Banks’ incentives don’t align with their customers’

My bank tells me my customer status will likely be downgraded:

Banks measure their customers’ value by the amount of money they maintain in their bank account and fixed deposits. This makes sense for the bank; these deposits are what they lend.

This measure, though, is increasingly at odds with customers’ own interests.

Money in a bank account will lose value against inflation. ‘Safe money’ in a fixed deposit is better placed in a liquid fund or ultra short term debt fund; these funds invest in much the same debt instruments as a bank would, and yield marginally better returns than FDs, without an early withdrawal penalty. Anything above this is best invested. But even though most banks have sister stock broking companies (HDFC Securities, ICICI Securities) for their customers to invest in liquid funds and stocks or other equity mutual funds, these investments don’t count against customer value.

A bank’s ideal customer will leave lots of cash lying in their bank account or in FDs, unproductive for the customer but highly attractive for the bank.

This divergence of interests is what so many financial startups look to address and make money off. Scripbox, Fisdom, ET Money, WealthTrust, Clearfunds, FundsIndia, Zerodha, Smallcase, Piggy, Goalwise, Sqrrl, Cube, PeSave, Orowealth, ArthaYantra, 5nance among many others all have different takes on making it easy for individuals to make better use of their money. The user experience, accessibility (via apps or mobile websites) and simplicity of this new generation of financial services is so much better – albeit the bar that banks and their sister companies set is abysmal – that, for instance, an HDFC bank customer would rather park their money with one of these services than with HDFC Securities.

This looks like the telecom sector from a decade ago. Operators (carriers) viewed anything beyond voice and sms as a ‘value added service’ including, for the longest time, even mobile internet access. Their interests – maximising super high margin voice and sms revenue – quickly diverged from their customers’ – using the Internet on their phones (and everything that the internet made possible: the web, email, apps, maps, all sorts of messaging, payments, games, crystal-clear video and audio calls). And companies that had nothing to do with telecom – Apple, Google, Skype, Amazon and dozens others – now dominate ‘mobile’.

In less than a decade, operators have become little more than dumb pipes for data, warring it out by making internet access ever cheaper. It seems inevitable that this is what’s going to happen with banks. They’ll be dumb pipes for money, competing only with ever-higher interest rates.