Banks gambling with our money

At least that’s what Mervyn King, governor of the Bank of England, seems to think according to today’s Times. More particularly he’s concerned that the top executives at said banks are using other people’s money to do it. So the bail-out the other week should be seen as an offer of breathing space and time to put financial houses back in order rather than license to continue as before.

In other words there will be no return to the good old days. Anyone thinking the current tightening was going to be short term was kidding themselves.

It might be a surprise to hear that I believe this is a positive move. I’ve said a number of times in this blog that we need to stop living on borrowed money and actually earn and save something. This is going to happen now because people – and by extension the mass of people that is the economy – won’t have the choice.

The problem is going to be that a number of small businesses tend to survive on other people’s credit. Would the likes of Amazon really be as big if it didn’t have the facility to order items on a credit card with one click? Personally I think not. This isn’t to blame online retailers for people losing control of their willpower and buying stuff they can’t afford, that’s down to the individual, but facilities like one-click make it very easy to do.

The challenge is going to be for retail businesses to restructure themselves so that they’re less dependent on people’s plastic. This is going to mean lower turnover, which in turn will need to attract more margin to keep a business running.

There are industries in which this will be possible. People will pay a premium for goods if there is genuine value in the form of services to be had. They don’t mind paying a fair price if they can understand why. Companies like Richer Sounds never compete with Internet companies because they know people will pay the money to keep them in business for next time they need advice from a human.

The difficulty is going to be in the commoditised markets. You can add value to a sound system in a way that can never apply to, say, a book. These are absolute commodities and will sell on price alone. How you keep that sort of product profitable in an environment in which people don’t want to use credit is beyond me.

Guy Clapperton is a freelance journalist who specialises in small business issues and has written for the likes of The Guardian, the FT and the Daily Mirror. Guy has written about finance and franchising for SmallBizPod. http://www.guyclapperton.co.uk