Lloyds has just seen six years of profits wiped out at a single stroke. RBS has posted a huge quarterly loss. Barclays and Santander have taken big hits. The payment protection insurance (PPI) mis-selling scandal has turned into a neverending nightmare for the main banks. The policies came with so many conditions they were virtually worthless and almost all were mis-sold. Over the last few years the banks have paid out an estimated £44bn in compensation to millions of customers.
This was no accident
Long-suffering shareholders will now be sighing with relief, however. The deadline for claims has passed – after 29 August no more could be lodged – and the final bills will soon be settled. With the scandal behind them, the banks can repair their balance sheets and get on with building the business.
But hold on. In truth, it is not really over. PPI was no one-off accident. It is not as if a few over-enthusiastic branch managers went a little crazy and started over-selling a product they hadn’t really understood. Nor was it caused by one or two banks going rogue. PPI was systemic. For years it was virtually impossible to buy any financial product without coming under pressure to take out PPI. Why would supposedly well-managed companies make selling such a bad product so central to their strategy?
The reason is simple. The high street banks have a very expensive branch network that collects and distributes cash, and it is all paid for by a “free” basic product – the current account – that is steadily facing more and more competition. In the past banks made the whole thing work by charging interest on loans, and fees for overdrafts. But as those markets became more competitive, it became harder to make the model work. So they turned to selling products such as PPI to maintain profits. It wasn’t that they didn’t realise the products weren’t much good (after all, the banks drafted the small print). Or that they didn’t care. It was simply that there wasn’t any other way to make money.
The problem has got worse. In the last few years, competition has intensified. Challenger and app-based banks have captured a younger market with snazzy new features and offers. Hundreds of start-ups are muscling in to the market too, developing hyper-competitive products in niches such as international money transfers or processing credit-card transactions. Peer-to-peer lenders have marched into the main business of collecting deposits and making loans.
Perhaps most worrying of all, the technology giants are all edging into the financial-services market. Amazon already offers a current account, Google and Apple have sophisticated payment systems built into their phones, and Facebook is launching its own currency (admittedly with mixed results so far). Even Uber has this month launched its own credit card. It is going to be harder than ever to make any money in traditional retail banking.
The next PPI?
The result? The banks are simply going to look for other sneaky ways of making money. There are already signs of that. Packaged accounts may be almost as bad as PPI. Loans to small businesses may have been mis-sold. So might interest-rate hedging products. Overdraft fees, payday loans, investments and pensions could all come under a lot more scrutiny. Many customers may have been pressured into buying products they didn’t need. Until the banks fix their business model, and find a way of making profits on their core offering without having to sell add-on services, their basic problem isn’t fixed.