Sales Trend 2 of the Barrett 12 Sales Trends Report for 2019 touches on a very timely topic in Australia – trust and the financial sector.
By guest author David Robertson, Head of Economic and Market Research, Bendigo and Adelaide Bank.
2018 has not been a good year for the stock prices of Australian financial institutions, with the ‘Financials’ sub-index of the ASX200 down over 16% from its high of 6621 in January. The rest of the market is also lower but not to the same extent –and the broader ASX200 index did reach a fresh ’18 peak recently in August unlike the banks –adding weight to the proposition that many financial institutions have lost valuable trust through the Hayne Royal Commission. So what is at stake with trust in banks, and how can this trust be reclaimed?
Trust and lending are inextricably linked, and the provision of credit is a primary (and imperative) role of banks. In his 2016 book Homo Deus leading historian Yuval Harari noted “Money is the most universal and most efficient system of mutual trust ever devised.” Harari also observed that while the invention of money transformed the world by facilitating commerce, employment and the creation of government wealth, it was far more recently that the invention of credit allowed economic growth to explode. “Credit: founded on the assumption that our future resources are sure to be far more abundant than our present resources. A host of new and wonderful opportunities open up if we can build things in the present using future income.”
The role of a bank therefore is both to act as an intermediary -a bridge between investors who have excess money and borrowers who have a vision or need but not enough money-, and perhaps more importantly to be a foundation of trust for the financial system. This feeds into economic growth and prosperity by enabling credit to be freely available to fund projects and visions, and moreover to ensure that mutual trust in money is maintained. So when the Royal Commission into misconduct in the financial services industry revealed widespread examples of appalling customer outcomes and poor conduct (and culture) at a number of banks, insurance and superannuation companies, the risk wasn’t just that some finance industry share prices might fall for a period. It was much deeper; that the provision of credit might become restrained, and that the communal trust in money, the ability to borrow and to plan for the future may be inhibited.
Banks historically have held a trusted position in the community and in society, but since the Global Financial Crisis (GFC) in particular they have lost their position around the world as some of the most trusted institutions. The GFC brought fears about the safety of some investments and even bank deposits, which in general governments ultimately guaranteed to renew trust, but since then the trust at risk is different –it is about ‘doing the right thing’. Out of the Royal Commission, the total cost to the four major banks and AMP has been estimated at $7.4 B 1, via customer remediation and refunds, risk and compliance costs and regulatory costs. The cost of community trust however is much harder to estimate, and may be far more challenging to recover.
To regain trust and respect, Australians will need to see real evidence of banks doing the right thing: actions and outcomes, rather than just apologies, promises and fines. One business model put forward by Harvard University Professor Michael E. Porter (one of the most influential economists and business advisors of the last 50 years2) is the concept of Shared Value: companies creating economic value alongside creating societal value. Porter postulated in his seminal Harvard Business Review article on Shared Value that: “The purpose of the corporation must be redefined as creating Shared Value, not just profit per se. This will drive the next wave of innovation and productivity growth in the global economy”. The attraction of this approach is the collective and mutual benefit for all stakeholders –for customers, for shareholders, for employees and for the broader community.
Shared Value promises another advantage beyond the likely benefits for productivity and economic growth: it will engender trust. Through Australians seeing the societal outcomes of companies that are feeding into prosperity rather than off it, they are more likely to trust those organisations and support them; and I suspect regain trust in the financial system and corporate Australia. So how can banks deliver Shared Value? Rather than making suggestions for other banks, I can simply give the example of Bendigo Bank’s Community Bank® model, which I have seen first-hand in a range of regional and metropolitan locations in each Australian state and territory.
There are more than 320 Community Bank® sites in Australia, each with their own local board of directors, local staff members and local branch, and collectively they have delivered more than $205 million3 in profits back to their local communities since the first site was established 20 years ago. The franchise model leverages Bendigo and Adelaide Bank’s infrastructure and expertise, and shares revenue 50/50, ploughing valuable capital back into local communities that would otherwise likely be lost to major bank shareholders. The power of this Shared Value model was recognised last year with Bendigo and Adelaide Bank winning the ‘Corporate organisation leading through Shared Value’ award4 for Australia, and last year the Bank ranked 13th in the world in Fortune magazine’s global ‘Companies that are changing the world’ list.
As Bendigo and Adelaide Bank’s managing director Marnie Baker noted in a recent opinion piece, “In our globally integrated instantaneous digital world, trust is the new currency”. Trust appears to be at a low ebb in Australia for financial services after the interim findings of the Royal Commission into Financial Services, so there is a lot at stake: the economic benefits of a trusted financial system with appropriate flow of credit to drive innovation and productivity growth; trust to invest; and trust in corporate Australia to create and share value for the benefit of all stakeholders. A revival of trust won’t hurt share prices or jobs and wages growth here either.
You can download the complete 12 Sales Trends Report for 2019 here.