What can America learn from Europe? The Digital Generation is upon us, and bancassurance, which seemed like a United Kingdom 90s footnote is re-emerging.
In the UK bancassurance was heralded as the “next revolution in finance”. I first heard of it around 1996 when, ironically, it began fading out to roundabout nothing. In the US on the other hand, little at all is known about bancassurance. This is because it was legally prohibited until recently due to the Glass-Steagall Act of 1933. Glass-Steagall prevented US banks entering into business with a company which provided another type of speculative banking.
The legislation, signed off by Roosevelt, effectively separated commercial banking and investment banking.
In a 2009 opinion piece, Joseph E. Stiglitz, winner of a Nobel Prize in economics, blamed the recent financial crisis on partial repeal of the act, alongside other workarounds. The Dodd-Frank reform bill signed into effect by Barack Obama in 2010 includes the Volcker Rule, named after former Federal Reserve chairman Paul Volcker, which attempts to take banks to the humdrum days of old, when banking was black-suited, toneless and there was not a fintech in sight. President Trump, of course, is prepared to do a number on the Dodd-Frank bill, accusing it, despite its conservative flavour, of still encouraging risky behavior. A variant ex-Fed chairman Ben Bernanke says elimination of Dodd-Frank provisions would be a major mistake.
“Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money — people who can take bigger risks in order to get bigger returns.” Joseph E. Stiglitz
Speculative investment may seem from the public point of view a risky venture, but from a financial perspective liquidity and high returns are part and parcel of effective policy. A stalwart of high growth, China, ever the model to follow, recently allowed banks to buy insurers, stimulating bancassurance. Whilst it is either a dim memory in the UK, or a nonentity in the US, in Europe bancassurance remains an effective means of provisioning customers in need of insurance.
EUROPE LEADS THE WAY:
The Big Banc first exploded in Europe, and it seems self-sustaining.
“Despite the onslaught of financial regulation that European banks have endured since the financial crisis, the region still leads the way for bancassurance in terms of global market share. Life insurance and long-term saving products have historically dominated European bancassurance, although non-life products have become more attractive and easier to mediate in recent years.”
Bancassurance has its natural home in France and Spain, where the public are culturally accustomed to buying insurance from banks. Insurance companies like AXA find the relationship incredibly beneficial.
In the 1990s bancassurance was driven by high financial content products (indexed and unit-linked policies) which were easy to sell during a time of growth, especially with the sudden expanded Internet usage. Today there is a move towards mass-market clients, and analytics-driven technology and RPA alongside the prospect of open banking expands the potential to new grounds.
Provisions – From EU to BASEL III
When universal banking provision was integrated into EU 1992 banking legislation, a model was promoted which allowed investment to gets it teeth into fare which had traditionally been the hunting grounds of Germany and Switzerland. Other countries like Spain, Belgium and France have had integrated services since the 1800s, though only recently did the uninitiated realize the existence of such a complementary service.
The reality is that the Wall Street model is essentially replicating the bancassurance blueprint that has existed in Europe for decades.
Access to allfinanz at a bank's backbone means that banking staff have more products to offer clients, which increases staff productivity and overall efficiency. The main core of profitability for banks has been savings held as deposits for clients. By entering the life insurance business, the banks have found a new way to offset some of their losses. As a consequence there are created synergies, cost savings, customer retention, revenue diversification, the better utilization of resources, the building of brand equity and more.
Whilst banks run on a five-year cycle compared to insurance's fifty-year cycle, and insurers raise eyebrows at the margins expected by bankers, the tightening of both purse strings and belts by frameworks like Basel III necessitates new channels for maintaining profits and liquidity.
Who takes the blame?
But wasn't it just such instruments that were the downfall of banking in the 2008 financial crash? The financial innovation inherent in the alphabet soup of CDOs and ABSs and CLNs (collateralised debt obligations, asset-backed securities and credit-linked notes) underwritten by CDS (credit default swaps) appeared to be unsustainable, at least as part of the tale which was told. But the number-crunching technology of risk measurement has improved dramatically and advanced analytics, AI and ML are now offering new assurances. Sharing warm leads via new distribution channels and agreements offers new hope.
Allfinanz was an integral part of the great German stronghold which allowed large industrial businesses to be propped up by financial institutions. The hausbank system, where a corporation relied on its “house bank” as primary financial supplier, allowed such companies to be buttressed; and in addition the Hausbank always had the possibility of converting a collapsing firm's debt into equity and taking control - probably restructuring or selling. Deutsche Bank under this system held a quarter of Daimler's equity. By ensuring bonds/stocks and merger/acquisition transactions are provided by the same facility that gives credit facilities, a hand-in-glove arrangement allowed financial managers to sit pretty and feel completely secure. Capital market services and credit facilities together was a match made in heaven.
Join us in Berlin as we remind ourselves what the US can learn from Europe.
Bancassurance in Europe: Past, Present and Future, Ornella Ricci 2011
Bancassurance, N. Genetay, P. Molyneux 1998
Failure of Wall Street: How and Why Wall Street Fails - And What Can Be Done About It, The, Eric Banks, 2004
Universal Banking in the United States: What Could We Gain? What Could We Lose? Anthony Saunders & Ingo Walter, 1993