UK: Lessons of a great delusion - beleaguered financial services fail to deliver promise.

UK: Lessons of a great delusion - beleaguered financial services fail to deliver promise. - How did anyone believe, asks Robert Heller, that financial services were a cutting edge?

Last Updated: 31 Aug 2010

How did anyone believe, asks Robert Heller, that financial services were a cutting edge?

Self-delusion has loomed large at many points in Britain's post-war economic history - but never more embarrassingly than in the euphoria over financial services. The Thatcherite assault was to be led by those de-regulated, unified, incentivised forces, a kind of Revolutionary Guard. In the event, with Iraq-like disaster, the forces fell apart - not before a formidable foe, but an internal enemy: bad management.

Whether you look at clearing banks shovelling enormous loans into Robert Maxwell's maw, or insurance companies plunging head over heels into mortgage insurance, or merchant banks encouraging clients into record-breaking deals that broke their backs, or auditors missing millions, the picture is the same - rotten judgment compounded by inept, sometimes illegal execution, and all excused only on the wholly irrelevant grounds that everyone else was doing likewise.

True, the American Express flops in investment banking and with its Optima card are just as appalling. True, it was a Swiss bank that handed £53 million over to Maxwell before receiving the collateral - and a French bank that lent to the monster most heavily in unsecured form. True, the foreign banks buying into London make pig's ears out of silk pursues as efficiently (or inefficiently) as the locals. But Britain, it is clear, need bend the knee to nobody when it comes to doing badly what should never be done - and doing none too well what must be done.

Eddie Hutchinson and Alan Melkman of Marketing Dynamics cast a most perceptive light on the latter point with an analysis of the customer relationship. In any business, they say, this passes through four stages: courtship, engagement, honeymoon and wedlock.

The high street banks believe that their customers are wedded and bedded. So they barrage them with offers of new "products" or services - many no doubt loss-making, if anybody's counting - on the assumption that the wedded bliss will rub off on the other offerings.

But as Melkman and Hutchinson point out, the premise, is false: customers are wedded to the banks, not by love, but habit. Listening to bank customers recounting their latest horror stories is like hearing Northern Line commuters give tongue. Mishandled transactions, ridiculous charge for "unauthorised overdrafts", grotesque imports on translating foreign cheques into sterling, and appalling delays in money transfers are run of the mill: deep in the electronic age Visa payments have to be sent seven days in advance to avoid heavy interest charges. Why?

Beyond the everyday lies the emotive issue of financing the everyday business. The average small businessman must boggle at the sight of the banks lining up to lavish loans on Maxwell private companies while (as a litany of anguished complaints has made clear) smaller, honest fry may suffer from all manner of abuse, up to the sudden descent of the axe. Far from deluging unhappy customers with new goods, the banks could spend their marketing money to much better purpose by finding out what services are most important - and providing them more effectively and consistently.

That is basic management (and precisely what the much-buffeted Midland Bank did in establishing the postal bank, First Direct). But it isn't basic banking. Banks have always invested heavily in training - though not enough of it, to judge by results, in so-called "customer care".

But they train bankers, not managers. One American bank, Banc One Corp, has achieved a spectacular rise by taking a different route. Regarding itself as a retailer, a chain of money shops, Banc One puts the customer first: you only need look at the all too common high street branch with impatient queues and untended tills, to wonder where the priorities lie.

Moreover, when Banc One ads another bank to its empire, an early step is to swap teams, to learn what can best be transferred, not from new masters to minions, but between new colleagues. Transfer of best practice, even from a new buy, is another basic of the excellent management which is the only way in which Britain's beleaguered financial services businesses can struggle back to good profits.

That battle will be lost unless hallowed hierarchies are put to the sword. Too many reporting levels, too much second-guessing, too much-top-down chopping and changing are guaranteed to slow down decisions and the promotion of the ablest talents.

Banks appear to operate an army-style system of rotation. Instead of branch managers staying long enough in place to build relationships and create true profit-centres, they job-hop from branch to branch, which doesn't help with either efficiency or customer care.

No doubt, the banks will replay angrily to such criticisms - as they did when the small businesses rose up in arms. Of course, they are trying hard, sometimes successfully, to improve. Of course, initiatives are in hand in many of these vital matters. Of course. But look at the dismal financial records of the last few years. Consider, too, the effect on the morale of a top-class branch manager who suddenly sees all profits, and more, wiped out by one wild Maxwell Loan - and ask why sober men who are trained to be prudent above all can act so often with such gross imprudence.

The answer is partly mob psychology and partly because, in the pursuit of growth, other far more important issues - from the satisfaction of existing customers with existing services to the quality of loan books and borrowers - have taken second place.

In choosing the wrong priorities, the financial services industry is not alone: its corporate customers (Maxwell horrifyingly included) have done likewise often enough. But how did anyone ever come to believe that British financial services were a cutting edge - instead of a blunt instrument?

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