As we build up to Sibos in Toronto, it’s time to bring some fundamental banking concepts to, ahem, account.

We all assume accounts exist for a good reason. Got to be some place to keep your money, right? But accounts are flawed, in many ways and I’ll hope to convince you of this. Let’s start with a retail example.

Last year my wife had around £25,000 in her current account. Yes, I know she’s a lawyer but she’s not rich, honestly, I married her for love (and, by the way, nearly 40 years ago), she does family law which is more like social work really and paid about the same… Anyway, we had had some builders in and they wanted paying and, being builders, had screwed up and so no way we were going to pay them yet.

Well, all credit to our bank. They rang her up, and said, “We notice you have £25,000 in your current account. Now, the current account only pays interest up to the first £5,000. I can get you interest on the remaining £20,000, if you’d like.” Not much interest, these days, but even 1.9% on 20k is several meals out. “Ok,” she said, “give me the money.” “Great,” he replied, “I’ll open up a savings account for you then.” “No,” she said, “just give me the money. You’ve got my £25,000 and you tell me you can get me interest on the unused 20k, so just give me the interest.” “No, it doesn’t work like that,” he said, “you have to open another account. It won’t take more than around 10 minutes.” “No,” she said, “I don’t want to open another account. Just do what you have to do to get me the interest from my money, which you already have.” He was struggling. Eventually he shamefacedly admitted he didn’t get his commission unless she opened a savings account.

What is wrong with that, true, story? Where to begin? Firstly, the commission structure, clearly cock-eyed. Secondly, the silo’d nature of the bank. Thirdly, the “sales” technique. But fourthly, a crucial complete misunderstanding of the client’s real need.

Banks assume we want accounts. If we want to get by day to day, open a current account. For a loan, open a loan account. Unless it’s a mortgage, in which case open a separate, mortgage, account. For savings, a savings account. But it’s not true. All we want is for the bank to look after our money, not lose any of it, not charge us the earth for the privilege, not milk us for interest if we need some funds and give us reasonable rate of interest on the money we do have. Banks experimented for a bit around 10 years ago with “All in One” accounts – basically a notional pool across a still-underlying set of accounts, which should have been attractive because a fluctuating positive current account balance could help reduce interest payments on a mortgage. They should have been all the rage, but they didn’t really catch on, mainly because they turned out often not to be cheaper.

But, you say, people like keeping things separate. Yes, it’s true, consumers do. It’s called “jam jar accounting” and goes back to when people used to keep one jam-jar on the mantelpiece to hold the gas money, one for the rent, one for the electric, and so on. But having a current account, a loan account, a savings account and a mortgage account are different jam-jars. Everybody has his or her own jam-jar strategy.

I asked the COO of a noted UK Challenger bank why he was offering accounts. “How are you being disruptive?” He said, “Yes! Yes!! That’s what I wanted to do! The regulator wouldn’t let us. In fact, the regulator couldn’t even understand the concept!”

What about for the big boys, though? What about transaction banking?

Well, now it gets even more interesting. Of course, separate legal entities have to have their money held separately (unless you want to get into creating additional legal entities with client money and comingling with all the complex regulation and reporting that involves). Furthermore, for tax and legal reasons, countries have to be separated.

The problem with accounts in commercial banking is the way they are used for payments.

The old fashioned way of making payments was barter, then cash, then IOUs/cheques (where America is at, by the way), then direct bank transfer. Look at any invoice.[2] What do you see? “Please remit to IBAN GBXX123456789XX.” “Here’s my private bank details, please put the money in there.” It’s like, in a shop, the teller opening the till and letting you put the money in. (Hope you don’t help yourself, while you’re there).

Maybe I’m a purist but I don’t really like giving this information away to a third party. Yes, I know in theory people can only put money in (yippee!) and not take money out (ouch) but – well, even then it’s worrying. What if somebody put some money in by mistake, a large enough amount to matter but not be obvious, and I spend it (and all my real, own money) and then someone comes knocking wanting it back? (And yes, banks will just give it back…) But it just feels wrong.

