Month: July 2021

Where Will High Street Banks be in Ten Years’ Time ?

You will likely have grown up knowing the ‘big four’ banks and their presence on every high street. Barclays, NatWest, Lloyds and HSBC (which you may remember as Midland Bank) were prominent in almost every town. If you needed a loan – especially if it was for business purposes – then your first port of call was the bank manager.

Gradually, the image of the ‘big four’ began to slip. They were beset by scandals, notably the PPI (Payment Protection Insurance) mis-selling scandal. According to an article published in FT Adviser in August 2019 the scandal will have cost the industry £50bn, with Lloyds the biggest culprit having – at that time – paid just over £20bn in compensation. To put that figure in perspective, the market capitalisation of Manchester United, the UK’s biggest and best-known football club, is around $2.5bn (£1.77bn) at the time of writing – making the PPI compensation bill 28 times the value of Manchester United.

So not surprisingly, public faith in the banks was starting to wear a little thin. What has really threatened the “old” banks, though, is the rise and rise of fintech (financial technology).

Many people will have heard of the so-called ‘challenger banks’ such as Monzo, Metro, Revolut and Starling. The millennial generation (roughly, the generation that came of age around the turn of the century) and Generation Z (the generation after millennials) have very quickly taken to fintech, using the various apps for transferring money, investing and saving and everyday banking. We’re now seeing the start-ups going mainstream, with Starling Bank advertising its business account on TV.

But perhaps the most compelling evidence is anecdotal. You talk to so many people now who say they simply cannot remember the last time they went into a bank branch. So what will we see in ten years’ time?

A huge reduction in bank branches is almost certain. While that may cause problems for town centres already suffering from shop closures, it is hard to see any alternative. Bank branches are expensive to maintain and they demand something that is even more costly than bricks and mortar – people!

Will this cause problems for some groups of people – the elderly, for example, who are disproportionately reliant on cash? Possibly – but while the UK may be lagging behind Sweden who are on course to be a cashless society by 2023, it seems inevitable that we will use less and less cash in the future.

Fintech will continue its inevitable rise. There will be more challenger banks, and you suspect they will increasingly define their target markets – business lending, for example, and specialise in them.

And those expensive people? Sadly, they are going to be needed less and less. Looking into the crystal ball it seems inevitable that if you are dealing with a ‘bank manager’ they will be online, on your phone or on your wrist and making lending decisions based on artificial intelligence and machine learning.

Who will Pay the Bill for Covid-19 ?

Government borrowing is at its highest level since the Second World War. According to the Office for National Statistics it reached £303.1bn in the year to March – nearly £250bn higher than in the previous year. Borrowing in March was £28bn – the latest month to set an unwelcome record. Borrowing in the year to March was 14.5% of Gross Domestic Product: at the end of the War it was 15.2%.

Many pundits are expecting a spending boom: depending on which article you read, we “accidentally saved” between £100bn and £125bn during lockdown. Nationwide, for example, have reported that customers’ savings “more than doubled” to £10.6bn during the pandemic.

With the lockdowns now easing, surely this money will be spent, kick-starting the economy and fulfilling various predictions of the fastest growth since the Second World War?

Perhaps not: a recent survey suggested that the army of accidental savers lockdown created has plans to stay prudent. As the BBC report put it, consumers are likely to “play it safe” as the UK emerges from lockdown. Neither can the Chancellor expect a windfall from Corporation Tax: with the pandemic having hit the profits of many, many companies’ tax receipts from business are certain to be reduced.

But at some point the Chancellor has to start paying the money back. So just who will pay the bill for Covid? And how long will they be paying the bill for?

It hardly sounds like a prudent way to run a country but perhaps the UK will never pay back the debt. In the last 100 years the UK has never not been in debt: in the last financial year (before Covid struck) the Government was planning to borrow £160bn – of which £100bn was to pay back old debt.

Some of you – brought up with a strict understanding that debt must be repaid – will recoil in horror, but Government borrowing is not like a credit card: the debt (at least according to the experts) does not need to be paid down as quickly as possible.

Borrowing is cheap at the moment, with interest rates at historic lows – so low that last year the Government issued negative-yield bonds. Effectively, institutions that bought the bonds were paying the Government to look after their money.

What the Chancellor really needs is a healthy dose of inflation. In years gone by, when annual inflation was in double digits, that very quickly reduced the “real” amount of Government debt. But even though inflation increased to 1.5% in April, a sustained period of high inflation looks very unlikely.

Your grandmother would not approve, but for now it looks like the Chancellor’s emphasis will be on servicing the debt, rather than paying it back – and on keeping his fingers crossed the predicted rebound in the economy really does happen, finally starting to swell his tax coffers.

Is cash too safe ?

One of the great themes of the past 15 months has been accidental savings: the amount people in the UK have “saved” by the simple expedient of not being able to go out and spend.

“Thrifty Brits stash the cash in lockdown” has been a typical headline, quickly followed by an estimate of how much cash we might have “stashed” through not going to the pub, eating out or buying new clothes. One estimate put the figure at £160bn, with the Bank of England suggesting that up to 5% of this could be spent, and hence boost the UK recovery, as lockdown eases. Economists at Deutsche Bank went further, suggesting that around 10% could be spent on nights out, holidays, cars and more.

“Would I be shocked by £20bn of extra spending? No,” said economist Sanjay Raja. Spending on this scale would comfortably add between 0.5% to 1% to UK GDP.

But however much is spent, that still leaves a huge amount of money that is not spent – a huge amount of money that remains “accidentally saved.” According to Peter Flavel, the CEO of Coutts, however, we are not saving wisely.

Looking at it from the point of view of an Australian who has lived and worked in several countries, and is now in the UK, Flavel makes a simple point. The UK’s Individual Savings Account (ISA) is “potentially the best medium term savings product globally.” But, he argues, “they are not used very well, [in fact] they are used badly.”

As you may well know, a couple can invest £40,000 per year into ISAs. Junior ISAs have a limit of £9,000 per year. The products enjoy tax advantages and give immediate access to your cash if it is needed. Small wonder that Flavel describes the ISA as a “World Champion” amongst saving options.

According to recent statistics around 20% of the UK adult population have invested in an ISA – but what concerns Flavel is that the overwhelming majority of these ISAs (76%) are held in cash, meaning that with low interest rates and inflation, the real value of the ISA could actually fall over time.

We take a balanced approach to financial planning. It’s often a good idea to keep some money in cash, after all none of us know when we will need access to our “emergency fund.” But Peter Flavel makes a very valid point: it is important that we don’t allow a disproportionate amount of our savings to accidentally accumulate in cash. It runs the risk of unbalancing your overall financial planning portfolio, giving you a more cautious approach than you might otherwise want or need, and, with low-interest rates likely to be the norm for some time, it also risks poor returns. Of course, where that balance lies is different from one individual to the next.

If you are interested in finding your own balance then do not hesitate to get in touch with us. While “I’ve accidentally got too much cash” doesn’t sound like a problem, in financial planning terms it very well could be.