Weekly News Digest 27 September 2019

The ever-evolving retail banking sector in the United States never fails to intrigue. For many years, as Americans clung to their chequebooks and the time-honoured ritual of providing a personal signature at the point of sale, it seemed that digital methods were struggling to make an impact. But a high-level overview in the Financial Times usefully sums up a transformed picture : the traditional mortgage providers have seen their market share haemorrhage as online-only lender Quicken soars above them, both Big Tech and Telcos have been making aggressive moves (eg, Facebook's Libra, the Apple Card, T-mobile's current account) while international neobanks are also popping up (eg, N26, Monzo and, in 2020, Pepper's expected market entry). According to Reuters, online banks, spared the regulatory and structural headwinds suffered by incumbents, now house a tenth of all deposits in the country. But the revolution, as the FT points out, goes "beyond consumer services: America's big banks are also facing increasing fintech competition in small-business lending. One such is OnDeck, which has loaned more than $12bn to small-business owners. Having traditionally operated under the charter of another bank...OnDeck announced in July that it would apply for its own charter or acquire a bank that has one."

Are we seeing the slow fading away of the rails used by the global schemes to so successfully extend payment card acceptance to the four corners of the earth over the past half-century? It certainly is beginning to seem so with the news that American Express has now put its weight behind a new Pay-by-Bank service in Britain, a development which comes in the wake of both Mastercard and Visa's enthusiasm, as demonstrated through investments and partnerships in recent years, for alternative networks from instant payments to cryptocurrencies. (On Tuesday, for example, Mastercard announced a
request-to-pay-service, also in the UK, that works with either real-time payments or cards.) One thing is for sure: as long as the global networks can afford to fund these platform-hedging tactics, the possibilities for any disintermediation of their core proposition should decline. In 2016, Dan Edelman of American Express wrote that "today's customer journey is more flexible than ever before", citing the choices available in terms of "websites, social media networks, physical stores and traditional media": three years later, that logic has now led to its inexorable conclusion: the brand trumps the infrastructure as well.

In last week's edition, we drew attention to the extraordinary progress made by digital innovators in the United Kingdom, as illustrated by the public appetite for neobank apps and contactless payment methods. Now new figures from the country's leading consumer watchdog demonstrate the real-world consequences of such changes, as British high streets have seen no less than one third of their branches disappear since the middle of the decade : in total, 3,000 have closed, with a further 300 now open only on a part-time basis, which in some cases means a single day per week. Not that the challenger banks are having everything their own way: Metro Bank, although its shareholders have proven remarkably patient, has been prompting concerns about its business model since confessing a major accounting error in January. Now the bank has admitted an embarrassing failure to lure new investors with a bond issue that would have offered a 7.5 percent rate of interest. The challenge now is for the iconoclastic firm, which has made a point of opening new branches and extending opening hours, to maintain funding at a level that satisfies the Prudential Regulation Authority: the national regulator continues to keep the bank under close observation.

A pair of intriguing stories from Europe this week: first, from Denmark, we learned that one of the country's major banks has dramatically extended the cohort of customers that must pay interest for any large amount on deposit. Until now, Danes with 7.5 million kroner ($1.1m) were charged a negative rate, in keeping with the ECB's own negative rate for financial institutions. Now the qualifying level has dropped by an order of magnitude to 750,000 kroner ($110,000). The firm in question is Jyske Bank, which also hit the headlines last month when, in a world first, it put a negative interest rate mortgage on the market – effectively paying customers interest for taking out a mortgage loan. This is about as dramatic a case of interest rate pass-through as one will ever see: as an ECB-published paper last year pointed out, "the transmission mechanism of monetary interest rate reduction is significantly impaired" in the Eurozone. (Although Denmark does not use the euro, its lending rate has tracked the ECB's refinancing rate very closely for the past two decades.) The question now is: will major depositors move en masse to competitor banks, in what would be a potentially expensive development for the likes of Danske Bank? Or is Jyske in the vanguard of a stance that will become general in the sector or even throughout Europe?

Meanwhile, media and political leaders in Rome have been reacting to a think tank-produced plan to penalise debtors who repay in cash rather than settle electronically. Some powerful voices have come out in opposition, including populist politician Matteo Salvini, who likened the notion to the policies of the Soviet Union in its heyday. According to reports, the idea is for Italians to be offered tax credits simply for paying their debts by electronic means. The country, says Bloomberg, suffers from a 30 percent tax-evasion rate, long the bane of governments trying to right state finances. "The proposal would face strong opposition from cash-loving Italians if a bill ever reached parliament", commented Patrick Houlihan of Verisk Financial Research. "No doubt both Athens and Madrid will both be looking on with interest to see how this kite is received."

To end, links to some other stories of interest this week...

• China: tech companies turn to financial services
• Singapore: expanding fintech to stay ahead of rivals
• UK: credit card lending growth weakest since 2015
• US: consumers' access to credit worse than thought per Fed
• UK: Santander takes $1.65bn impairment, citing Brexit and ring-fencing