the RBA only reports the value of loans switched between owner occupied and investors, not switched away to non-property purposes.  More fog around the numbers!

Banking Misdirection and the BEAR

According to Wikipedia, Misdirection is a form of deception in which the attention of an audience is focused on one thing in order to distract its attention from another. Managing the audience’s attention is the aim of all theatre; it is the foremost requirement of theatrical magic.

An article From The New Daily. suggests the banks employed this tactic by using Sundays announcements about the end of ATM fees to distract attention from the BEAR draft legislation released the previous Friday.  We had already covered the BEAR on our blog but more generally I agree the potential coverage was diluted thanks to the ATM news.

It is worth looking at the limitations of BEAR, especially as conduct relating to consumer outcomes is excluded, the focus on the rules relate to prudential matters. In the UK, who have similar measures on place, they also included consumer related bad practice.  The rules should have similar reach here, because this is actually the central issue banks need to address.

Will BEAR help consumers?

According to consumer advocate CHOICE and the Consumer Action Law Centre, not really. In a joint submission to the government, the two groups pointed out that these rules only applied to prudential matters – that is, matters relating to systemic financial integrity. They did not apply to consumer matters.

The difference between the two is best understood as follows: the global financial crisis was essentially a prudential crisis. Overseas banks were lending more than they could afford, and (to put it simply) they ran out of money.

The CBA financial advice scandal, meanwhile, was a consumer issue. It involved bank representatives doing the wrong thing by customers.

CHOICE and the Consumer Action Law Centre urged the government to imitate similar laws in the UK, and extend the BEAR to consumers. That would mean bringing in the consumer watchdog ASIC as well as the prudential watchdog APRA.

But the draft legislation reveals the government has not done this. It has also crafted loopholes that allow both itself and the regulator freedom to relax the rules in special (unspecified) circumstances.

These moves suggest the government isn’t quite as tough on banks as it would have the public believe.

Regional banks call for level playing field

Australia’s most recognised regional banks have called on a major competition inquiry to level the playing field and put consumers and the economy first.

In a joint submission lodged with the Productivity Commission, AMP Bank, Bank of Queensland, Bendigo and Adelaide Bank, ME Bank and Suncorp highlighted five key areas that require policy reform to achieve sustainable competition and competitive neutrality:

  1. Further policy reform to reduce the artificial funding cost advantages enjoyed by the major banks. While the new Major Bank Levy has reduced this advantage, it only recoups a small proportion of the overall credit rating uplift enjoyed by the majors;
  2. Further reform of risk weights to address the significant gap that still exists between the capital requirements of the major banks and standardised banks. While there has been some risk weight narrowing following the FSI, the gap remains significant, and is particularly stark for loans with the lowest risk;
  3. A review of macro-prudential rules to better balance macro outcomes such as stability, without undermining banking competition. One option would be for APRA to give greater policy weight to minimum capital requirements. Macroprudential rules set by APRA have effectively ‘locked-in’ market share of loan books at current levels, thus leaving smaller banks with no room to challenge the already dominant position of major banks;
  4. Mortgage aggregators and brokers owned by major banks should publicly report on the proportion of loans they direct to their owners. While we do not suggest that major banks should be banned from owning broker networks, we do believe that where this occurs it should be managed in an open and transparent way to ensure customers are able to make fully informed decisions; and
  5. Before any new regulations are introduced, greater consideration should be given to the impacts on smaller banks. The unprecedented pace and volume of new regulation and compliance has a disproportionate impact on smaller banks which stifles sustainable competition.

The banks also support the ABA’s submission calling for more care and attention into the shadow banking sector, which continues to compete free of many regulations and APRA oversight.

The CEOs said while Australia had been well served by a strong and highly regulated banking sector, it was important that stability did not overshadow competition and good consumer outcomes.

Suncorp Banking & Wealth CEO David Carter said: “We believe there can be a balanced and fair framework allowing banks of all sizes to compete on a level playing field, while still meeting all sound, prudential principles. We would like to see more attention on macro-prudential rules to promote customer choice and competitive pricing, as opposed to maintaining the status quo – which is in effect similar to the ‘yellow flag’ being waved at the Grand Prix, where all drivers are then prohibited from overtaking one another.”

