Excellent article in Quartz (HT: Ananth) about the decline of physical bank branches in remote areas of Scotland as banks embrace the digital revolution and the problems it creates for local communities. The article covers the spate of branch closures by RBS, a bank rescued with tax payer bailout during the financial crisis, and currently 60% owned by the UK government.
It’s one more way this century has favored the young, urban, and digitally minded, concentrating power in capital cities (where nobody has heard of a bank van) and destabilizing communities that were already losing jobs and people. It draws a sharp contrast with a time, decades ago, when the bank branch manager mattered in Britain. “They had a place in society, they knew what was going on, they knew everybody who was worth knowing,” Derek French, who started working at National Westminster Bank in 1957 and spent the next 38 years there, said in an interview. But that system, where the local branch manager made key lending and banking decisions, began disintegrating before the internet came along, during the 1970s and 80s. As credit scoring and algorithms caught on, authority was sucked out of the provinces and concentrated in London. The business model proved cost efficient and unstoppable, not unlike the rise of internet banking now.
As their autonomy declined, branches were “de-skilled” and became little more than sales outposts. Their decor matched their new role. “The previously dark and imposing banking halls were redesigned into brightly coloured, open-plan retail spaces,” Pål Marthon Vik, a research fellow at the University of Salford, wrote in a PhD thesis titled The Demise of the Bank Branch Manager. The digital revolution supercharged the shift in algorithmic, automated authority that was already underway. To be sure, there are benefits beyond fattening banks’ bottom lines. The patriarchal branch manager was almost always a man and more likely to make loans to other men, with the same color of skin (that is, almost always white). Credit scoring makes lending more efficient, precise, and profitable.
But banking also became less personal, and the real-world connection of a banker who is embedded in a community was lost. While the old system could be unfair, people seem to trust the algorithms even less: The percentage of Brits who think banks are well run fell from 90% in 1983 to 19% in 2009. Another worry is that big data and better algorithms could exclude some parts of society from getting financing, according to Mick McAteer, co-director of the Financial Inclusion Centre, a not-for-profit policy group. Providers are getting better at identifying the most profitable and most risky consumers. While some, maybe even most, people will get better deals on loans and insurance than ever, those who can least afford it will pay more financial services, he said.
This about the changed role of banks is important,
The government’s role goes deeper when it comes to modern banking. Commercial banks operate in an unusual sphere, where they rely on government subsidies (access to central bank lending and money, and cheaper funding costs from the implicit expectation that big banks will get bailed out in emergency), yet exist as for-profit entities with an obligation to enrich shareholders... the underlying principle that banks are for-profit entities that derive much of their earnings from government support remains. (But) they’re designed to benefit private shareholders rather than society as a whole.
The article is a great case study about the double-edged sword that is progress and development. Conventional wisdom would have it that digital banking and fintech constitutes technological advance and economic progress. It lowers transaction costs, access barriers, and expands opportunities, and thereby enhances economic efficiency. But amidst all these benefits, its social costs most often get glossed over.
The biggest problem with such progress is that while its benefits accrue disproportionately to the non-poor, its costs are borne disproportionately by the poor (and those living in backward areas). Like with other common signatures of progress - farm mechanisation, e-commerce, cross-border trade, immigration, globalisation, and so on - the asymmetry in their impact is the big challenge to overcome. Given that markets will not address these (at least in the short-run, and in the long-run, as Keyenes said, we are all dead), it is essential that public policy assume an important role.
While there may be specific public policy levers available for each problem, the political economy challenges associated with redistribution and other mitigating actions make them difficult to implement. In the circumstances, perhaps the only practical response may be to have a reasonable enough social safety net that cushions the vulnerable from the inevitable adverse effects of such trends that accompany development and progress.
The biggest problem with such progress is that while its benefits accrue disproportionately to the non-poor, its costs are borne disproportionately by the poor (and those living in backward areas). Like with other common signatures of progress - farm mechanisation, e-commerce, cross-border trade, immigration, globalisation, and so on - the asymmetry in their impact is the big challenge to overcome. Given that markets will not address these (at least in the short-run, and in the long-run, as Keyenes said, we are all dead), it is essential that public policy assume an important role.
While there may be specific public policy levers available for each problem, the political economy challenges associated with redistribution and other mitigating actions make them difficult to implement. In the circumstances, perhaps the only practical response may be to have a reasonable enough social safety net that cushions the vulnerable from the inevitable adverse effects of such trends that accompany development and progress.
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