More importantly, we have misunderstood the true nature of a payment. A payment is from A to B for C. Quite apart from completely forgetting about C (a “clean payment” – ha! doesn’t exist!)[3] we conflate the act of paying (A) and the act of receiving (B). All A wants (maybe reluctantly, but never mind) is to lose the right sum of money, and to lose it in the right way, whether using spare money, dipping into money set aside from something else or funding this payment partially or fully somehow. Meanwhile, all B wants is to know payment has been made and the money received has been used to best effect. A may want to lose money in GBP while B might best want the money in JPY. A might need the money for a bit before paying or might be flush and happy to pay early. B might need the money urgently – or not. So whether a wire, FX, a loan, an investment or some combination (yeah! supply chain finance!) the principles are all the same.

So why not just have one product?

What banks may not realize though is that this is really hurting their sales efforts. We know that principal banks make 3.2 more income than others – basically being the principal bank is being the profitable bank. So how to acquire a new client?

Well, the great thing is, the sales person goes into the company, shows all the advantages of coverage, of expertise, of better liquidity management etc etc. Just change your main banking to us!

What does the corporation do? Changes his accounts over to this new bank. Finance write to all the company’s customers advising them of the new payment account. “Please, from date X, ensure all remittances are now paid to NEWBANK at this IBAN.” Now picture what happens. All the customers are rubbing their hands with glee. Six months later, with the corporation on its knees for lack of cash, business booming but actual balances fallen off a cliff, the sound can be heard of the plaintive collections clerk phoning round the customers one last time “Where is out money?” “Oh, sorry, haven’t you got it yet? We paid it, into the OLDBANK account, as usual.” “Grr…” Stickiness, that’s what this creates, and good banks don’t want artificial stickiness, only bad ones do. And Governments certainly don’t want it.

Again, there’s a remedy: virtual accounts, and they are beginning to take hold. But that’s why we constantly need to challenge fundamental, historical, always-one-it-this-way assumptions, like the usage of accounts.

One last story. Twenty years ago, I was working at Group level in a large UK bank and joined a “let’s innovate” session at head office. We asked ourselves the question: what are our unwritten, unknown assumptions, that might be wrong?” A tricky one to answer, it’s a bit like saying “What are you NOT thinking of?” or “What’s in the bottom right of Johari’s window?” So we mulled about and did a few exercises to think about how our actions were driven by historical and no-longer-existing assumptions.

It hit us! The Post Office! Hundreds of years ago, banks worked on a daily cycle. Why did they work on a daily cycle? Because the Post Office delivered mail daily. So payments could be sent to a clearing house every evening. Head office could send out a “refer list” every morning and it land on the bank manager’s mat to show, essentially, what had been paid and what had bounced. But now we have real time banking. Accounts still operate on a daily basis. We don’t need the Post Office for this any more, we no longer send vans out every night. Though we still often have “close of business” processing when our old batch systems have to dreams their fancy end-of-day dreams.[5] If you don’t believe me that we are still on a daily cycle, have a look at your bank statement. What’s in the leftmost column? Date, yes? Not time. At what time was each transaction posted? Who funded any intraday shortfall? Who paid interest on any transient surplus? When is interest credited? When debited?

Cheerfully knocking a 3’ wide 6’ high opening for a new door in an 1850’s brick supporting wall right next to the supporting corner with NO lintel (not even a concrete one) – on the Thursday before Good Friday so I couldn’t rustle up an Acrow to hold it up for five days. Had to “build” a brick stanchion. Amazingly, we didn’t get cracks nor did the house fall down.

Oh, and we can and probably should abolish those also. One for another blog.

And I could argue here is where we could learn a thing or two from Sharia’a banking – one of whose principles is never to divorce the transaction from the underlying trade. Isn’t that just “the financial supply chain should follow (be concurrent with?) the physical supply chain” – but in simpler language? And, where would your CDO squareds have been under Sharia’a banking – essay question: would the ten-years-ago crisis have happened had we been under Sharia’a law?

Named not after an exotic Johari but after two guys, Joe Luft and Harry Ingham. See if you don’t know about this.

Russia is an especial problem. 11 time zones, so if a branch in Kaliningrad closes at 6pm, only four hours later the Kamchatka branch could be ready to open at 8am.

“Interest credited at start of day, debited at end of day” say the corporations. “Interest debited at start of day, credited at end of day” say the banks. Oops. One for the regulator?

Phil Cantor’s blog