Mutually beneficial: banking lessons from the industrial revolution
Customer-centric, focused on financial inclusion, helping the underserved and unbanked. Have we rediscovered the principles of the first banks and building societies?
I recently read an article about Nationwide winning Pool B of the RBS Remedies Fund (the what of the what? We got you) and it got me thinking. Perhaps we’ve not moved on quite as much as we’d like to believe. The story pointed to Nationwide’s co-operative model, its origins and culture to paint a picture of it being the worthiest winner of £50m to build new services for SMEs.
I won’t argue with a lot of that. I’ve often considered Nationwide the Ford Transit of banks. Nothing to get excited about but always there, always dependable and somehow ‘decent’.
That got me thinking still further. What exactly is my problem? Deep down, do I want to use services from a brand I think is ‘decent’. Yes, I do. Is a mutual model one I feel aligns to my own values? Sure. Is ‘safe’ a good thing in banking? Indeed.
It also struck me that these notions were some of the founding principles of the very first banks and building societies. It’s worth looking back at some important lessons and ideas from the industrial revolution that, in the intervening centuries feel, to me at least, like they were lost, only to be rediscovered in the digital age.
All roads lead to Birmingham
Not literally. But allow me an indulgent ‘my hometown rules‘ moment because there’s a serious point.
In the century between 1760 to 1850 or thereabouts, Birmingham created the basis for the modern industrial world. It gave us even more much later with Black Sabbath, but that’s a very different blog.
The city’s industrial development was built on the adaptability and creativity of a highly paid workforce, practising a broad variety of skilled specialist trades. It was home to a highly entrepreneurial economy of small, often self or family-owned workshops that can still be seen today in the city’s Jewellery Quarter. Or as we now call them, ‘entrepreneurs’, ‘startups’ and ‘SMEs’.
With this rapid economic expansion, there was a need for capital and so the foundation for modern financial services was formed. Lloyds Bank was founded in the city, in 1765. The first building society, Ketley’s, arrived ten years later with a model that pooled members' resources and drew lots to select which of the members would have land purchased and a home built. Once everyone was housed, the firm would close its doors, a ‘terminating’ mutual model that lasted up until 1980.
The more things change…
So, we’ve stood still for more than 240 years? Not at all.
But can anyone argue that we haven’t, for all the technological advances and data at our collective disposal, also lost sight of the founding principles? An age when industrialists and philanthropists built entire villages for workers to ensure better living standards, improve health and prosperity.
The small business banking sector is considered the lifeblood of any economy, yet for decades it has been one of the most underserved and over-charged sectors of banking services.
Ryan Edwards-Pritchard from Funding Options mentioned this in Fintech Insider Episode 321: the UK is still a nation of entrepreneurs. According to data from Companies House, around 300,000 small businesses were started in 2018, with an estimated total of 5.7m operating around the UK.
Thankfully, some modern day Ketley’s are now offering services that work for the individual and the small business owner. They’re not shoehorning an existing product, giving it a different name and charging for it but building new services around the requirements of the modern-day business.
While they’re not meeting customers in taverns in industrial towns, they are talking to them via social media and communicating with a tone of voice that harks back to a far more personalised, human, experience. They are building that sense of community through, well, digital communities rather than coffee houses or inns.
The likes of OakNorth and Funding Options are creating access to funding for firms and individuals that would have been rejected by the incumbents, using new technology and techniques to pinpoint underserved needs. In so doing, they are actively supporting this huge ecosystem of SMEs that are the engine of the economy.
11:FS has also been part of that, building the Mettle service for NatWest that takes a forward-looking approach, allowing customers to use their banking and accounting data to enable them to make smarter business decisions.
Returning to founding principles
The UK government is playing an active role too, although the mere existence of the BCR fund to build new services is a damning indictment of what came before. However, the principles of access, inclusion and customer-focussed propositions are central to the new services it is funding.
We talk about Jobs to be Done and creating services to meet customer needs. We talk of financial inclusion in an age of inequality, of finding methods to getting financial services to the unbanked.
That’s precisely what the founders of those first building societies and banks did. A lot of the services I now see from fintechs and challengers feel very aligned to those guiding principles but designed for, and enabled by, a digitally connected era.
The challenge is how those values continue to be translated in a digital context. We’ve already discussed at length about how broken the modern mortgage process is. If access to housing is a central tenet of the founding principles, then the likes of Proportunity or Habito are taking the lead there.
Where it gets even more interesting is if those principles and the services built from them were integrated into a wider set of propositions, whether that be from an incumbent such as Nationwide or a challenger firm.
As for business banking, the real test will be the services that eventually emerge from the Remedies Fund. We’ll be keeping a close eye on that.
If you want to know more about the state of SMB services, our Head of Research, Sarah Kocianski has done a deep dive on the topic here.