ME CEO Jamie McPhee said: “Regulatory imbalances have allowed a small group of banks to dominate the Australian market. Reform is needed if we want to create a fairer banking system so smaller banks can compete. A more competitive banking system is about improving customer choice and promoting economic growth.”

AMP Bank Group Executive Sally Bruce said: “Access to cheaper funding plus lower capital requirements for like-for-like loans gives the big banks a huge advantage over smaller players. Combined with the blanket approach to compliance and macro-prudential limits, we have a system of issues which impede competition and the best outcomes for customers. We are at risk of keeping big banks big and small banks small unless we address.”

The CEOs said improving competitive neutrality will deliver better customer outcomes and drive greater innovation in the sector.

“A strong banking system is good for all Australians and smaller banks bring vital competition and choice to the market,” they said.

“While the market is competitive today, it is vital this competition is fair, productive and sustainable.

“The bottom-line test must be: what is good for customers is good for the economy.”

The BEAR Roars!

The Treasury released the exposure draft of the Banking Executive Accountability Regime, open for consultation until 29th Sept 2017.

The Bill amends the Banking Act to establish the BEAR: an enhanced accountability framework for ADIs and persons in director and senior executive roles.

  • The BEAR imposes a clearer accountability regime on ADIs and people with significant influence over conduct and behaviour in an ADI. It requires them to conduct themselves with honesty and integrity and to ensure the business activities for which they are responsible are carried out effectively.
  • It does this by creating a new definition of ‘accountable person’. An accountable person is a Board member or senior executive with responsibility for management or control of significant or substantial parts or aspects of the ADI group.
  • The general requirement placed on accountable persons is framed in the context of their particular responsibilities. These will be clearly defined in accountability statements for each accountable person and an accountability map for each ADI group.
  • Accountability maps and statements are designed to give APRA greater visibility of lines of responsibility. The maps will clearly allocate responsibilities throughout the ADI group, to ensure that all parts or elements of the group are covered.
  • An ADI must comply with its BEAR obligations. These include new accountability, remuneration and key personnel obligations. An ADI must ensure that it has a remuneration policy consistent with the BEAR, its accountable person roles are filled and it has given accountability statements and maps to APRA.
  • ADIs must set remuneration policies deferring an accountable person’s variable remuneration to ensure accountable persons do not engage in behaviours inconsistent with BEAR obligations.
  • APRA will have additional powers concerning examination and disqualification to let it implement the BEAR.
  • If an ADI breaches its BEAR obligations, significant civil penalties may be imposed by a court.
  • Recognising there are different business models and group structures in the banking industry, the Bill uses both high level principles as well as prescribed detail. The BEAR will work with existing legislative and regulatory frameworks

The ABA were unimpressed in a statement from Anna Bligh, Australian Bankers’ Association Chief Executive:

“The seven day consultation period announced by the Federal Government on new banking executive accountability laws is grossly inadequate and playing fast and loose with a critical sector of the economy.

“The industry recognises that improving senior executive accountability is crucial for customers to have trust in banks.

“Banks want to work with the Federal Government to get this right, but just seven days to consult is not good enough.

“This is a significant piece of reform that impacts on the integrity of banks and the stability of the financial system and it needs thorough scrutiny.

“It’s an entirely new addition to the system of corporate governance in Australia. The Government’s timeframe risks serious unintended consequences.

“The ABA urges the Government to extend the consultation period and do the proper due diligence to ensure that the objective of improving senior executive accountability is met.”


DFA’s SME Report 2017 Released

The latest results from the Digital Finance Analytics Small and Medium Business Survey, based on research from 52,000 firms over the past 12 months, is now available on request.   You can use the form below to obtain a free copy of the report.

There are around 2.2 million small and medium businesses (SME) operating in Australia, and nearly 5 million Australian households rely on income from them directly or indirectly. So a healthy SME sector is essential for the future growth of the country.

However, the latest edition of our report reveals that more than half of small business owners are not getting the financial assistance they require from lenders in Australia to grow their businesses.

