Gallup on Banking: Squandering Trust for 32 Years

When a child is untrustworthy, parenting is needed. When an adult is untrustworthy, counseling can help. When a company is untrustworthy, markets exact discipline.

But what if an entire industry has lost trust? What kind of a problem is that? And how can it be solved?

The Banking Industry

A recent Gallup survey makes the banking industry a timely poster child for low trust.  Banking is not the only low-trust industry these days; pharma could give it a good run, for example (and both are more trusted than Congress). But the trust issues raised by the poll are not just industry-specific.

First, the facts. In Rebuilding Trust in Banks, Gallup presents 32 years of survey data. That’s quite a lot of years.

In 1979, 60% of respondents said they had “a great deal” or “quite a lot” of trust in banks. By 2011 that number was down to 23% (actually up from 18% in 2010).

That is a 70% decline from peak (60) to trough (18).  Put another way–the industry squandered 70% of its trust. That’s quite a lot of squander.

The obvious two questions are: How does that happen? And what can be done about it?

How Can an Entire Industry Squander Trust?

I haven’t seen a single answer, partly because there is no One Answer. But I also haven’t seen a good list. So let’s break it down.

1. It’s tempting to blame a general decline in trust across all business. But there are three problems with this view:

a. Trust in business actually seems to be volatile, not steadily dropping;

b. The statistics usually conflate two issues. Saying “trust in business has dropped” fails to distinguish a decline in customers’ propensity to trust from a decline in banks’ trustworthiness;

c. There are notable exceptions. Nurses and pharmacists have topped the “most trusted professions” surveys for years–how do they beat the odds? (Particularly pharmacists–since pharmaceuticals as an industry ranks so low).

2. A decline in the inclination of people to trust. Dr. Eric Uslaner suggests that people’s propensity to trust in government is cyclical (it varies with the economy), but that trust in people has steadily declined since the 1970s.

3. A decline in general trustworthiness of banks. It’s not easy to isolate banking trustworthiness from customers’ propensity to trust–definitions are difficult. Two very different but powerful approaches to corporate trustworthiness measurement can be found in Trust Across America and in Laura Rittenhouse’s Rittenhouse Rankings of corporate candor.

4. An anti-trust ideology of business. We have inculcated a couple of generations of businesspeople with beliefs that drive down both propensity to trust and corporate trustworthiness.

Here are five ideologies in vogue since the 1970s:

a. Economists’ celebration of the virtues of markets–think Milton Friedman;

b. Strategists’ celebration of competition–think Michael Porter;

c. Pop philosophers’ celebration of laissez-faire systems–think Ayn Rand;

d. Financial theorists’ celebration of shareholder value–think Michael Jensen;

e. Government officials who embraced all the above ideologies–think Alan Greenspan.

If you doubt the power of beliefs to change society over a generation, consider this passage from Michael Lewis’s Vanity Fair article describing a German banker who was [recently] completely snookered by lying US investment bankers.  Why was he taken? Lewis writes:

He mists up a bit when he tells stories about the Americans he did business with back then [in the early 80s]: in one story an American investment banker who had inadvertently shut him out of a deal hunts him down and hands him an envelope with 75 grand in it, because he hadn’t meant for the German bank to get stiffed.

“You have to understand,” he says emphatically, “this is where I get my view of Americans.”

In the past few years, he adds, that view has changed.

What does this add up to? It means:

  • Low trust in business is not pre-ordained—we reap what we sow;
  • Low trustworthiness drives low propensity to trust more than the other way around;
  • Beliefs drive behaviors;
  • Leaders’ belief systems exert big influence over trust in business.

What to Do?

If you’re with me on the diagnostic, there’s a simple prescription:

Leaders, Straighten Up and Think Right.

In other words: start with leaders and thoughts.

Here’s what Gallup has to say about how to build trust:

The effort to rebuild trust must begin with bank leadership, then flow through a bank’s employees to customers, the public, lawmakers, and regulators. Every interaction matters. If bank leaders and employees do not demonstrate that they trust their own bank, other stakeholders never will.

Because the process of rebuilding trust with the public starts with the bank, Gallup recommends that bank leaders make rebuilding employees’ trust in banks their No. 1 priority.

Yes, there’s more. Uslaner has a lot to say about economic inequality and education, and it’s very valuable. But you yourself—yes, you, the reader—may not have a lot of direct control over inequality.  You do, however, control your own thoughts, and you probably influence and lead other people.

Start thinking trust-creation. When it comes to trust, thoughts have power.


‘It’s a Wonderful Life’ Explains the Financial Crisis

Frank Capra’s perennial Christmas movie “It’s a Wonderful Life” is remembered mainly for celebrating civic and familial virtues. George Bailey sacrifices his dreams for those of others, but in the end receives the greatest rewards of all.

But George was also a good industrial economist. Reluctant inheritor of dad’s Bedford Falls Building and Loan, he understood the institution’s role—to consolidate deposits into home loans, so Joe the debtor could escape the landlord tyranny of the evil Mr. Potter.

When Potter engineers a short squeeze and an angry run on the Building & Loan’s deposits, George takes the town to school on economics 101:

…you’re thinking of this place all wrong.
As if I had the money back in a safe. The money’s not here.
Your money’s in Joe’s house…that’s right next to yours.
And in the Kennedy House, and Mrs. Macklin’s house, and, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can.
Now what are you going to do? Foreclose on them?

