Move aside minister – let customers re-shape the banks

Suddenly it seems that everyone has some bright ideas on how the banking industry should be run.

Chancellor George Osborne thinks we need more Captain Mainwaring-style bank managers who actually know their communities and customers. Ed Miliband thinks we need more challenger banks, with the established players cut down to size. Vince Cable used to think we needed more mutuals and who knows, he might still do so despite the terrible problems at the Co-op.

Indeed, the main political leaders have so many strategies for our banks, and are so confident of the rightness of their ideas, that it seems a shame they are wasting their time on government when they are clearly so well qualified to run a major financial institution instead.The trouble is, it is all nonsense.

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The reality is that we need less meddling, not more. There is already plenty of evidence that the banking industry is changing, as it certainly should. It only needs one policy from the politicians, and right now it would be a radical one: leave it alone and let the market decide how it should be re-shaped.

No one would dispute that the major high-street banks are a poor advertisement for free-market capitalism. Too big, reluctant to lend to small businesses and addicted to mis-selling terrible products to baffled customers.

With wildly extravagant cost structures and regularly needing dollops of taxpayer cash to bail them out, they are the poster boys for everything that can go wrong with big businesses. It is hard to say anything positive about them. It often looks as if they exist mainly to overpay their senior executives.

That explains why there is so much pressure for change. Last weekend, Osborne praised the traditional bank manager who was at "the very centre of local life, who knew all the businesses, knew the people who ran the businesses and was empowered to make judgments about who had a good idea. Now that's all gone. It's all Computer says No'".

Miliband, in turn, probably has a five-year plan for the industry somewhere, including the launch of a new Gosbank (the little-missed bank of the old Soviet Union, in case you were wondering).

Ukip and the Scottish National Party have yet to weigh in with their own visions for the banking industry, but no doubt they will soon. Nigel Farage would probably make it compulsory for all brokers to wear red braces again and, of course, sell the euro, while Alex Salmond probably wants to re-create the RBS empire in all its glory.

In fairness, Osborne has a point. Plenty of people are frustrated by banks that make you contact call centres staffed by people who have no idea who you are, and who have no authority to do anything even once you have been through 15 security checks to verify your identity.

Likewise, some more challenger banks might be worthwhile and, despite the Co-op disaster, mutuals certainly have a place. But the mistake is to imagine that politicians can have any idea how the industry should be re-shaped. In reality, the banking industry is embarking on a phase of intense innovation right now.

A survey by the British Bankers Association found that transactions through branches of RBS, as an example, had declined by 30% over the last five years, while the use of mobile apps had soared. A new breed of challenger banks are emerging, such as Metro or Sweden's Handelsbanken, which have a different approach to customer service from the big five established players.

Pure internet banks are likely to emerge, so long as the regulators will let them. Quasi-banks such as peer-to-peer lenders like Zopa and Funding Circle are making rapid headway, taking deposits and making loans, and they may end up becoming something so close to banks that it makes no difference to most consumers.

Wonga has shown how short-term lending can be turned upside down it is expensive, but not necessarily more so than an unauthorised overdraft.

Other new players may come into the market. Ebay's PayPal already does a lot of what looks like banking and may well compete across a broader range of services. It wouldn't be surprising if Google, Apple or Amazon launched banking products.

Given how industries such as travel agencies, newspapers, telecoms, books and retailing have been blown apart by the internet, it is surprising how little banking has been affected to date. But a tipping point may well be close, where the old-style banks find themselves rapidly replaced by new competitors.

No one knows precisely what customers will want. It might be high levels of service. They might want lower costs, or greater convenience, or more choice. Most likely they want some combination of all of those, paying less for basic services such as transfers, getting higher rates on their savings, cheaper and more flexible loans, and better advice and help.

It is anyone's guess. But what is certain is that George Osborne, Ed Miliband, and Vince Cable have no idea. They should get the government out of the way and let customers and entrepreneurs re-shape the industry between them: the last thing it needs is yet more political meddling.