Most SME’s are now digitally literate, yet the range of products and services offered to them via online channels remains below their expectations.

More SME’s are willing to embrace non-traditional lenders, via Fintech, thanks to greater penetration of digital devices, and more familiarity with these new players. In addition, many firms said they would consider switching banks, but in practice they do not.

Overall business confidence has improved a bit compared with our previous report, but the amount of “red tape” which firms have to navigate is a considerable barrier to growth.

Running a business is not easy. In some industries, more than half of newly formed businesses are likely to fail within three years. We found that banks are not offering the broader advice and assistance which could assist a newer business, so even simple concepts like cash flow management, overtrading and debtor management are not necessarily well understood. There is a significant opportunity for players to step up to assist, and in so doing they could cement and strengthen existing relationships as well as creating new ones.

We think simple “Robo-Advice” could be offered as part of a set of business services.

The sector is complex, and one-size certainly does not fit all. In this edition, we focus in particular on what we call “the voice of the customer”. In the body of the report we reveal the core market segmentation which we use for our analysis and we also explore this data at a summary level.

Here is a short video summary of the key findings.

The detailed results from the surveys are made available to our paying clients (details on request), but this report provides an overall summary of some of the main findings. We make only brief reference to our state by state findings, which are also covered in the full survey. Feel free to contact DFA if you require more information, or something specific. Our surveys can be extended to meet specific client needs.

Note this will NOT automatically send you our research updates, for that register here.

ASIC questions legality of bank rate hikes

From The Adviser.

The corporate watchdog told a parliamentary hearing this week that the big banks could be in breach of the ASIC Act over the reasons given for hiking interest rates.

ASIC appeared before the House of Representatives Standing Committee on Economics yesterday (14 September) where chairman Greg Medcraft provided no opening remarks and instead launched straight into the inquiry.

Chairing the committee was David Coleman MP, who kicked off the questioning by raising the issue of recent rate hikes by the banks. He noted that some banks, in their public justifications for the out-of-cycle rate hikes, have named the regulatory impact but did not name any other factors.

Mr Coleman questioned if the interest rate increases were larger than could sensibly be justified by the regulatory impact.

He then asked ASIC chairman Greg Medcraft: “Would that concern you?”

“Yes, it would. I think what you are really saying is, are they profiteering on the announcement?” Mr Medcraft replied, before passing to ASIC deputy chair Peter Kell to elaborate.

“Yes, it certainly would concern us,” Mr Kell said. “It would go in effect to, I suppose, whether the public justification or explanation for the interest rate rise was actually inaccurate and perhaps false and misleading, and therefore perhaps in breach of the ASIC Act.”

The deputy chairman explained that ASIC is currently “looking at this issue” and will be working with the ACCC, which has been given a specific brief by Treasury to investigate the factors that have contributed to the recent interest rate setting.

“It is an issue we are concerned about,” Mr Kell said. “We will have to look at any particular statement carefully. I would also ask if the committee has any particular statements they have concerns about?”

CBA blames regulator for rate hikes

David Coleman MP took the opportunity to read from a 27 June press release issued by the Commonwealth Bank of Australia (CBA) which informed the market of home loan pricing changes. It stated: “To meet our regulatory requirements, variable interest-only home rates for owner-occupiers and investors will increase by 30 basis points.”

Mr Coleman said that there was “no wiggle room” in CBA’s statement, which made clear that regulatory requirements were the sole reason for the rate hike.

“CBA has very clearly put on the record that it is to meet the regulatory requirement,” he said.

“It is notable in this context that analysts who have looked at these rate rises have concluded that the rate rises will increase the profitability of the banks. Presumably, this is not the role of a regulatory change.”

Mr Coleman said that it is important that the industry is aware and that bank executives are aware that “the ACCC has powers to interrogate these matters very carefully”.

Back book repricing under scrutiny

APRA was grilled by the parliamentary inquiry earlier in the week, where Mr Coleman questioned whether CBA’s and other lenders’ back book IO repricing practices were “actually opportunistic changes” that had effectively used the APRA speed limits as excuses to garner profit.

