13 Oct 2016
Wells, long the poster child for banks globally in terms of the share it held of its customers’ wallets, was found to have faked some of that success. The sins were troubling on many levels: fake accounts were created, unjustified bonuses paid and then, when the long-running scam was revealed, thousands were sacked – but until Stumpf, no one at the top had gone.
" [Bank] models are successful in profitability terms but are they as successful in engendering trust?"
Steve Worthington, Professor, Swinburne Business School
Brad Sherman, a Democratic congressman from California, was blunt about Wells and the fate of the staff sacked for creating fake accounts: Wells, he said “created a system where they hired good Americans and turned 5,300 of them into felons”.
There are clearly lessons here for governance, reminders that when something seems too good to be true – Wells’ phenomenal product-per-customer numbers – it probably isn’t. Bonuses and remuneration were emphasising the wrong behaviours, sales rather than services.
Critical for the banking industry – and many others – though is the challenge of rewarding employees for doing the right thing for customers. In the recent parliamentary inquiry into banking in Australia, the bank bosses were adamant their success relies on customer service.
Wells Fargo positioned itself as a leader in ‘cross-selling’ financial services and reportedly had an internal goal to achieve at least eight financial services products per customer; promoted as the ‘Gr-eight initiative’. Customer facing employees were rewarded if they made their sales targets and were punished if they did not.
This created a situation where employees were ‘gaming’ the compensation system, opening up over two million unauthorised deposit and credit card accounts. Management gurus like to say “what gets measured, gets done” but management practitioners will also know “what gets measured, gets gamed”.
Regulators in Australia have also become concerned employee sales incentives are harming the integrity of the whole financial industry. As a result of this pressure the Australian Bankers Association is conducting an independent review of product sales commissions and product based payments that could lead to poor customer outcomes.
But is it possible to structure staff rewards in a way that avoids gaming and promotes positive outcomes? What alternative banking models exist that we can learn from about gaining and sustaining the trust of customers and how can mutually beneficial services – for both customers and employees -cross -selling of financial products be achieved?
One possible model is Handelsbanken.
Originating in Sweden, Handelsbanken is a full-service bank, serving both private and corporate customers. Founded in 1871, it now has around 850 branches in what it regards as its ‘home’ countries of Sweden, the United Kingdom, Denmark, Finland, Norway and the Netherlands.
Handelsbanken’s culture is based on having a long-term perspective and stability and this permeates the whole bank, particularly as regards relationships with customers and employees.
The business model is both local and digital and decentralised: all contacts with customers are between the customer and the branch, regardless of how the customer wishes to meet the bank, whether the customer prefers face-to-face or digital interaction.
This decentralised model, with a large degree of local autonomy, creates satisfied customers and enables better risk assessment because of local knowledge. It also gives employees a greater sense of responsibility and the ability to make their own decisions on customer requests.
Handlesbanken’s goal is to have higher profitability than the average of the peer banks in its ‘home’ markets. This goal is mainly achieved by having more satisfied customers and lower costs than those of its competitors.
To enable being close to their customers Handlesbanken is organised geographically and this achieves a distinct local presence in all the markets where it operates. Branch managers have a very high degree of independence and all income and expenditure within the branch’s area of operation are allocated to the branch.
Managers are autonomous and they staff and organise their branches according to the business the bank chooses to do in its local market. In most cases, branch managers live in the locality and they are involved in the community in which he or she works.
Handelsbanken refers to its ‘church spire principle’ which implies the area that can be viewed by the branch manager from the top of the church tower is the branch’s local market. Branch managers are given the authority to make all decisions regarding pricing, hiring and marketing.
There are no national marketing campaigns, no head office edicts on sales targets and no call centres to put you on hold. Customer-facing employees are not paid variable remuneration, either in the form of bonuses or commissions, and hence they have no financial incentive to convince the customer a certain service or product suits them best.
Each customer’s unique requirements are the governing factor in the relationship that they have with the bank.
So could the Handelsbanken’s model work more widely? In Australia some argue the big four banks appear on the surface to be competitive but in reality they all operate with similar business models.
These models are successful in profitability terms but are they as successful in engendering trust and customer/employee satisfaction?
The reality is it is difficult to know whether a Handelsbank model would work outside Scandinavia, there are real cultural, regulatory and market differences.
But one of the challenges for Australia is the oligopoly makes it difficult for radically different models to break in. We have seen some: ING Bank in Australia is digital only; Bendigo and Adelaide Bank has a community ownership structure; mortgage specialists have come and gone.
But currently the so-called Four Pillars are not allowed to merge with each other and no foreign bank can enter the Australian market by taking over one of the Big Four. So maybe what is needed to create the opportunity for radically different models is the dismantling of the Four Pillars?
Many banks globally have used Wells Fargo as a benchmark, it has long been an aspirational model. Maybe now banks like Handelsbanken should be held up?
Steve Worthington is a Professor at Swinburne Business School
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
13 Oct 2016
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