Customers don't trust the major banks so why aren't any new lenders emerging to challenge them, asks Matthew Lynn
Sherlock Holmes once solved a mystery by concentrating on "the dog that didn't bark".
In the story Silver Blaze, the detective's point was that sometimes it is more useful to look at what isn't happening than what is.
In financial markets, there is now a dog that isn't barking very few new banks are appearing.
A year and a half after many of the world's major banks had to be bailed out with government support, customers don't like their banks, don't trust them and don't think much of their fees.
You would imagine that if the market was working properly, entrepreneurs would come forward to blow the industry wide open. It isn't happening.
The financial services industry still isn't open enough to new competitors. If governments and regulators want to fix just one thing about the markets, it should be that.
There are plenty of reasons to think this is a good time to be establishing a bank. First, the banks are widely disliked.
They went broke, got bailed out by their government, then went straight back to paying themselves huge bonuses as if nothing had happened.
The easiest way for a comedian to get a laugh right now is to bash some bankers. If people could punish them by switching their business elsewhere, they would.
Second, the recklessness of many of the world's leading financial institutions before the credit crunch has left many people wondering if banks are really safe.
Given the wisdom of hindsight, would you really want large amounts of cash on deposit with Royal Bank of Scotland?
Third, their services and fees aren't great.
They never were that good, but banks are increasingly repairing balance sheets by boosting charges for ordinary consumers. In the UK, the benchmark interest rate is 0.5 per cent. Can you get a mortgage or a loan for your company near that rate? Forget it.
Unpopular companies, lacking the trust of their customers, offering poor value - it should be a perfect opportunity for someone new to come into the industry and rip up the rulebook. In fairness, quite a few people have already seen the possibilities.
In Britain, the established banks collapsed more spectacularly than just about anywhere outside Iceland.
Last week, Virgin Money Holdings, Richard Branson's financial-services unit, bought a tiny British bank called Church House Trust. Virgin plans to use that as a base for building a domestic retail-banking business.
Other people are working on a similar idea. Sandy Chen, a Panmure Gordon & Co analyst, is planning to start a new bank.
Vernon Hill, a US entrepreneur, aims to open a new UK lender called Metro Bank. Tesco, the UK supermarket chain, also plans to sell cheque accounts and mortgages.
And yet these are all marginal initiatives. They are likely to be irrelevant to the mass market.
Nor is the UK exceptional. There is little sign that the big established banks are being seriously challenged in any of the major economies.
That is very odd. In a free market, when customers are unhappy with an industry, you expect to see new alternatives.
In the airline industry, Ryanair blew away the old carriers with its cheap approach to flying. In the car industry, new firms from Japan and Korea shoved aside old manufacturers. New retail and restaurant chains are launched all the time.
In most industries, old business models are constantly being disrupted. That's how capitalism works. Badly run companies are replaced by better ones. Innovative ideas are encouraged. Dead ones get thrown out. So why not in banking?
There may be some inertia. It's a hassle to move a current account in particular. But the real reason must be that there are too many barriers to entry.
The complexity of getting banking licences, the burden of regulation and the way the payment systems operate between banks are clearly making it too hard for new competitors to get into this business.
After the credit crunch, we heard a lot about improving the regulation of financial services. In reality, there are very few economic problems that can't be more easily solved with a healthy blast of competition.
What governments and regulators should be doing is making it easier for new people to break into the industry. Rules should be redrafted to make sure they don't favour the established players over newer competitors.
The banks that aren't there are telling us it is still too difficult to launch a new business. And until some new lenders have been created, we can't conclude that this industry has been successfully overhauled.
If the regulators need to focus on just one task, they should be promoting more competition - because that's the only thing likely to produce a better industry.
- BLOOMBERG
