Credibility Crunch
Credibility Crunch
Governments around the world have taken drastic action to shore up the financial credibility on which banks depend, but this will have only have a marginal effect on the reputation of individual banks and the banking sector as a whole.
With intervention, Governments have assumed the credibility from the banks.....can Governments successfully transfer that credibility back to the market and how long will that take?
Governments themselves are not without responsibility for the Credit Crunch. For example the Community Reinvestment Act 1977 required banks to meet the credit needs of the "entire community". It became against the law not to lend. There was therefore more lending to those least able to repay. Fannie Mae and Freddie Mac (US Government sponsored mortgage giants) were encouraged to guarantee a wider range of loans in 1990's. Homeownership increased, more buyers drove prices up, making loans less affordable to the poor and 'requiring' even slacker lending standards.... Seeds were sown and banks looked to offload these assets quickly.
And of course we, the customers, are part of the equation too. Globally there are very different credit cultures: Japan's 125 year mortgages, Germany's absence of a house buying culture and general credit adverse nature (they insisted on the 500 Euro note!); Nordic countries strict bankruptcy laws (for life); America's no stigma to fail culture ; UK predominance of Credit Cards (125 Million Cards for 60 Million people vs Germany's 15 Million cards for 80 Million people)... And then we have Islamic Finance under which interest may not be charged. What is common is the lack of basic financial awareness among many banking customers internationally.
Banks - more than most rely on a reputation for probity and integrity. Credit is derived from 'credere' - to trust. Who would hand over their money to someone they did not trust? or trust to make a positive return? One strategy that will rebuild trust in the banking sector will be increased regulation by governments and international bodies.
However this alone is unlikely to be enough and banks may prefer to mitigate more draconian legislation by taking proactive action to rebuild credibility themselves, and thus, aid the process of transferring the temporary and artificially up-held credibility back to where it belongs.....with the market and the banks.
This paper explores ways in which others have responded to their own credibility crunch and how banks may be able to employ similar strategies and how those strategies might be implemented.
Pro Cycling - a cautionary tale
Just before the start of the Tour De France in 1998, an employee of the Festina Team was stopped on the border between France and Belgium. His car was found to be loaded with medical products that could be used to enhance the performance of athletes.
Up to that point riders, teams, sponsors, media, regulators, fans, governments and society at large had effectively condoned doping, by turning a blind eye to its practice. It was well known that past champions had used amphetamines and other stimulants to keep going and there was a tacit acceptance of this.
This acceptance of what they all knew to be wrong was protected by an ‘omerta’, a code of silence. That remained largely intact until the police intervened in July 1998.
Something had changed in the expectations of society. Whereas before July 1998 doping was an acceptable price that all involved were willing to pay, not only for success, but just to be at the table, after July 1998 it became increasingly unacceptable. Since July 1998 Pro Cycling has been in a protracted and damaging battle for credibility with fans, sponsors, the media, the authorities and society.
To begin with many teams were in denial that they had a problem. There was a little window dressing and a tightening of the code of silence, but for most it was business as usual.
With aching, painful slowness it has begun to dawn on most of the players that there will be no return to business as usual, that change has already happened. That they are no longer in the driving seat and they have quite some catching up to do.
What has changed is the expectations of society and once society’s expectations have changed there is no going back. Pro Cycling's resistance to change has made the process of change far longer and far more painful than it need have been.
Over the last few years we have seen the emergence of a new breed of cyclist and a new breed of team. Cyclists who wear their integrity with pride, support anti doping initiatives and openly condemn fellow riders who are caught cheating. Teams too have stepped up. There has been an emergence of explicitly clean teams who use transparent, independent oversight to ensure their credibility. There has also been a wave of emotional admissions of riders and ex-riders coming clean about their past.
The lesson for Banks
What went wrong for cycling was that they did not spot the changing standards that were expected of them until it was too late. This is analogous to the situation with banking; the credibility created by past greatness and achievement was slowly emptied without "filling the bottle". While everything was going well no one really questioned the culture of internal behaviour of banks - apart from the occasional “Fat Cat” headline and accompanying ineffectual murmuring of politicians.
Following the credit crunch the fat cat is firmly out of the bag and it will not go conveniently back into it. Societies expectations of banks have changed and they will not change back. There will be no return to “normal”.
