If you’d gone to a bank in the mid-2000s to get financing to sell ice to the Inuit, it’s quite possible they’d have said yes.
It was a “golden age” of banking, at least according to erstwhile JPMorgan Chase CEO Jamie Dimon. Post Big Bang and the dot-com bubble, a mix of improving technology and a rollback of regulations created an environment of excessive lending and stellar returns. But times have changed, and many, in particular those at the cutting edge of the New Digital Economy, are paying the price.
Don’t just take my word for it. A recent report by the UK government’s Crypto assets Taskforce, for example, highlighted the fact that such firms face difficulties in getting access to banking services in the UK.
Unfit for purpose
In its most basic form, the banking system exists to channel society’s surplus wealth to individuals and businesses who can use it productively. That works well when times are good and there is a pervading risk-on mindset. But that hasn’t been the case for some time.
The woes of the traditional banking industry today are manifold. In addition to post-financial crisis trust deficit and the macroeconomic and political uncertainties dominating the headlines, a slew of too-big-to-fail and consumer protection rules have muzzled an industry grown fat on light-touch regulation — think Basel III, PSD II, MiFID II.
Ultra-low interest rates and muted market volatility have squeezed margins to an eye watering degree, while restrictive cross-border rules and seemingly never-ending litigation have only compounded the misery. And let’s not forget the much talked about threats to the status quo posed by cash-rich Big Tech companies and myriad fast-moving, tech-savvy FinTechs.
As a result, many banks have responded by adopting a defensive posture with regard to risk. The obsessive focus on risk, rebuilding capital reserves, centralizing operations to save money as well as a reliance on clunky, outdated technology means many big banks are unable or unwilling to properly assess and provide young digital enterprises with the finance and services they need to survive and thrive.
Paying the price
So, what happens if you have, for example, a startup business in the New Digital Economy, for instance in the FinTech, blockchain, AI, crypto or gaming spaces?
The answer, in many cases, is that you’ll have a hard time finding a bank that understands your business and its needs or is even willing to talk to you. That means that while you may well have the best idea you can’t even get something as simple as a bank account. You can’t invoice. You can’t pay bills and wages. And potential investors will take note, but not in a good way.
These businesses are suffering because of the restrictive institutional inertia of the traditional banking sector. Their market segments are considered to small and the cost too high to change existing risk modelling frameworks. This means they effectively have no track record on which to base funding decisions.
A risk business
Put simply, many banks don’t, and are not equipped to understand them. Consequently, they are viewed as too risky and often get the “thanks, but no thanks” treatment. Despite fine words about supporting long-term and sustainable growth many banks have an almost exclusive short-term focus to deliver shareholder value. Yet the banks may be missing out on the next big thing, or worse, a great idea may never become a reality. And an increasing number of people are realizing this is in no one’s best interests.
There is a clear and pressing need in the market for a bank that understands the New Digital Economy, and which is prepared to support the growth aspirations of the new businesses it is spawning.
In short, there is a need to regain a focus on the true value add of a banking system; to ensure appropriate support is provided for individuals and businesses who can use it most productively and profitably.
INITIUM – banking on the future
At the INITIUM Group we see an outstanding opportunity to step in and help these underserved, fledgling companies get their great ideas off the ground, and to support the growth of the New Digital Economy. As entrepreneurs ourselves, we are able to view the world through the eyes of digital entrepreneurs. We know what they want and need.
That’s why we are building a multi-jurisdictional banking group from the ground up, employing innovative technologies to fully understand the risks and opportunities the sector offers, and to provide the core corporate banking services needed to support the most promising businesses. That’s what banking should be all about.