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Why Non-Banks Love the Profitability Paradox

In recent posts I’ve discussed the Profitability Paradox — low-risk customers are unwilling to take on more credit, while banks are reluctant to lend to higher-risk people who need the credit. This is a problem for banks and their customers. Who is it not a problem for? John Lewis, for one.

Last week FSTech in the UK reported on a survey from uSwitch in which 75% of respondents said they would be willing to dump their bank for UK department store John Lewis. Other retailers with a toe in financial services also scored high. A significant minority of people said they would gladly bank with Amazon and eBay — companies that have no experience in banking (though PayPal is clearly the thin edge of a very large wedge).

In other news, the new issue of The Economist cites the growth of mobile money in emerging markets that have little access to banks. And it’s not just retailers and mobile companies that want a piece of the banking world. New competitors have sprung up, with lower costs due to more modern operating systems. I have seen consumer finance companies in Latin America start to add money transfers and deposit services.

When you have a vein in your body that is blocked by fat, the body will find another way to divert the blood. The lack of credit flowing through the system in too many countries — combined with trust weakened by the recession and bank scandals — has created banking alternatives. Many non-bank competitors can afford to serve consumers less profitably because they make their real money on retail sales. Unfortunately, these alternatives will become a standard way of doing business for many people — potentially making the Profitability Paradox much worse.

All this means the clock is ticking for banks. They need to find ways of managing profitability while continuing to extend credit. And next time I blog, we’ll look at how some banks are trying to make this work.

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