What has made the credibility crisis in cycling longer and far more painful than it need have been, was the denial that there was even a problem to start with, and the sheer front with which teams and riders tried to return to normal. Those who saw the change as positive were outraged. A far more effective strategy would have been contrition, engagement with stakeholders and a transparent and explicit strategy for change. The crisis could have been over in 2 years instead of continuing after 10.
In the end what is finally making the difference for cycling is the cultural change of teams and riders. While banks, to a greater or lesser degree, understand and realize that they have a problem. And that this problem is self-inflicted. The path to recovery is far more uncertain and far more perilous. Their opportunity also lies in cultural innovation, to a way of being that is more in keeping with the morals and standards of today’s society. Because it is society which ultimately decides whether an industry, sector or individual institution is credible or not.
Moral movement
The morals and ethics of our society are not constant, they trend in a generally socially liberal direction (this is not the same as financially liberal). What was once acceptable is no longer acceptable; slavery, child labour, racism, homophobia for example. As more and more people are better educated this trend is accelerating.
Other sectors have been caught out by this moral movement. Many clothing companies have been caught out by the shift from cheap goods at any price to cheap goods as long as it does not involve child labour. Animal testing, fur farming, battery farming of chickens, excessive pesticide use, genetic modification of food, pollution of rivers, nuclear energy are all areas where whole sectors have been caught out by changes in the moral landscape of our society.
For the banking industry the moral shift we are seeing is away from profit at any price towards profit without gambling, profit without exploitation and profit with transparency.
The opportunity for Banks
As is often the case in these shifts there is a huge advantage for the first movers. The ones who proactively take the risk of doing something new and different. Except of course that in this situation the risk of doing something new and different is a far smaller risk than the risk of remaining in denial, not doing anything and just hoping it will all go away.
The first Banks to publicly acknowledge that there are things to learn and there might be better ways to be will have an advantage. The first banks to take steps towards transparency, integrity and authenticity will have an advantage. Banks that don’t move fast enough will be playing catch up for a very long time.
Authentic Banks
Authentic businesses are those which generate their profits through the pursuit of a profound and positive purpose. In the research for my book Authentic Business I came to the conclusion that authentic businesses spend, on average, up to 80% less on motivating people, both customers and staff, than other businesses. Authentic businesses also have impeccable credibility.
Authentic Banks exist - Zopa, Triodos and Grameen banks for example, but these are tiny players on the very margins of banking. The opportunity exists for a group of banking executives to embark on the authentic transformation of their bank.
To some extent this was trialled, with great success, by ANZ Bank in Australia. A few years ago they found themselves the least popular employer in Australia. They discovered that their unpopularity stemmed from same kind of moral movement. People were wanting their employers (and their banks) to stand for something they believed in.
ANZ performed a bottom up values led transformation and tripled their share price and became on of the most popular employers in Australia.
Values led transformation is powerful, but not as powerful as a purpose led transformation, which includes values as well. Bottom up transformation is nearly always more powerful than top down.
The opportunity lies in identifying the core motivations of a wide cross section of staff and using that core motivation to articulate the purpose of the bank. The purpose statement must inspire employees and deliver on established corporate objectives as well as delivering value for the wider community.
For example the opportunity exists for a mainstream bank to claim the "social role of banking" position. If money is the lubricant of our society then banks are the oil pumps (if you can forgive such a mechanical analogy). Credit Cards, loans, mortgages, savings accounts all have a vital social role as long as they are applied with wisdom.
Another available slot is for a bank position itself as a "financial coach", although it would be vital to do it without being perceived as either patronising or manipulative?
Imagine a bank providing free and unbiased education about finance with branding - but without any selling. This education could take numerous forms - the most obvious would be to ensure that all communication was clear, unbiased and easily understandable.
In this way the bank becomes a platform for employees to achieve something that they already believe in passionately. The requirement to motivate staff is turned on it’s head as they become fully engaged with the business.
Once the purpose is clear the project becomes one of identifying obstacles to it’s achievement and removing them. Once a team or business have a shared sense of purpose they are extremely motivated and quickly form teams to remove these obstacles. As the obstacles are removed the business becomes more and more authentic. The staff become more passionate and the customers more engaged.
Neil Crofts
Credibility Crunch - To learn more about this author, visit Neil Crofts's Website.
