01 December 2010

Simplicity in Banking

As a consequence of the financial crisis 2007-2009, banks have lost much of their public image: because of their former careless lending practices, because of the use of public guarantees and tax payers’ money, because of almost stopping granting new loans, because of foreclosures etc. Smaller and in some cases non-existent bonuses have also badly affected the loyalty of their employees. So it’s time for revising brand promise and values so that a bank would be perceived as a responsible part of society and not as a monster.

One great value to be introduced is simplicity which is in stark contrast with the complexity of the current financial world. Some banks have done so already. They have understood that next to honesty, simplicity is the most important virtue. Thus, by explicitly stating simplicity as one of their core values, banks can attract more customers and make their own people working more for less. Now the question goes: how to understand the value “simple” for a modern western bank?

First, let’s look at some facts. Complex products, structures, instruments, processes, systems etc. are unlikely to disappear. New regulations do little if anything for this. Rather contrary: they attempt to more regulate the current complex system and in this way make it even more complicated. To reduce the amount of required capital and minimise the impact of Basel III to the profitability, advisors and counselors like McKinsey & Company recommend banks to implement even more sophisticated models, and more advanced risk- and liquidity management approaches and tools. The argument goes that these models and approaches considerably improve risk control and risk management capabilities of banks, and thus lower risks. Without challenging the later right now, calling a bank simple seems questionable at least from internal perspective.

We are recommended to look at things from customers’ point of view. If a bank has adopted the value “simple”, customers need to perceive the bank as simple. Let’s consider an analogue: most of people don’t know how exactly a computer looks from inside, but it’s still simple to use the computer and it works. It makes our lives easier. It should be similar with banks: customers don’t need to know how they exactly work, but the products and services that they offer need to be simple to use for us and make our lives easier. The second part of the analogue with the computers is not less important: the financial system behind has to function without failures. If we were to start looking into it, all the illusion of simplicity would disappear.

The limitation of the above interpretation is that it doesn’t count with the fact that a bank is not a computer or a machine. It’s like a living organism and it consists of human beings. The relationship between the bank and society is interactive. As by understanding simplicity in the above described way we allow bank to grow exceedingly complex from inside, it does grow. This complexity doesn’t stay into the bank, but ultimately finds its way to the many households and enterprises. Sophisticated investors and “casino banking” is not an isolated phenomenon. We have just seen that crises and crashes on financial markets hit the economy and hit simple people.

Thus, “simple” shall mean “simple”, and not just “seem simple”. All the processes, systems, models, no matter if they are for internal use or meant for the customers have to make sense to common sense at least after explanation is provided (and explanations have to be provided). Those stressing sophistication and complexity are on wrong track in that sense. Those who claim that they are simple but are not in reality are even more so – not only overly complex but also inconsistent.

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