Maz Kothari on the Evolution of Banking
With the recent discovery of the oldest hominid skeleton in Ethiopia, anthropologists now believe they have greater insight into how we as humans have evolved. How about Banking? Being an active patron of the banking industry got me thinking on the evolution, or should I say the de-evolution of banks.
Darwin’s idea of natural selection was based on the idea of survival of the fittest, and some banks, like many others who have confused this idea, thought fittest to mean biggest. You may not agree with Darwin but in the case of banks, bigger is not necessarily better. The notion of becoming a one-stop, global market place for all financial, retail or commercial needs, has now been infamously expressed by Citi. The idea was good. Go to any local street corner or around the world and there is your friendly mega-provider. Others, feeling outpaced by this competitor felt they needed to “adapt” to the changing environment and became Mastodon’s too.
The largest institutions went out and gobbled up smaller institutions like a hungry hyena on a barren savannah. And of course they avidly chased after larger, weaker prey as well, such as Countrywide, Merrill to name a few. Now almost a full year after some of these acquisitions, those responsible for orchestrating them are stepping down and many of these organization are rethinking what to do with all this size and… power?
On a smaller scale many other institutions tried to build their own version of this scale and have miserably failed because they tried to evolve into something different than what their DNA would allow them. For example, some tried to develop carnivorous Capital Markets appetites when they were clearly cut out to be retail bank herbivores. Others tried to develop arms that focused on sub-prime lending, consumed as much as they could and wound up choking because they couldn’t digest it.
Big, medium or small is not bad. It all depends on how banks use their innate capabilities. There is now a fundamental change in how banks view themselves since the financial crisis began in 2007. The banks that are deemed “fit” to survive, have limited scars due to prudent lending practices and have adequate capital to sustain themselves.
Clearly the trend is now many banks are shedding much of the excess that they have accumulated over the years. Specifically these banks are trying to go back to the basics by relieving themselves of business units that do not fit with their genetic make-up.
In the future survival of the fittest will apply to those banks that are best positioned to react to change and that can operate in a lean and efficient manner while not trying to be something that they aren’t…
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