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Banking is not the first industry or sector to face a credibility crisis. Nor is it the first to nearly self-destruct, due to significant down prioritizing of the very thing that makes it strong; It is the scale of the consequences that make the credibility of banks so significant. However there is still much to learn from other credibility crises and how the players have responded.
Governments around the world have taken drastic action to shore up the financial credibility on which banks depend, but this will have only have a marginal effect on the reputation of individual banks and the banking sector as a whole.
With intervention, Governments have assumed the credibility from the banks.....can Governments successfully transfer that credibility back to the market and how long will that take?
Governments themselves are not without responsibility for the Credit Crunch. For example the Community Reinvestment Act 1977 required banks to meet the credit needs of the "entire community". It became against the law not to lend. There was therefore more lending to those least able to repay. Fannie Mae and Freddie Mac (US Government sponsored mortgage giants) were encouraged to guarantee a wider range of loans in 1990's. Homeownership increased, more buyers drove prices up, making loans less affordable to the poor and 'requiring' even slacker lending standards.... Seeds were sown and banks looked to offload these assets quickly.
And of course we, the customers, are part of the equation too. Globally there are very different credit cultures: Japan's 125 year mortgages, Germany's absence of a house buying culture and general credit adverse nature (they insisted on the 500 Euro note!); Nordic countries strict bankruptcy laws (for life); America's no stigma to fail culture ; UK predominance of Credit Cards (125 Million Cards for 60 Million people vs Germany's 15 Million cards for 80 Million people)... And then we have Islamic Finance under which interest may not be charged. What is common is the lack of basic financial awareness among many banking customers internationally.
Banks - more than most rely on a reputation for probity and integrity. Credit is derived from 'credere' - to trust. Who would hand over their money to someone they did not trust? or trust to make a positive return? One strategy that will rebuild trust in the banking sector will be increased regulation by governments and international bodies.
However this alone is unlikely to be enough and banks may prefer to mitigate more draconian legislation by taking proactive action to rebuild credibility themselves, and thus, aid the process of transferring the temporary and artificially up-held credibility back to where it belongs.....with the market and the banks.
This paper explores ways in which others have responded to their own credibility crunch and how banks may be able to employ similar strategies and how those strategies might be implemented.
Pro Cycling - a cautionary tale
Just before the start of the Tour De France in 1998, an employee of the Festina Team was stopped on the border between France and Belgium. His car was found to be loaded with medical products that could be used to enhance the performance of athletes.
Up to that point riders, teams, sponsors, media, regulators, fans, governments and society at large had effectively condoned doping, by turning a blind eye to its practice. It was well known that past champions had used amphetamines and other stimulants to keep going and there was a tacit acceptance of this.
This acceptance of what they all knew to be wrong was protected by an ‘omerta’, a code of silence. That remained largely intact until the police intervened in July 1998.
Something had changed in the expectations of society. Whereas before July 1998 doping was an acceptable price that all involved were willing to pay, not only for success, but just to be at the table, after July 1998 it became increasingly unacceptable. Since July 1998 Pro Cycling has been in a protracted and damaging battle for credibility with fans, sponsors, the media, the authorities and society.
To begin with many teams were in denial that they had a problem. There was a little window dressing and a tightening of the code of silence, but for most it was business as usual.
With aching, painful slowness it has begun to dawn on most of the players that there will be no return to business as usual, that change has already happened. That they are no longer in the driving seat and they have quite some catching up to do.
What has changed is the expectations of society and once society’s expectations have changed there is no going back. Pro Cycling's resistance to change has made the process of change far longer and far more painful than it need have been.
Over the last few years we have seen the emergence of a new breed of cyclist and a new breed of team. Cyclists who wear their integrity with pride, support anti doping initiatives and openly condemn fellow riders who are caught cheating. Teams too have stepped up. There has been an emergence of explicitly clean teams who use transparent, independent oversight to ensure their credibility. There has also been a wave of emotional admissions of riders and ex-riders coming clean about their past.
The lesson for Banks
What went wrong for cycling was that they did not spot the changing standards that were expected of them until it was too late. This is analogous to the situation with banking; the credibility created by past greatness and achievement was slowly emptied without "filling the bottle". While everything was going well no one really questioned the culture of internal behaviour of banks - apart from the occasional “Fat Cat” headline and accompanying ineffectual murmuring of politicians.
Following the credit crunch the fat cat is firmly out of the bag and it will not go conveniently back into it. Societies expectations of banks have changed and they will not change back. There will be no return to “normal”.
