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Banking reform?

On the morning that the Vickers banking commission “Interim” report was released, I thought I would set out a few personal thoughts.

You won’t address the banks’ poor delivery and virtual monopoly of the lending and savings markets by creating more banks – whether you break them up or not – or fiddling at the edges with the rules. That just means we have more banks. When horse drawn carriages could not meet man’s transportation needs, we didn’t just breed more horses, we invented the motor car.

We don’t just need more of the of the same, dressed up in a different way. It’s time for the Government to stop thinking that banks are the only way to provide the essential financial tools required by the public and the economy. Through their corporate greed and lack of foresight, many banks became insolvent and had to be bailed out, despite their virtual monopoly and offering very poor products and services to the consumer.

Since the crisis, and despite the handouts, banks continue to systematically fleece the consumer, by inflicting some of the biggest spreads ever seen in an attempt to rebuild the balance sheets that they destroyed. It’s not impressive, and frankly the prospect of trying to address such poor performance by creating more banks is misguided.

Access to good value, competitive savings and borrowing products is essential for people to lead their lives successfully and for the economy to operate effectively. Allowing the same industry that brought the country to its economic knees to continue to have a monopoly on delivery of these vital social functions just makes no sense at all.

Obviously there are bits of the banking system, away from the casino banking of their investment arm, which are socially useful and ways to make these better must be found. The peer-to-peer mechanism, where the lenders and the borrowers decide the rate at which they do business, is such a way. The peer-to-peer mechanism keeps more money in borrowers’ pockets and gives lenders a better return at the same time – precisely because there is no bank involved in the transaction.

Over the last 6 years Zopa has proven that new competitors outside of the cosy cartel of banking can not only deliver ready access to superior value to the consumer, they can do a radically better job of supposedly core banking functions like managing credit. Peer-to-peer lending is a mechanism which helps enlightened lending companies give better value to consumers.

The Government should take decisive action to help new competitors with new models to apply real pressure on the banks to drastically raise their game, not just make it easier for more banks to join this cosy club where the consumer barely gets a look in.