He called on APRA chairman Wayne Byres to clarify whether lenders had put out “misleading” statements by using the APRA crackdown as reasoning for back book repricing.

Deflecting the question, Mr Byres said that APRA would wait to see what came out of inquiries by the ACCC and ASIC. He noted that ASIC would have “great interest” in the matter.

Where the accountability problems started at CBA

From The Conversation.

The heads or deputy heads of the three main banking regulators (the Australian Prudential Regulatory Authority, the Australian Securities and Investments Commission and the Reserve Bank of Australia) spoke at the annual regulators’ lunch last week. Guy Debelle, who is relatively new to his role as deputy governor at the RBA, summarised the feelings of the regulators at the lunch in regards to the public’s lack of trust in banks:

No one feels that anything particularly has changed, because even if the issue occurred a few years ago, it still generates the headlines today, and just reinforces the belief [that the banks cannot be trusted].

Unfortunately that’s because these problems were never actually resolved at the time, with regulators being palmed off with internal inquiries, until the scandal went off the front page. Of course the problems that have occurred recently at banks, especially CBA, are going to be dredged up again and again, because customers (unlike regulators) really suffered and no one was ever held to account.

On the same day, APRA chairman Wayne Byers also announced the makeup of the inquiry panel to which it has outsourced its job. The agency also released the terms of reference that will govern the conduct of the inquiry over the next six months.

Way way down the list of things to do is assessing the CBA’s “accountability framework” and whether it conflicts with “sound risk management and compliance outcomes”.

Note the terms of reference do not discuss “accountability”, per se, merely whether the framework (i.e. organisation charts and policies) is effective or not. Instead, the terms of reference discuss whether it conflicts with other policies and organisation charts. It is Olympic standard navel gazing, rather than action on the part of APRA, and a very minor part of the panel’s work.

But, accountability is not only about “what” but about the “who” and, as the French philosopher Molière wrote, “it is not only what we do, but also what we do not do, for which we are accountable”.

Inquiry panel member, John Laker, is also chairman of the Banking Finance Oath initiative, which works to promote “moral and ethical standards in the banking and finance profession”. He will be well placed then to remind CBA directors and managers of one of the key tenets of that oath:

I will accept responsibility for my actions [and] in these and all other matters; My word is my bond.

Responsibility and accountability are personal not commercial constructs and, notwithstanding the latest knee-jerk reaction to the money laundering scandal, these values have been in very short supply in CBA, over the last decade.

In fact, while there have been belated apologies for some of the scandals, no one in a senior position at CBA has actually taken personal accountability for any of the sequence of scandals that have recently beset the bank.

A detailed description of the many failures of accountability at CBA would take many thousands of words, but one scandal stands out above all others, not least because it involved the largest fine ever visited on CBA’s long-suffering shareholders. It set the scene for how the CBA board would handle future scandals, that is to obfuscate, prevaricate and litigate.

On December 23, 2009, the CBA board announced a payment of some NZ$264 million to one of New Zealand’s public service departments, New Zealand Inland Revenue.

The NZ High Court found that CBA had been using ASB Bank, its NZ subsidiary, as a laundromat through which it washed a number of dodgy transactions each year with the purpose of avoiding NZ taxes, which fed directly into CBA group profits. It was tax avoidance on an industrial scale.

It should be noted that three other major banks were also fined in a total settlement of NZ$2.2 billion (about A$1.7 billion at the time), the largest fines ever paid by Australian banks.

The banks had fought the NZ Commissioner of Inland Revenue for several years all the way to the High Court, until Justice Harrison ruled the transactions were “tax avoidance arrangement(s) entered into for a purpose of avoiding tax”.

Why such a small number of transactions? Because they were huge Interest Rate Swaps (IRS) transactions, created at the highest levels of the organisations with the purpose of turning expenses into income, a clever idea that some tax accountant had dreamed up around 1995.

During the extensive and expensive litigation, the CBA board kept maintaining that they had rock solid advice that their actions were legally watertight. But they were very wrong.

So, did anyone take responsibility for this embarrassing, unethical and expensive failure of management and corporate governance?

