Big Four Banks' Zero-Sum Problem...

Christopher Joye

In the AFR today I wax lyrical about what I think might be the big four banks' zero-sum, as opposed to positive-sum, game problem; the merits of putting their clients' interests first and being long-term greedy; the problems associated with business model complexity; and introduce readers to my mate "Noddy" (click on that link to read for free or AFR subs can use the direct link here). Excerpt below:

"Another constant across these experiences is that they are all rather "zero-sum", transactionally-orientated product exchanges. The more brokerage, interest and fees I pay, or the lower the return I receive, the more money the bank makes. Individuals tend to be siloed within business units and financially motivated to maximise the revenues they can garner from clients via the products they purvey. So irrespective of whether they are selling deposits, loans, bonds or shares, your value to the bank is determined by the volume of transactions you execute with it. There is little coordination and cross-selling across these divisions with most folks consumed by the day-to-day rigmarole of promoting their wares. From a customer perspective, this means truly whole-of-bank relationships are relatively rare: one increasingly uses different banks for different products predicated on access and price rather than qualitative characteristics like quality, service and an understanding of what is in your and/or your business's best interests. For years I took this as a given until I came across a guy called "Noddy". From the get-go it was immediately obvious Noddy was unique, although initially his precise point of distinction was unclear. Early on I thought it was just that Noddy was an unusually affable guy. We are friends and regularly shoot the breeze. I would occasionally meander into an opportunity or challenge I was ruminating on, voicing this with Noddy as a buddy, not a banker. Without fail Noddy would reflexively suggest a tractable solution. On some occasions it would work the other way around, with Noddy calling me to propose an idea I had never considered. A meeting would be arranged with a bunch of folks I had not met before from independent business units, with Noddy acting as conductor, coordinating what would otherwise be discordant capabilities into a more harmonious symphony. Before I knew it, I was engaged with seven or eight areas that were wittingly or unwittingly working as one to help me achieve my goals. As a result, the relationship has evolved from one-off product exchanges to a deeper strategic partnership, which would ordinarily be oxymoronic when thinking about interfacing with a bank. Reflecting on how this happened it occurred to me that Noddy's unique but elegantly simple starting point is always, "How can I increase the value of my client's business?". His edge is that he is not just obsessing about maximising the value of my transactions in the name of optimising his year-end bonus irrespective of whether that is good or bad for my business. If you are an oligopolist with a structural leverage and return on equity advantage over your smaller peers, it's easy to become a myopic product flogger disconnected from the impact of that service on your client's long-term welfare. It's much harder to subordinate these short-term gains to contemplate what is actually in your client's best interests, which is precisely why the big banks eagerly supported the Coalition's proposal to water down the best interests duty in the Future of Financial Advice laws, which we thankfully rolled. It is arguably no less difficult empathetically, stepping into your client's shoes and trying to view the world as they do to imagine the suite of future services that give them the best chance of succeeding, and, importantly, those that do not. The potential for conflicts of interest within banks are amplified by organisational complexity and remuneration models that overemphasise returns on equity irrespective of the risks taken to achieve those outcomes. It is much harder to manage, monitor and supervise a $100 billion global bank with a zillion different activities than a narrow, regional deposit-taker that concentrates on savings and loans in a single jurisdiction." Read full article at AFR here.


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