What has made the credibility crisis in cycling longer and far more painful than it need have been, was the denial that there was even a problem to start with, and the sheer front with which teams and riders tried to return to normal. Those who saw the change as positive were outraged. A far more effective strategy would have been contrition, engagement with stakeholders and a transparent and explicit strategy for change. The crisis could have been over in 2 years instead of continuing after 10.
In the end what is finally making the difference for cycling is the cultural change of teams and riders. While banks, to a greater or lesser degree, understand and realize that they have a problem. And that this problem is self-inflicted. The path to recovery is far more uncertain and far more perilous. Their opportunity also lies in cultural innovation, to a way of being that is more in keeping with the morals and standards of today’s society. Because it is society which ultimately decides whether an industry, sector or individual institution is credible or not.
Moral movement
The morals and ethics of our society are not constant, they trend in a generally socially liberal direction (this is not the same as financially liberal). What was once acceptable is no longer acceptable; slavery, child labour, racism, homophobia for example. As more and more people are better educated this trend is accelerating.
Other sectors have been caught out by this moral movement. Many clothing companies have been caught out by the shift from cheap goods at any price to cheap goods as long as it does not involve child labour. Animal testing, fur farming, battery farming of chickens, excessive pesticide use, genetic modification of food, pollution of rivers, nuclear energy are all areas where whole sectors have been caught out by changes in the moral landscape of our society.
For the banking industry the moral shift we are seeing is away from profit at any price towards profit without gambling, profit without exploitation and profit with transparency.
The opportunity for Banks
As is often the case in these shifts there is a huge advantage for the first movers. The ones who proactively take the risk of doing something new and different. Except of course that in this situation the risk of doing something new and different is a far smaller risk than the risk of remaining in denial, not doing anything and just hoping it will all go away.
The first Banks to publicly acknowledge that there are things to learn and there might be better ways to be will have an advantage. The first banks to take steps towards transparency, integrity and authenticity will have an advantage. Banks that don’t move fast enough will be playing catch up for a very long time.
Authentic Banks
Authentic businesses are those which generate their profits through the pursuit of a profound and positive purpose. In the research for my book Authentic Business I came to the conclusion that authentic businesses spend, on average, up to 80% less on motivating people, both customers and staff, than other businesses. Authentic businesses also have impeccable credibility.
Authentic Banks exist - Zopa, Triodos and Grameen banks for example, but these are tiny players on the very margins of banking. The opportunity exists for a group of banking executives to embark on the authentic transformation of their bank.
To some extent this was trialled, with great success, by ANZ Bank in Australia. A few years ago they found themselves the least popular employer in Australia. They discovered that their unpopularity stemmed from same kind of moral movement. People were wanting their employers (and their banks) to stand for something they believed in.
ANZ performed a bottom up values led transformation and tripled their share price and became on of the most popular employers in Australia.
Values led transformation is powerful, but not as powerful as a purpose led transformation, which includes values as well. Bottom up transformation is nearly always more powerful than top down.
The opportunity lies in identifying the core motivations of a wide cross section of staff and using that core motivation to articulate the purpose of the bank. The purpose statement must inspire employees and deliver on established corporate objectives as well as delivering value for the wider community.
For example the opportunity exists for a mainstream bank to claim the "social role of banking" position. If money is the lubricant of our society then banks are the oil pumps (if you can forgive such a mechanical analogy). Credit Cards, loans, mortgages, savings accounts all have a vital social role as long as they are applied with wisdom.
Another available slot is for a bank position itself as a "financial coach", although it would be vital to do it without being perceived as either patronising or manipulative?
Imagine a bank providing free and unbiased education about finance with branding - but without any selling. This education could take numerous forms - the most obvious would be to ensure that all communication was clear, unbiased and easily understandable.
In this way the bank becomes a platform for employees to achieve something that they already believe in passionately. The requirement to motivate staff is turned on it’s head as they become fully engaged with the business.
Once the purpose is clear the project becomes one of identifying obstacles to it’s achievement and removing them. Once a team or business have a shared sense of purpose they are extremely motivated and quickly form teams to remove these obstacles. As the obstacles are removed the business becomes more and more authentic. The staff become more passionate and the customers more engaged.
Neil Crofts
Credibility Crunch - To learn more about this author, visit Neil Crofts's Website.
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