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opinion

Challenger Banks v. Challenging the Banking System

The banking industry has changed little since the financial crisis and whilst we see new challengers emerging, what we need is truly ethical alternatives. Most challenger banks are not offering anything different except perhaps fancy new user experiences. What is needed is a fundamental rethink of what role banks play in society.

A bank is a simple institution. Its basic function is to take people’s extra money and divert it to others who need money to do something productive. This flow of money creates activity in the real economy that generates an income for the bank as the intermediary, which is then distributed to the original savers or investors, or retained by the bank.

Various complexities surround this core activity, but these by-products—from commercial transactions to derivatives—simply wouldn’t exist apart from this back-and-forth movement of capital.

“The reality is that the system is still not working for the majority of people and it will take other new players to really initiate reform”

Bevis Watts, Triodos Bank UK MD

But embedded in this simple flow of money is a moral issue: how should that saver’s extra money be used, and is it in their interests? By and large, banks have chosen to lend that money to the person or organisation that will maximise the bank’s profits. This is the guiding principle of the current financial industry in the UK, but one that we at Triodos Bank think is ripe for disruption.

Financial Technology, or FinTech, has certainly had a role to play in making the word ‘disruption’ part of common parlance in finance. The move towards big data, artificial intelligence and open APIs has created possibilities that were simply unthinkable even just a year ago. There are also many new apps that can potentially change the very interface with our banks.  Some of these innovations offer real added value to us as consumers and it’s exciting to think of what advances might be just around the corner.

Such technological advances have allowed a plethora of new players to develop new products and services, and the better customer and user experiences that these developments offer certainly have the potential to take market share away from the incumbents. We must make sure it’s not the equivalent of redecorating the office: it might look and feel a bit better but it’s still the same old system that prioritises profits over everything else.

“What if, rather than profit-seeking, a bank’s mission was to direct the flow of money towards people and projects that would make our world a better place?”

Bevis Watts, Triodos Bank UK MD

 

The reality is that the system is still not working for the majority of people and it will take other new players to really initiate reform. Current customer satisfaction rates with the high-street banks continue to be low, and a wave of scandals have revealed a banking culture that is primarily self-serving, hence the rise in ‘challenger’ banks.

It this context, it becomes clear that consumers are restless. For example, a recent consumer survey commissioned by Triodos showed that six out of ten respondents (61%) want to know where their bank lends their money, but three quarters (75%) of people are unaware of where it actually ends up.

We think that banking needs more than a facelift, it needs a fundamental revision, a version 2.0. What if, rather than profit-seeking, a bank’s mission was to direct the flow of money towards people and projects that would make our world a better place? What if the recipients of finance were the ones who would generate economic activity that benefitted the common good, and not just the good of the bank or its shareholders?

This is the type of change that we are bringing to the banking system, and what we think is the truly disruptive element of our mission. That’s why we call ourselves a challenging bank: we’re not just challenging the established players for market share, we’re fundamentally challenging the way banking is done.

Triodos Bank enewsletter

One of the ways that we are challenging day-to-day banking practice is by publishing where all of our funds entrusted are being used. This is core to our ethical commitment to transparency and ensures that our depositors know exactly who and what is benefiting from their money. It means that someone can clearly see that Triodos actively supports things like an independent food market in Brighton, and an arts centre for the elderly in London, and renewable energy in Scotland. In a financial world of profit maximisation, choosing to direct capital to social and environmental outcomes is truly disruptive. It’s exactly what we need if we are going to create a more equitable, fairer society.

In my view, the current financial system absolutely does need to be challenged, and I’m hopeful that the cracks that are starting to appear in the current system will turn into fissures. Many FinTech, and challenger banks are helpful as a phenomenon because they are chipping away at the unthinking loyalty that many in the UK have to the established banks. Yet we need to ask: why do these challengers actually exist and who is benefiting from their business model? Are they financially, socially and environmentally sustainable? And most importantly: where does savers’ money go and does it benefit that saver’s non-financial interests in the long term? It’s only when we challenge the industry with these questions that we create something truly disruptive.

This article originally appeared in Ethical Consumer.

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V Lloyd-Thomas 2 days ago

Its a step in the right direction, a better solution would be a paradigm emanating from the few who control all the wealth of the world, to show and live by compassion and equality for all species, not just humans