No board member or senior manager ever took responsibility for being found to have tried to avoid huge amounts of tax in one of the bank’s key markets. In fact the opposite, Sir Ralph Norris, who had been CEO of ASB during the wash and spin cycle, was made CEO of the CBA group in 2005.

What message does such disgraceful and ultimately unproductive behaviour send to staff?

First it says, don’t take responsibility for anything, bluff and dissemble and, if found out, never ever admit to anything. If board members refuse to be accountable for their mistakes, why should anyone else, especially if whistleblowers are treated appallingly?

And the NZ scandal was only the first of many scandals.

While CEO, Ian Narev, has expressed “disappointment” at customers being treated shabbily, no senior leader has been held directly accountable for the financial planning scandal, the CommInsure scandal, the manipulation of BBSW and Foreign Exchange benchmarks, and now the money laundering action being taken by AUSTRAC.

Making belated apologies is not taking responsibility for misconduct unless corrective actions follow. But, in CBA the scandals keep coming, as the apologies appear to have changed nothing in the organisation.

Surely someone, somewhere in the huge CBA organisation has the ethical grounding to stand up and say – “yes, we did make mistakes and, yes, we should bear the consequences, and to start the ball rolling, I resign”. Actions speak much louder than mere words.

The APRA inquiry will undoubtedly find that the bank’s “accountability framework” was deficient but unless names are revealed, its conclusions will be suspect.

However, it is not up to the panel to name and shame, but to convince the senior management of CBA that only true accountability will restore trust in the bank and that someone has to step up and take responsibility for their actions and inaction, otherwise staff will never know the right thing to do.

The CBA inquiry panel is due to hand down an interim report by December but by then we should know if the inquiry has any teeth by any admissions of accountability coming from the CBA board and management. But don’t hold your breath!

Author: Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie University

Rate hikes a result of regulation: APRA

From Australian Broker.

Banks would not have increased their investment and interest-only rates were it not for speed limits imposed by the Australian Prudential Regulation Authority (APRA), the regulator’s chairman Wayne Byres has said.

These statements come from a hearing held by the House of Representatives Standing Committee on Economics around APRA’s 2016 annual report held yesterday (13 September).

Committee chair David Coleman brought up comments by the Commonwealth Bank of Australia (CBA) which alleged that rates hikes were implemented “in line with what our regulators require”.

“Many banks make similar statements and we’ve been blamed for all sorts of things,” Byres said.

While banks have used higher rates to influence customer behaviour, APRA had been “deliberately silent” about the measures which could be used when it implemented these speed limits, he added.

Byres acknowledged that rate hikes were indeed linked to restrictions brought in by APRA.

“Based on what I know… the banks would not have made these interest rate changes if it were not for these regulatory initiatives.”

Coleman remained unsatisfied, pointing out that rate changes affected banks’ existing books despite speed limits only applying to new lending. He asked Byres as to whether these rate increases were a requirement rather than just a response to APRA’s restrictions. At first refusing to give a direct reply, Byres said bank statements linking rate hikes to regulatory measures were “vague and ambiguous”.

Coleman then expanded his question, pressing Byres about a hypothetical in which a bank makes a general move and links this to regulatory requirements despite being wholly unconnected.

“This is not ok,” Byres said.

However, he stressed that APRA was not to blame for any rate hikes, saying “a direct assertion that we made them put up interest rates is clearly not true”.

Banking sector will be ground zero for job losses from AI and robotics

From The Conversation.

Deutsche Bank CEO John Cryan has predicted a bonfire of industry jobs as automation takes hold across the finance sector. Every signal is that he will be proved right very soon.

Those roles in finance where the knowledge required is systematic will soon disappear. And it will happen irrespective of how high a level, how highly trained or how experienced the human equivalent may currently be. Regular and repetitive tasks at all levels of an organisation already do not need to be done by humans. The more a job is solely or largely composed of these routines the higher the risk of being replaced by computing power.

The warning signs have been out there for a number of years as enthusiastic reports about artificial intelligence have been tempered with fears about significant job losses in most sectors of the economy.

