A famous banking expert explains why the future prospects of the banking business are very doubtful.
Financial analyst Alexander SINELNIKOV answers our journal’s questions.
— Mr. Sinelnikov, we have already discussed many things in the previous interview. Now please tell me how to convert the rouble to an investment currency and to fill the economy’s blood circulatory system with it. The President’s Councilor, Sergei Glaziev, suggests switching on the printing presses, but directing the money towards the products necessary for the country…
— I agree with Glaziev that the printing presses should be switched on to enhance the monetization of the economy - but not roubles but dollars should be printed (laughs).
Actually, this took place in the 2000s and in the beginning of the 2010s, when the US Federal reserve printed dollars and they flew into our economy via oil and gas sales. But if printing dollars is technically impossible, we should start restricted rouble emissions. To remind you, this practice existed in Soviet times, when there was a three-channel system of currency.
One channel is the so called cashless rouble, which was used for payments between enterprises. The second money channel was cash currency, which made it possible to transfer money from a cashless account to a cash account for salary payments. And the third channel was the so-called foreign currency equivalent rouble. This channel was not connected with the other channels in any way, except for special cases and under the government’s decision.
Want to repeat the Soviet experience? Do it full scale, not partially. If Mr Glaziev says that the economy should be developed at the expense of money resources, monetization and restricted emission, do it, please! But do or die, and return to the three-channel currency system. And we will see what the return to the Soviet era results in.
— As for me, I would not like to return to Soviet time. What tools may be used without the need for such radical disturbances?
— The CB of Russia uses only one tool called the key rate. But it also has exchange regulations and controls, both customs and supervisory. All these tools are not being used to their fullest extent.
If they are used as in China, then the rouble will be like the dollar. For example, the yuan does not differ much from the dollar as to its fundamental characteristics, as the Bank of China uses all available tools to support the stability of the national currency in all aspects.
— Let’s remember how the Chinese acted when they incurred strict sanctions after the Tiananmen events (by the way, incomparable with the current anti-Russian ones). The PRC had to alter its economic policy, simultaneously stimulating interior demand and attracting external investments via its special coastal economic zones...
— …and those closed industrial coastal zones were not connected with the continental ones. They had their own monetary and credit system, and budgets of continental enterprises could not be transferred to the special free zones and then abroad. That was the same as in the Soviet Union three-channel currency system.
And even now there exist continental yuan and foreign currency yuan, which is rated in Hong Kong. As we can see, the currency system is multilayered.
— The financial and credit system is being cleared out. Many banks are being deprived of their licenses. According to the RF CB’s report of 2015, the number of unprofitable banks is about a quarter of the total number, and bank equity and asset profitability is very low. Why is the business model of banking in Russia so unattractive? How competitive is it?
— We should speak not only about Russia but about the world banking system. As far as I remember, the first bank was founded in Sienna (Italy) in 1472,and the banking model has not changed at all for the last five centuries.
It is still transactional-ma
Today, banking technological platforms such as inter-bank correspondent accounts for transactions are hopelessly obsolete. Players with other platforms have come on to the market, and their financial services are more efficient. These are international payment systems (Visa, MasterCard, etc.), telecom operators, social networks, e-wallets and others.
As a result, banks cannot compete with new high technology IT companies and “telecoms” and thus are losing the markets where they used to be monopolists.
Tremendous rivalry between the new players, whose proposals are more efficient and available than the banks’, has influenced banking credit margins. It is not by chance that Russian banks’ asset profitability has decreased to as little as 0.3%, and return on equity has become 2.4%.
Conclusion: the existing banking model has fully exhausted itself.
— But if we follow the new “IT” way, won’t we ‘bubble’ like the American derivatives market? All these virtual debt obligations, pseudo-money, telemarketing systems with IT companies’ shares… Is there no danger?
— This question is absolutely valid. Any new phenomenon on the market will, for sure, attract the attention of wrongdoers. It is clear that with Internet development we got hackers, and harmful viruses spread. But the Net itself is not evil.
Each new and useful thing is accompanied by drawbacks, but innovations’ importance is no less progressive.
— How should the current financial business model be altered?
— It will alter itself. Instead of the obsolete model another one, without state participation, will appear. The market itself will regulate it and promote what is most in-demand.
I will give an example, quite clear to any reader. You may be surprised to hear this, but the “Auchan” retailer is not only a seller, but a financial organization to some extent. And when you buy your purchase at the cash desk, your card is authorized , and further accounts are fulfilled in the “Auchan” processing center.
That is, “Auchan” has refused banking service for effecting payments by plastic cards, having left the corporate and retail banking services world. And why did they do this? Because the high cost of the bank’s services does not fit with the financial model of the food retailer, and the latter has to cheapen it itself.
The main thing is that the retailer can service itself, and for free! Its main activity brings in its primary income, and the banking services are expenses. That is why effecting payments on the basis of its own processing allows it to economize on its own trading margins and thus raise its competitiveness.
And a bank cannot render services for free: such is its business model, five centuries old. Nothing can be done with it. A bank cannot, but its rivals can!
For example, Facebook, making remittances between its subscribers, may render financial services for free, because for Facebook, Apple, Google – for all these IT-giants — the service is additional, since they get money from advertisers.
Their business model is advertising, and banks have a banking business model, and they cannot deliver services for free, so they cannot compete with their more advanced rivals.
— But there is the Islamic bank model, where lending rates are forbidden. Might this be the thing of the future?
— This is not a good example. They have just exchanged bank commissions and margins for participation in profit distribution, and that is all. But still, the service is fee-based and the social network does not interfere with your business. That’s the main difference.
— And the last question. In one of your latest interviews I read that the strategy of work should be changed crucially: from work on the growing market to work in the conditions of a falling market. What sectors, from your point of view, are the most attractive for investments in falling market conditions?
— The basic text describing the network of interactions on the market is called “Capital”, and its author is known worldwide. By now, capital has remained, but it has changed its form. If during the second industrial revolution it had a monetary form in the form of permanent assets (that is, industry, agriculture, land, etc.), now in this epoch of further scientific and technical revolution, the most precious capital is human capital.
That is why at present it is necessary to invest in the spheres where the importance of human capital is high, including the aforementioned IT sphere, where the main capital is people creating intellectual property, their minds. The manufacturing of high-technology products, innovative foodstuffs which have saved Africa from hunger, medicine, bio- and space technologies – these are the spheres where fundamental and application-orie
In other words, business should develop people, not just hardware and money.
We have spoken of banks. As an experienced banker, I’d say that banks have a lot of money, but this does not bring a lot of joy — what does 2.4% efficiency mean? And IT companies generate incredible money flows — because they convert human capital into money, but not vice versa.
— Thank you for an interesting conversation. There is much food for thought…