British banking: How it broke down and how to rebuild it
I'm old enough to remember how British banking used to be.
I can recall a time long before an exasperated Sir Mervyn King, the governor of the Bank of England, declared: "Of all the many ways of organising banking, the worst is the one we have today."
The puzzle is how once conservative, traditional bank managers changed into people prepared to foist products such as payment protection insurance on to their customers.
PPI started as a good insurance idea - designed to help people with personal loans or mortgages keep up their payments if they lost their jobs or became ill.
But it ended up as one of the most cynically expensive financial products ever to be offered to the British public.
Niels Kröner used to work for management consultants McKinsey. From the mid-1980s, he says, they advised banks how to become more efficient and profitable.
At first, computers were used to automate and centralise data-processing previously carried out in branches. Then decision-making was automated.
That, Mr Kröner says, is when the trouble began, because the result was to distance bankers from their customers.
"It all looked really logical and rational at the time," he says.
"But in hindsight, perhaps, one should have told the banks, 'Beware of the dangers of centralisation,' and rather stick to a business model that more or less works."
With the new systems in place, top bankers started producing financial products, such as PPI, and imposing tough targets on branch staff for selling them.
Former banker Cliff D'Arcy says such systems became pervasive. "The targeting was harsh, severe, relentless," he said.
"Your job was on the line if you didn't sell enough PPI. Cashiers, assistant managers, financial advisers, even the manager - everybody would have a personal and a group target towards selling PPI."
In Cambridge, former NatWest cashier Tim Kierman says a bonus system, running alongside the selling targets, focused staff on selling - and ultimately mis-selling - products such as PPI.
Mr Kierman was sacked by NatWest in 2009 for helping a campaign against high bank penalty charges.
At the time, he was taking home about £1,000 a month - well below the average British wage. So the £200-a-quarter bonus for getting his quota of customers into a room with the branch sales staff - the "customer advisers" - really made a difference.
Failure to meet his target did not only threaten his own bonus. If overall branch targets were not met, branch staff would all suffer financial penalties.
"You have a customer adviser over your shoulder saying, 'Why didn't you get them? Why didn't you say this? Why didn't you do this?" he says.
"You don't want to be having to try to explain how come cashier X can do the job. And you can't do the job."
The same change happened in business banking. The former close relationship between branch managers and business clients was replaced by remote, computerised loan approval systems.
Pressure on front-line staff to sell their business clients profitable financial products also grew.
The extent of the change in Britain is apparent if you go to a place such as Ludwigsburg, a small provincial town in south-west Germany.
It is like entering a banking time-warp.
Germany has its equivalents of British High Street banking giants, but most people in Ludwigsburg use local banks based in the town. The same is true across Germany.
The Ludwigsburg Regional Savings bank has highly computerised, highly centralised back-office systems, shared with local savings banks across Germany.
But that's where the transformation process ended.
Banking in Ludwigsburg is still face-to-face, without targets or bonuses to divert staff from providing local customers - business and personal - with useful financial services.
Stephan Kessler, the head of business lending, says long-term relationships result in good quality lending and lower defaults.
"I always compare it with going to the doctor," Mr Kessler says. "You tear down your pants - and you have to do the same with your banker - you trust in each other."
The advantages of relationship banking are now widely recognised. But with British banking now operating on a far more adversarial model, there are doubts that such banking can be revived in Britain.
Earlier this year, I came across a reason to hope it might.
Handelsbanken sounds German, but in fact it's a Swedish bank, with more than 100 branches in Britain offering traditional relationship banking to personal and business customers.
Andy Copsey, Handelsbanken's UK chief operating officer, has found a hunger in Britain for the basic banking it offers. As a result, he is now opening a new branch every 10 days or so.
"I think our traditional values chime with the UK public and the business people out there," he says. "And that encourages us to continue to open more branches and recruit more staff."
Handelsbanken could hardly be more different from the familiar British banking model.
It has no targets or bonuses. Its branch staff deal with customers face to face and only in their immediate vicinity. Most lending decisions are made locally - by the branch itself.
Most Handelsbanken staff have had careers at one or other of the High Street giants - and all described relief in escaping top-down selling pressure and the chance to be, as one put it, a "proper banker again".
Handelsbanken is not the only alternative model now emerging. A string of new banks is appearing on the High Street.
In addition, so-called peer-to-peer lenders are starting to cut banks out of the picture entirely, using the internet directly to match lenders with borrowers.
I experimented putting £350 of my own money into a peer-to-peer lender and ended up with 35 mini-loans of £10 each.
One borrower I met, Rob Boufee, got his loan at about half the interest rate his bank charged. Providing he and other borrowers repay in line with forecasts, I will end up with a better return.
Peer-to-peer lending is still unregulated and relatively small-scale. But this growing competition gives one of Britain's top regulators, the widely respected director of financial stability, Andy Haldane, hope for the future.
Sometimes the system needs to visibly break, he says, before the process of repairing can begin. Recent scandals, such as the manipulation of Libor - the inter-bank lending rate - may prove the tipping point.
"What we've seen over the course of the last year or two is a much greater energy by the general public into shopping around for their financial services," Mr Haldane says.
"This is manna from heaven. If it comes from customers, it cannot be resisted.
"And banks being forced to compete on their customer proposition is the way in which this problem can solve itself, without the need from regulators like me to start sticking their finger in the pie."
There's a long way to go before British banking is back on course. But with a bit of luck, it could be that we have seen the nadir.
Slowly, and not without difficulty, a form of banking may just emerge which benefits the British economy as a whole, rather than just feeding on it.
The fourth and final programme in the series will broadcast on BBC Radio 4 on Saturday, 25 August at 12:00 BST.