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Why we all need banks

I'm happy to admit that if I need to travel by air I only fly British Airways. I only take another airline if BA doesn't fly to where I need to get to, which is a surprising list of places. For example it doesn't fly to Taipei (big trading economy), Dhaka (large Bangladeshi community in U.K.) or Auckland (historical Commonwealth ties) when one might expect it to, all places I've had to go to recently.

Still one can't have everything. On a trip to Budapest last month I caught the BA in-flight magazine Business Life, and one article in particular stood out. The title shouted in large font "Who Needs Banks? The rise of crowdfunding". The article went on to describe the growth in direct lending such as P2P and crowdfunding, saying how lack of supply was causing more and more small businesses to turn to this disintermediated form of finance.

Jason Hawkes | Iconica | Getty Images

But it was the article title that I found a trifle annoying. Mainly because we all need banks. Every single one of us, individual or corporate, who wishes to engage in any form of commerce, of any size, needs banks. This might explain why in recent years some banks have got away with treating some customers very badly, but the truth is unarguable. Unless one is able to find someone who can supply a basic money transmission account, which can also act as a liquidity facility and go overdrawn if needed, banks are here to stay.

Paul Volcker famously noted post-2008 that the only useful financial industry innovation of the last 30 years was the ATM machine. Whether he meant it as a soundbite or not, it's a pity he wasn't able to recognize the value of the humble interest-rate swap (without it no-one could arrange a fixed-rate mortgage. The U.S. market only managed it because the banks transferred all the interest-rate risk to the government. Handy if you can do that). Or indeed, and this is the real big one, the universal availability of the even more humble current account (the U.S. calls them checking accounts).

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The money transmission account, which handles operational payments for the customer in and out, in any size, and which can also go overdrawn when said customer suffers cash flow problems, ranks up there with the wheel as one of the great inventions of humankind. Sure, it was created more than 30 years ago, but has only been available to just about everyone within the last 30 years. By supplying that product to princes and paupers alike, banks do a great service to society.

Who else provides them? No one. Not P2P lenders, or crowdfunders. Or Amazon. Or Google. A remark attributed to JPMorgan CEO Jamie Dimon suggested that his biggest fear competition-wise in the next 10 years was Google. Not unless they offer current accounts and can clear them they aren't. The rise of the supermarket bank like Tesco, Sainsbury's or M&S ignores the fact that these institutions themselves need banks to clear their daily cash operations. In essence such firms are just another stage of intermediation. Not unless any of these new competitors start to do genuine banking and clear for themselves at the central banks can traditional banks say they are in real fear of the future.

Of course banks face genuine tough challenges in the next 10 years, and competition in an over-banked economy is one of them. But who needs banks? Let's not kid ourselves, we all do.

Professor Moorad Choudhry is at the Department of Mathematical Sciences, Brunel University and author of The Principles of Banking (John Wiley & Sons 2012).

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