Monday, 23 July 2012

The “Bank of Dave” or How one idea can change an industry

Two weeks ago I ran into a story that covers a fascinating and somewhat different approach to mainstream banking.

I really enjoy listening to what the so called “little people” running small businesses have to say on the economy, sometimes even with more enthusiasm than listening to an “expert”. The entrepreneurs and business owners operate in the real economy and notice and tackle the problems first hand (with more or less success). Very often their experience can be much more revealing and truthful than anything one can read in the papers or hear at an academic lecture. This is such a story.

It is a story of a successful businessman from Burnley (a small town in North West England) called David Fishwick with a great ambition to change a fraudulent system with a simple, yet very intriguing solution. To open a bank focused on customers and local development, offering a good deal to both its debtors and its creditors. But it's not the idea itself, it's the way he came to it. 

So far the idea has certainly gained him a lot of media coverage in the UK (see here, here, here or here). In fact he even wrote a book about it and made the whole story into a TV show on Channel 4 that has apparently already caught a million viewers. The first episode is available online, titled “How to open a bank”. It's a really interesting documentary. 

The whole thing started with the beginning of the crisis:
"I never had any desire to be a banker. My company sells minibuses and I have a lot of very good customers who I’ve known for a long time. As soon as the credit crunch happened in 2008, these people couldn’t get a loan from the banks they had been with for years, and so they couldn’t afford to get a new minibus. If nobody could buy minibuses, that would be a very big problem for my business.

I had to do something drastic to keep going through the recession, so I began lending my own money to my customers. Unlike the banks, I knew they were good and honest people who could be trusted. I was proven right, and it made me see just how wrong the banks had gone.

I knew things really weren’t right in the financial system when one of my bank managers came to visit me one day to offer me a loan I hadn’t asked for and didn’t need. He told me that his bank, a big one that I won’t name here, had been given money by the government and they had to lend it out. The problem was that he didn’t want to lend it to anyone who had the slightest chance they wouldn’t pay it back.

Basically, he wasn’t going to lend to anyone that really needed it." (from City A.M., July 10th)
Isn't this the sad truth behind any government guaranteed loan program? Give it to the banks and force them to comply with some randomly selected credit targets based on a static model designed by some group of debunked civil servants, and as a result see the banks hopelessly looking for well-off and low-risk companies to dump the funds on them. The rest of that money will end up in the central banks anyway, either as overnight deposits or any other instrument they can think of. 

Dave’s response was to take matters in his own hands and develop his lending idea even further. He realized there is no need of inventing a “new way of banking”, but simply to restore the ideals from before – a focus on customers, something in which competition is usually the best involuntary solution. Or as JP Morgan Jr. would say: “The banker must at all times conduct himself so as to justify the confidence of his clients in him.”

This is what the bankers have lost the most among the public – confidence and credibility. But it’s still hard to improve this, particularly if the banking oligopoly isn’t broken. The proof of an oligopoly with extremely strong barriers to entry was experienced firsthand when Dave wanted to open up his bank: 
"I quickly discovered that setting up a bank is actually very difficult. I tried to go to the Financial Services Authority (FSA) to get a banking licence, but that didn’t go very well. They wouldn’t even meet with me unless I put millions of pounds in escrow for them. Given the size of what I was trying to do, I thought that was ridiculous. I was beginning to understand why no new bank apart from Metro Bank has got a high street banking licence from the FSA in over a century...

Luckily, I’ve never been someone who takes no for an answer, so I worked with some top-notch lawyers in Manchester and found a way to use various other licences to create something that does all the important bits of what a bank does." 
Even though officially, he cannot call it a bank. So he called it, believe it or not, “Bank on Dave!” (officially, Burnley Savings and Loans). 
“Channel 4 has filmed the whole project, but that doesn’t mean it’s just a publicity stunt. You can take a trip to Burnley and see it for yourself. You might even get a loan – we lend an average of £25,000 every week. That’s money that’s going to small businesses and people in Burnley, where it makes a real difference. 

Many of our customers have been rejected by the high street banks, but among hundreds of them we’ve barely had a missed payment. This is because I meet them face-to-face, and take time to get to know their businesses and, more importantly, whether they’re a person I can trust. In short, I judge them as people, not as credit scores. 
We don’t just offer a better way for borrowers. We help our customers achieve 5 per cent on their savings. And, instead of paying ourselves bonuses, we are donating every penny of operating profit to charity.”
The result? After a tough beginning and many more boundaries he and his team had to face, he ended up with having 62 people depositing £110,000, while making 103 loans worth a total of £365,000. He even made a small profit of £9,500. Not bad at all for an idea based on lending on trust. But even more important than the profit itself was the emphasis of the “bank” to help the local business community of Burnley and thereby fulfil the basic role of every bank – to support the real sector of the economy. In times of lacking confidence, seriously damaged reputation of banks and cash hoarding, this idea comes as a breath of fresh air. 

Will it work, will the banks debtors be efficient enough in making their repayments, and will this be enough to attract new creditors, is left to be seen. However, one cannot argue that the idea is very interesting, and I for one am certainly looking forward to the unfolding of the whole story. I hope I don’t write a blog a few years from now that the bank is now broke, and I do hope more vigilant entrepreneurs pick up on the idea so that we can see more and more success stories like these, where new business models support the creation of even more new businesses. All based on the driving forces of creative destruction where the too-big-to-fail banks are the ones that are supposed to exit the market, and be replaced by new, better and more responsive ones. If only the Treasury will allow it.

1 comment:

  1. You're absolutely right about the sad truth behind government guarantee programs. When will they learn that no matter what the authorities do they won't make the banks lend money to anyone when they at the same time have their hands tied with higher capital standards?


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