Nov 2008
The death of trust in the banking system

Trust in Financial Markets

The UK financial services sector is the single largest contributor to the UK balance of payments – recent measurement of the sector suggests financial services are now 7% of the economy. Anyone with bank or savings accounts, insurance policies, ISAs, TESSAs, pensions, endowments, bonds, shares, etc, etc, is a customer of the financial services sector in one way or another. This means it includes the majority of the adult UK population – and a few children as well.
In the not so dim and distant past, securing a line of credit or a loan from a financial institution meant an interview with your local Bank Manager. These were often intimidating meetings, and when interest rates, unemployment and inflation were high the answer was often ‘no’. Bank Managers provided a voice of reason.
But higher disposal personal incomes and employment, an increasingly competitive commercial environment, combined with fiscal and taxation changes, fuelled consumerism and personal debt. In fact, Grant Thornton estimated that Britons have now racked up debt that exceeds the entire value of the economy. Not many days go by before I receive yet another cheap loan or credit card offer in the post, and shops are falling over themselves to offer me store cards at 25%+ interest rates every time I make a purchase.
The BBC’s Robert Peston suggests that UK banks had zero dependency on wholesale money markets for lending in 2001. But by 2007 this had grown to £625 billion – a borrowing and debt culture led by the Government and followed by the general public.
So what has happened since 2001? In their attempts to compete and secure market share, banks have forgotten their remit to protect customer money. Staff were provided with incentives to sell financial products, irrespective of the customer’s ability to pay or their need/understanding of the product. Cheap credit and low interest rates encouraged people to spend more and save less. The Internet has created even more opportunities to spend, spend, spend – online shopping, betting, share-trading – with a ‘buy now, pay later’ mentality taking hold of many consumers.

The Credit Crunch

The collapse of the sub-prime market has been attributed to the overindulgence and greed of the financial sector. Governments who gave the sector increased freedom during the late 1990’s are now having to take responsibility for the mess we find ourselves in.
So when over-inflated property prices started to fall, banks realised their exposure to market debts, and the flow of money around the system ceased. The first sign of this in the UK was the collapse of Northern Rock. Customers lost trust in the bank and in the safety of their investments, and the Government stepped in to secure confidence.
Since then we have seen semi ‘nationalisation’ of other banks, and the almost complete collapse of the Icelandic national economy.
When a company’s incompetence or greed becomes apparent, customers invariably react negatively towards them. If this isn’t short-lived then it will often drive the company into insolvency (like Lehman’s) or seek security in the arms of a buyer (like Merrill Lynch to Bank of America).
Now we find ourselves in a gridlock situation, where banks continue to restrict the supply of money and credit to each other and to consumers. The financial bail-out has transferred risk from the shareholder to the taxpayer, with more onerous repayment expectations. In consequence, almost overnight, mortgage offers have gone from 125% to 80% loan to value. Interest rate cuts are not being passed on. It’s a harsher regime, with a ‘one-size-fits all’ and far less personal approach than the old Bank Manager interview.

One-way Traffic?

So, this is all doom and gloom? We are in a recession, unemployment is rising, repossessions on the increase, and lines of credit are being cut off to businesses.
In one respect this is GOOD! Many people have been living beyond their means, and this sense check is good for the economy. The age of consumerism is coming to an end, we do not need 15 TV sets around the house, for example, and we must all reduce the wastefulness of modern living.
But how does the economy and the financial services sector get back on track? The one-word answer is
As consumers and businesses we need to show financial institutions that we are trustworthy by demonstrating our ability to repay. Credit costs outside of mortgages should be higher to slow the national spend culture.
But it isn’t just one-way traffic. Institutions need to show they are operating in a trustworthy manner. The obscene bonuses of the last 20 years must be eradicated, and a prudent fiscal management programme implemented. Banks should return to financial guardianship of our lives and money and reign in their sales tactics. A return to ‘bank manager’ relationships, and more scrutiny of repayment ability, would be welcomed by many.

What is Trust?

Trust is a feeling of confidence, often backed up by evidence of consistent performance and of keeping promises.
In an uncertain, unstable market, trust is often something that shines out as a competitive advantage. In 2003 I illustrated this point by taking Michael Porter's Value Chain Model and producing a Trust-focused Value Chain. In this model all aspects of marketing and business activities go into developing trust. It is no coincidence that trust occupies the 'profit' portion of Porter's model, because being trustworthy is profitable!

The Trust Focused Value Chain (Poole, 2003)

One measurable element of trust is the number of advocates your brand or business has. Advocates are customers who recommend you to others, who sing your praises and remain loyal despite minor set-backs.
The Trust Focused Value Chain shows that trust is not just related to front-line staff, it involves many back-room operations and the overall culture of the business. If senior management are rewarding short-term sales targets at the expense of sound financial risk management, the corporate culture will not generate respect or trust from customers.
Employees and other stakeholders need to be involved, and need to believe in the trust-building culture. Consumers are incredibly attuned to falsity and will exercise their choice by moving their business. Abbey and HSBC have benefited from their more restrained financial lending policies – savings and mortgages have flooded to their doors.
Shareholders are often rewarded for short-termism which in itself creates swings in the stock market. Just look at trading on most Friday’s or just before a bank holiday – anything that worries a stockbroker is sold. The bottom line is that they no longer trust the company and its management.

The Future

OK, so the UK is now officially in recession – so what? We’ve been here before, and we are probably in a stronger position than before. We need strong leadership from Government and business leaders, and a targeted approach to rebuild the economy. You can do your bit by trading freely with people and businesses you trust, and creating a culture of responsibility and trust within your own organisation.
Corporate Social Responsibility (CSR) programmes are a way to build trust – but only if they are perceived to be truly free of marketing spin and corporate ego. There needs to be real commitment and a formal strategic approach embedded into the corporate culture.
Most businesses are hurting, and this is likely to continue for some time. The general public are hurting, as house prices continue to slide, unemployment looms for many vulnerable workers and general living costs remain high.
The end of consumerism means some businesses will die if they fail to deliver what the public need, but this is just the law of the jungle. Consumerism is unsustainable over the long-term, and a new breed of trustworthy and ethical marketers and entrepreneurs are needed to drive economies forward.
To get out of this downturn, we all need to take responsibility, we all need to become trustworthy, and we need to trade with people who can demonstrate that they are worthy of our trust and business. This is a time of a new beginning for the economy, but one in which we return to some old fashioned values. It needs every one of us to succeed, including those in power – in business; local, national and international Government.
The revolution needs to start today. Are you on board?