Retail finance needs to innovate

If a century ago the index of the cost of intermediation (the amount taken by middlemen) in the retail and financial sectors was taken as being 100, by the present day in retail it would have plummeted to one.

Anthony Hilton: 'If the financial industry's efforts in the retail sector are to be successful it will have to start offering value for money.'
Anthony Hilton: 'If the financial industry's efforts in the retail sector are to be successful it will have to start offering value for money.'

This is a consequence of innovation leading to technological progress, a revolution in transport, more sophisticated business processes and a huge increase in scale, control and efficiency.

In the financial sector, in contrast, you would find that the index still stands at 100 today. There has been almost no innovation in retail finance. This of course explains why so much of any return on investment is absorbed by the charges imposed by managers, most of which goes on meeting the costs of marketing and distribution. It is partly why customers do not believe they get value for money from financial services and underpins the lack of trust in the sector.

The numbers were quoted at a conference earlier this month by Zopa CEO Giles Andrews, who in turn attributed them to Andy Haldane of the Bank of England, so they should be taken seriously. Andrews can deliver such damning judgements because his company Zopa is one of the exceptions. It is a peer-to-peer lender. It uses the internet to put people with money in touch with people who want to borrow and therefore cuts out the need for a bank. It and a few others like it have used technological innovation to deliver a huge increase in value to their customers.

Andrews believes innovation is so difficult because retail finance has become hugely complicated, in turn because the firms operating in the sector are just too big.

Now ironically, if you asked a financier to name the great strength of the City, he or she might well say its ability to innovate. But the bulk of this innovation takes place in wholesale finance. Currently the entire financial industry is obsessed with the need to rebuild trust, but if its efforts in the retail sector are to have any hope of success then it will have to start offering value for money, and being honest about what it can achieve. This requires fundamental business reform and it is this, rather than better comms, that is the real challenge.

Anthony Hilton is City commentator on London's Evening Standard.

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