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Why Big Banks Don't Want Your Money

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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With two of the world's largest banks -- HSBC and Deutsche Bank -- facing huge fines for transgressions in dealing with investors and wealthy clients, markets' attention is focused on what they plan to do with their retail units. This is strange, because getting rid of these operations would hardly be the most logical or inspired solution to their problems.

HSBC's share price surged Monday after the Sunday Times newspaper reported that the bank is thinking about spinning off  its U.K. retail unit. Deutsche Bank, for its part, announced a restructuring plan that includes selling a controlling stake in Postbank, a retail institution Deutsche bought in 2010. Deutsche also wants to trim its own retail operation by 200 branches by 2017.

The retail news comes after major scandals involving other parts of both banks. HSBC has been ordered to post 1 billion euros' ($1.1 billion) bail in France after being accused of using its Swiss private banking unit to help wealthy clients avoid taxes. Deutsche, for its part, has just been fined $2.5 billion for its involvement in manipulating the Libor interest rate. 

In some ways, the juxtaposition makes sense. Cutting costs and reducing regulatory attention are particularly urgent imperatives for banks with tarnished reputations. Jettisoning retail operations is one way to do that. The way it is practiced in Europe today, retail is costly, and low interest rates are squeezing margins. At HSBC, retail's share in operating income has been declining much faster than its share of non-interest expenses. In a lengthy report a month ago, JP Morgan called Deutsche's retail a "problem child" and urged the German bank to sell Postbank and retail operations outside Germany to cut costs and improve profitability.

Reducing involvement in retail, though, would be nearsighted. Interest rates will not stay near zero forever. Even in these tough times, financial start-ups are demonstrating that retail can be done more efficiently.

Consider Number26, a German venture that recently picked up 10 million euros in funding from famed Silicon Valley investor Peter Thiel, who had long shied away from investing in European start-ups. Number26 has no bricks-and-mortar infrastructure. Customers manage their accounts through a smartphone app or the Web, and are identified via a web camera. Opening an account takes less than 10 minutes. Drawing cash using a Number26 MasterCard is free in almost all ATMs. The start-up makes money from a portion of fees collected by MasterCard from merchants.

It would make more sense for major banks such as Deutsche to move in this all-digital direction than to sell off their retail operations. True, dumping clunky legacy IT systems and lots of unneeded real estate and employees wouldn't be easy --  Postbank workers are now on strike to protest the planned spin-off  and demand job protection. But it would preserve a relatively cheap (in normal times), large and reliable source of funding: private deposits. People will always save, take out loans and make payments, and helping them do these simple things is as stable a business as selling food -- it's just a matter of getting the logistics right. Deutsche's restructuring plan talks about investing as much as 500 million euros in information technology for its retail business. With that kind of money, a venture like Number26 could probably take over the world. 

Another way to cut costs is, of course, to stop breaking laws. Legal costs halved Deutsche Bank's net income in the first quarter of 2015, and the bank's litigation reserves suggest there is more to come. Shareholders should be more forceful about pushing out managers who allowed the law-breaking to happen, rather then letting them come up with more restructuring plans. Deutsche Bank co-chief executive Anshu Jain headed Deutsche's investment bank when the Libor misbehavior was going on, and now he's scaling back profitability targets and suggesting cost cuts to pay for the wrongdoing.

Upheaval in the banking industry calls for courage and innovation, not reactive cost-cutting and rejection of private customers.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net