Comments on: Ethics of Where You Bank

By: Will Dearman

Will Dearman — Wed, 20 Jan 2010 06:28:48 +0000

I'm actually in agreement with you, Matt. In their most basic forms, banks are nothing more than custodians of value and some good could be done in the industry by reflecting upon that. Per James Gardner's "Innovation and the Future Proof Bank" I'm starting to brainstorm about my 'Futurebank' -- what sort of organization I envision being successful in the industry 10+ years from now. I haven't yet fleshed out my ideas (or finished the book), but I envision an ecosystem of lean, specialized organizations interconnected through open data standards for the consumer's benefit. I'm not sure how or if we'll get there, but it is something that is on my mind.

I think the 'new' model (for lack of a better term) would scale as efficiencies could be gained through greater specialization. This hypothetically wouldn't lead to a Too Big To Fail scenario because (1) their specialization would prevent a large-scale economic collapse, and (2) the open standards would lead to more transparent and expedient resolution. As you can imagine, I'm in favor of the originally proposed non-watered-down OTC exchange for derivative contracts as an early step in this direction.

By: matthewbward

matthewbward — Wed, 20 Jan 2010 04:45:22 +0000

Yes, those comments are the first time I've argued against ethics. :)

Is “ethics” the new “digital”? Has the word come to be so all-encompassing that it means nothing?

By: matthewbward

matthewbward — Wed, 20 Jan 2010 04:43:14 +0000

I can't help but think more simple institutions would help. Even going beyond Glass-Stegal, what about a return to banks that do deposits and loans and nothing more? I've read about private banks popping up with this simple agenda; I'm curious what effect you think this would have at scale. I know the big trend is on disintermediation, and thus growth of services at these banks, but maybe more specialty would help.

By: Taylor Davidson

Taylor Davidson — Wed, 20 Jan 2010 00:15:05 +0000

In the marketplace, ethics need not be subjective. Consider an objective measure: $$ flowing to companies, products, organizations that are ethical.

Ok, perhaps it's not a "new" competitive advantage; in fact, that's what I said: "This isn’t a new concept: in fact, it’s a return to our roots, an retreat from the aberration of the industrial revolution."

(btw, you'll be interested in Matt's comments on that post)

I'll check out the transactional v. revolving credit article; balancing the two in a single account creates some interesting trade-offs for credit card companies, as we both know. Curious what you're cooking up, of course...

By: Will Dearman

Will Dearman — Tue, 19 Jan 2010 22:28:48 +0000

By: matthewbward

matthewbward — Tue, 19 Jan 2010 20:45:22 +0000

Yes, those comments are the first time I've argued against ethics. :)

Is “ethics” the new “digital”? Has the word come to be so all-encompassing that it means nothing?

By: matthewbward

matthewbward — Tue, 19 Jan 2010 20:43:14 +0000

By: Taylor Davidson

Taylor Davidson — Tue, 19 Jan 2010 16:15:05 +0000

By: Scott Bravard

Scott Bravard — Tue, 19 Jan 2010 13:22:44 +0000

If the goal is to avoid banks that are “too big to fail,” will this strategy make small banks more attractive acquisition targets for big banks? Thereby making them even more “too big to fail?” Legislatively leveling the playing field, I think, offers more potential.

By: Will Dearman

Will Dearman — Tue, 19 Jan 2010 02:37:36 +0000

I don't think ethics is necessarily related to size. From the business perspective, I believe businesses are being ethical if they are fulfilling their obligations to the stakeholders while abiding in the letter and spirit of regulation. For large banks this means ensuring excess returns to shareholders, being honest with customers, and fair with employees. The equation is the same for small banks, but different for credit unions. As you know for credit unions, customers are the shareholders and excess returns flow to them. From my perspective, the only reasons small banks (excluding credit unions) did not become as embroiled in toxic financial products is that they did not have the scale and financial/operational sophistication to participate. Credit unions lacked those as well, but without the excess returns mandated by shareholders they are most likely to invest in the communities they serve.

Beyond the obvious obligations to stakeholders described above, I think it is the responsibility of customers (through market effects) and citizens (through regulation) to ensure that their ethics are reflected in the banks and businesses operating. After all, all ethics is eventually subjective. So on a literal level I respectfully disagree with you and Umair; I don't think ethics are a new competitive advantage. Building a long term relationship of trust with your customers and clients has always been essential for a viable long term enterprise. A large contributor to the economic collapse of 2008 was a loss of trust; a renewed emphasis on building trusted relationship is the system trying to right itself. After all large degree of trust is required for Locke's Social Contract to function, and that is not a new idea.

Finally, I do not believe the credit card reforms will effect a large scale change in the industry. The terms along with the economic may shift some, but the incentives for the issuers have not changed. The card industry still extracts its value from getting in the way (via interchange fees) and getting and keeping people in debt. Of note, there was a great post on transactional vs. revolving credit that you might be interested in; it is sparking some ideas for me. I like to think that the eventual evolution of the system will: separate transactional credit from revolving credit and allow for near instantaneous settlement in a peer to peer manner eliminating the card interchange network (and the corresponding fees).

I've been putting some thoughts together on what the financial system might look like in the future (inspired by "Innovation and the Future Proof Bank" by @bankervision). Maybe we can collaborate on that some.