Taking a Peek, Future of Banking Offers (Some) Hope

One of the first prognostications on what the post-crisis banking industry will look like has surfaced, and it comes from an auspicious source.

Jeff Carter, the Business Executive leading the new Center for Future Banking and the Massachusetts Institute of Technology partnership for Bank of America Corp., has suggested in a recent blog that the way Americans save will change after the crisis passes. He suggested that such a change will require Bank of America and MIT, “working jointly on through the Center for Future Banking [to focus] on how to reverse the troubling erosion of personal savings in America.”

He added that the change in savings habits could alter so much more of the way banks do business.

Carter is right that savings will change (third-quarter data released yesterday by the Federal Reserve suggests that the change is already underway), and that the use of debt had grown unsustainable in the United States in recent years.

“In the final years leading into this crisis, the savings rate in America actually fell below zero into the negative,” Carter wrote. “Americans were collectively spending more than what they earned, and that’s just not sustainable.”

Carter added, “The fact is that debt had become an outsized variable in the equation, and we will need to see a return to more of a savings culture.”

True, our culture became enmeshed in debt. From the glitzy luxury items we bought to the vapid rise in home prices, debt fueled the nation’s economic habits. In an associated podcast he did with TheTakeaway.org, Carter talks about how many American households will undergo a painful realignment of their finances. Our debt culture is bound to take a backseat for years to come.

I side with Carter. Carter and I agree that society is not solely to blame for the debt fixation. Banking practice and economic factors were equal contributors to the debt debacle, and that means banking itself will change too in the post-crisis era (as if it hasn’t changed already). Some suggestions from Carter:

1) It is going to be a smaller industry. It is going to be a simplier industry. If a banker knows a borrower, it does not matter what the rating agencies say. Banks are a means to economic value, nothing more. Or to put it another way, bankers are enablers to economic value.

2) Banks will become more transparent. In Carter’s words, “consumers … are going to have the ability to take more control of their financial future.” Banking (read: banking income) will center more around transactions, rather than on simply the maintenance of relationships with clients.

JEFF CARTER OF THE CENTER FOR FUTURE BANKING
This more finite banker-to-borrower relationship that Carter talks about makes sense. But I wonder whether such a business model is sustainable. Credit scores allow for pervasive automated underwriting. Are we just going to be done with automated underwriting? What will that do to banks’ expense structures, operational efficiencies, and perhaps even viability — particularly as banks were just reaching the point of asset-agnostic lending operations? Rather, banks need to find a middle ground that incorporates the hands-on, intimate knowledge of a banker-to-borrower relationship, but allows for automated underwriting. I have no idea how that will work, but I hope the folks at MIT can figure it out.

Finally, this idea of banks becoming more transparent is a long, long time coming — and it is an indication of what Carter calls newfound industry “humility.” Indeed, banks will control less of their relationships with consumers. Before bankers start lamenting the change, consider this: such transparency opens new opportunities for bankers. I see them returning to the role bankers served in generations past; that of advisors and — dare I say — founts of financial ideas. Such a role would be of great value to consumers. People pay for value. See, the future of banking doesn’t look so dark after all.