Policy Innovation Blog

The revolution starts here

Stian Westlake - 29.07.2010

It's taken a while, but at last a new type of high street bank has emerged from the wreckage of the credit crunch.

OK, it's not exactly Venus stepping forth from the waves, but something pretty special was born recently in Holborn, an unprepossessing street in London:
a new bank. Could this newcomer, whose brash blue and red branding is a far cry from the muted stateliness of its well established competitors, be a sign of real innovation in the UK's financial services industry?

It's no surprise that innovation in financial services has bad reputation. The economic mess we're in had its origins in the alphabet soup of CDOs, CDSs and SIVs that were once held up as evidence of how innovative our financial services were.

But perhaps financial innovation is exactly what we need to restore the economy to health. The trick is to make sure it's innovation in the interests of customers, not solely in the interests of bankers. The new Metro Bank, with its longer opening hours and friendly atmosphere, is a small example of this. But we could go much further. Here is a four-step model for the kind of financial innovation we need:

1.       Innovation to reduce risk. Universal banks that run both a "utility" (looking after people's savings)  and a "casino" (trading securities on their own account) seem inherently risky. Governments understandably want to safeguard the white bread utility business, but in doing so effectively underwrite the casino. Research like John Kay's excellent Narrow Banking, published by NESTA and the CSFI, provide innovative alternatives that could reduce risk.

2.       Innovation to improve access to finance for businesses. Vince Cable and George Osborne recently acknowledged what many businesses have been saying for years - that businesses find it hard to raise money to make good investments and to grow. We've shown recently how high-potential start-ups are hit especially hard by this, and the vital role of effective venture capital in building great businesses. We'd also like to see new entrants to the banking sector meeting this demand. We could also learn from programmes like the US's SBIC scheme, which underwrites borrowing by private investors who back growing companies. The scheme covers its own costs and has helped companies like Apple, FedEx, and Costco to grow.

3.       Innovation to serve customers better John Kay pointed out that countries with the most "dynamic" pre-bubble financial services, such as the UK, were often the slowest in adopting simple innovations that make banking better for ordinary people - like faster payment processing. Banking that improves our ability to save, make payments, and plan for our future - banking in the interests of customers, not bankers - is in order. Innovation has a role to play in this, whether it's simple innovations like Metro Bank's willingness to break the norms of branch opening hours, or more radical innovation such as peer-to-peer lending, a sector that NESTA has worked closely with in the past (look at our report Are People the New Banks? for more information).

4.       Innovation in meeting social as well as financial needs Finally, like Heineken, innovative banking should reach the parts that finance doesn't currently reach. This includes financing social and communities ventures - the Big Society that the government is keen to encourage. NESTA has been involved in developing this sector for some time (see Bridges Social Entrepreneurs Fund, Big Issue Invest, Unltd Advantage), but the financial downturn offers a chance to make it mainstream.

If you agree that this kind of innovation is what we need, we'd like to hear from you!