Many roles have already all but disappeared in the march towards a fully digital economy. Older readers may recall typesetters, typists, and increasingly, switchboard operators and back room postal workers, as work of the last century. And the changing nature of work is relentless.

Cryan shame? Deutsche Bank’s CEO. EPA/ARMANDO BABANI

Banking on jobs

The finance sector was once driven by human judgement and decision making. But slowly, it has changed. One-to-one conversations with your local bank manager were replaced by scripted call centre interactions during the 1990s. Today, increased processing power, massive cloud storage, strong encryption and an increase in the use of blockchain make possible tasks that had previously been seen as too complex for automation to be done quickly and consistently without any human intervention.

Artificial intelligence reduces the need for human work that requires analysis, consistent applications of decisions and judgement calls. These are pivotal actions for many legal and financial activities. Combined, in the background, with blockchain – essentially a publicly shared automated ledger of agreed contracts – arrangements that require some form of trust between two parties will also be able to be completed with little or no human intervention.

Blockchain is the basis of every cryptocurrency – forms of money exchanged online. Banks are slowly working towards ways of embracing these alternative systems. While alternative forms of money attract popular headlines it is the automation behind the scenes that is most compelling aspect for the finance sector. By removing the influence of human decision making from as many processes as possible, a fully digital supply chain can be created. As artificial intelligence learns more about the impact and influence of every process each time it happens, a bank’s efficiency should continuously improve, and profits increase, with fewer and fewer employees.


In this atmosphere of change to the world of work in banking, however, there are some roles that will prove more resistant to change. Work that is unpredictable or inherently people-focused will survive. Customer service staff will still need to tackle the inevitably complex queries that are the product of the human mind rather than the outcome of algorithms. AI will deal with most enquiries, but will inevitably need to transfer the most cryptic to a human interlocutor. Mortgage decisions, for example, will come as an automatically generated message; more intricate questions will still require face-to-face conversations.

At the other end of the (pay) scale senior executives will continue to steer the direction of their individual organisations, although the nature of their work will subtly change to become technology-based decisions. Executives will find themselves choosing an algorithm instead of directly making a high-risk investment decision, or they may end up selecting an artificial intelligence machine rather than interviewing people to become employees. Reduction in the wage bill at other levels of the business and the increasing significance of the few human decisions that need to be made may even assist in justifying their annual bonuses.

Inevitable change

The traditional banking sector is an obvious area for artificial intelligence and automation to generate competitive advantages for companies. This is a result, in part, of previous reluctance to embrace change. In the late 1990s there was a collective hysteria around the Y2K bug and fear of a wholesale shutdown of computers which failed to cope with the millennium date change. That highlighted the sector’s uneasy relationship with fast-moving technological change. But even this public panic prompted few immediate, practical changes.

Now, mobile app-only banks, with no branches, such as N26 and Monzo, challenge the traditional banking sector and its human resources legacy. Traditional banks are still largely oriented towards humans doing most of its work. In 2016, over 1m people, or 3.1% of the UK workforce, were employed in the finance services sector, which is the biggest tax contributor to the UK economy and the country’s largest exporter. Most predictions claim around 50% of the jobs in the sector will be lost. Depending on who you listen to, this process will take between five and 20 years.

The impact of these changes will be felt across the entire economy. There exists a genuine fear that artificial intelligence, robotics and fully digital businesses may contribute to a significant increase in the gap between rich and poor.

Deutsche Bank’s CEO is being frank about a future where jobs in banking and elsewhere will become ever more scarce as digital business becomes a reality. This realisation has reinvigorated calls for a universal basic income (UBI) or a social dividend in the UK and elsewhere. The proposal has found support with some MEPs as a means to maintain personal levels of prosperity in this new world. Crucially too, the UBI would seek to maintain the foundations of the current Western economy in an era of increasingly fully automated digital businesses – a goal, if achieved, which might also just about keep the current finance and banking sector in business.

Authors: Gordon Fletcher, Co-director, Centre for Digital Business, University of Salford; David Kreps, Senior Lecturer in Centre for Digital Business, University of Salford