From Financial Relationships to Financial Transactions, Losing Trust on the Way

The New York Times this Sunday has initiated an ambitious and comprehensive look at the financial crisis facing us. Gretchen Morgenson, a crack business writer, has not only her normal Sunday business page lead, but also the entire issue’s Main Section Front Page lead.

And rightly so. Count me among those who believe this is no ordinary recession; we’ll live to live again, but there has been huge financial misbehavior by all of us for a very long time; we’re going to have to pay the piper for some time to come.

Morgenson points out we doubled our mortgage debt in 7 years as a country; our savings rate—at 8% in 1968—is now 0.4%. And the biggest scorecard of all is the fall of the dollar, already precipitous, and likely to get worse.

One of the patterns that emerges is the conflict we have created in the world economy in the last two decades between efficiency and trust. It’s a major trust issue—one of social and political structure.

Here’s the idea.

The global financial system has gotten far more efficient by applying business process thinking “best practices.” Define processes so they can be outsourced to others, the thinking goes, who can then do those processes at a global level of scale, more cheaply.

That logic is what drives the outsourcing of payroll and benefits processing. It’s the same logic that drives mortgage lenders to sell loans to banks, and banks to package them to asset packagers.

It has in many ways worked: more capital became more available in more places to more people more quickly and at lower costs than had been the case 20 years ago.

Unfortunately, there was a side effectT—the substitution of short-term transactional fee income for longer term relational income sources (like interest).  And fee income has turned out to be the crack cocaine of the financial industry.

It isn’t just mortgages. It shows up in banks every time you get hit for $2 to withdraw $100 from an ATM not your own. It shows up in credit cards—in late fees and over-limit penalties, in huge rates for cash withdrawals. And of course if you refinance a mortgage, fees abound—enough to become the primary source of profitability for the refinancing institution.

Who cares about your damn loan when they can make money off of the act of taking out the loan, and more money out of selling it to someone else. Give ‘em a ten-year balloon loan at teaser rates. On Wall Street, the moral decline was captured with the phrase, “I’ll be gone, you’ll be gone—just do the deal.”  Gimme more crack—gimme the fee income, you can have the relationship and the loan.

So here’s the social trust issue.

One of the four Trust Principles (see my article “Trust: the Core Concepts” or my book Trust-based Selling) is the focus on relationships, not transactions; on the medium-to-long term, not just the short-term.

That idea is pretty simple and clear. Trust thrives in relationships, not in random encounters between strangers. Economic models that link entities—and people—allow trust to grow.

Economic models that structurally dissociate people—blind online bidding systems are an extreme case—are at best trust-neutral, and in many ways trust-destroying (in the case of blind online bidding, that is in fact the intent).

So we have a dilemma. The economics of outsourcing processes has indeed resulted in lower costs. It has also resulted in lower trust.

Can we have both? And if so, how?

I don’t have the full answer, of course. But I believe the answer is going to rely on two things:

• The political will—in government and in business—to recognize that, in the long run and in the big picture, we are all inextricably linked, and we’d better behave as such. In other words, an ethos or common belief-set based not on competition, but on collaboration.
• The insight that low cost alone does not drive value; that relationships, in fact, are the source of far greater value than the micro-process-here-now-self-aggrandizing instincts we have been propagating as “best practices.”

It ain’t going to be easy, though.