Fine, fine, you say. What’s that got to do with credit default swaps?

A lot.

The good folk of Bedford Falls were ready to take Old Man Potter’s offer of 50 cents on the dollar, until George Bailey personally talked them down. People were confident in him and trusted him. Trust and confidence were the coin of the realm for JP Morgan, and for George Bailey, and are again today.

Say you start a bank with $10,000 in equity. You make a $6,000 loan. You’ve got $4,000 left. If you loan that $4,000, you’re tapped out. That’s when you discover deposits, aka liabilities, which let you make many more loans, aka assets.

The amount by which you can leverage your equity to make more loans depends on how stable your assets and liabilities are. If you make bad loans, your asset quality declines. If you take on bad liabilities—securitized mortgages or CDOs, let’s say—then you may have to sell assets to cover your obligations.
Presto, there’s your bank run.

The run may be driven by Bedford Falls’ rubes, or by some Old Man Potter from Greenwich, but a run is a run is a run.

If someone doesn’t trust your balance sheet, the whole structure unwinds. It starts out as a liquidity crisis. Then it morphs into a solvency crisis. Finally it is revealed for what it is—a crisis of trust and confidence.

Is it really that simple? How could Hollywood possibly get something so much more right than the risk-meisters of Wall Street?

Yes, Virginia, it really is that simple. One thing Hollywood knows is that the true story is always about character development. The rest is just updated movie sets, hot off the street dialogue, and the latest “it” actors. But the thing that art imitates is–life. Character. Trust and confidence.

George Bailey’s character development lay in realizing his power to create trust and confidence in his community.

Any parallels with incoming presidents and the potential for good they may have exist strictly in the movies in your heads. (Which after all is where trust and confidence reside, not in risk models.)

Using Trust-based Selling in Banking: St. Meyer and Hubbard

Two years ago, I got a call from Jack Hubbard of a firm named St. Meyer & Hubbard . They did sales training for bankers, or so I understood, and were developing a "Trusted Advisor Prospecting System."  I was initially skeptical.  I viewed Trust-based Selling as more suited for B2B clients, and largely for later-stages in the sales process.

They showed me otherwise. 

We spoke a few times by phone, and exchanged some writings. I was quickly impressed with their unusual combination of vision-and-values perspective and down-and-dirty detailed, tactical programs.  They were teaching clients to apply trust principles at earlier stages and more retail-focused levels than I had appreciated was possible.

Jack and his partner Bob St. Meyer and their team have now written their own book—Conversations with Prospects—which I can enthusiastically recommend.

Recently I got to see them in action at an annual conference they put on for bank CXOs, mostly existing clients. And I don’t know when I’ve seen such a uniformly positive, enthusiastic and solidly appreciative set of clients.

Until a week ago, I had never personally met Jack or Bob—yet I felt like I was catching up with old friends even before meeting up in the hotel lobby. At dinner, they were Midwest-friendly, but also New York direct and to-the-point.

They clearly know banking. And here they were putting on a conference for their clients about their own subject matter—selling. But they always steered the conversation around to the others at the table. They never mentioned selling their own services. Which of course sold me even more.

In other words, they walk the trust talk.

Jack, for example, sends out over 500 emails a week of the “you might enjoy this article” variety. He doesn’t use a tracking system to follow each one up; he’s not looking to connect each of his actions to a client profitability analysis, nor does he constantly examine his behaviors to determine his sales efficiency. He just focuses on his clients, both those with whom he has signed contracts and those who have yet to do so.

Here are a few excerpts from “Conversations with Prospects.”

One thing all prospects want is the same thing any of us want in our most valuable personal relationships. They want to be visible. They need a bank, but they want a banker—someone who knows who they are, what they do, and what are their challenges and opportunities.

Bankers often try too hard to prospect using techniques that are all about the bank, relying on persuasion instead of conversation. Unless the banker gets lucky and hits the prospect at a moment of desperation or unfulfilled need, the prospect invariably pushes back with any number of brush offs, but most often the shut-down line is: “I’m happy with my present bank.”

Bankers will introduce themselves to prospects by saying things such as, “I’d like to come out and introduce myself because I think I can save you some money.” Or, “I’d like to discuss our cash management offerings.” Who really needs to spend time listening to another banker peddling the same products as the rest of the pack? We see a lot of sales letters that are just as bad, talking about the sales person and company, but not the potential customer and their issues.

Needs are not products. Bankers that discover, create, and exceed the need will always have business. When the push to sell products overrides the best interests of the client there is little discussion about managing anything.

When sales people are measured solely on the basis of production, the client is the ultimate loser.
In trust-based selling, the sales person stops trying to be interesting and learns to be interested. Banks that understand this work hard to focus on and understand the buying cycle of their prospects and clients. When banks match their sales cycle to the customer’s buying cycle, it’s a trust connection and they are well on their way to a sale.


IQ, EQ and the Next Billion Banking Consumers


The Boston Consulting Group might house the world’s highest concentrations of brainpower per square foot.  BCG is to consulting what Goldman Sachs and Cravath are to banking and law.

When it comes to intelligence, they are tops.

In terms of IQ, that is.

EQ?  Well, that’s not so much what they’re aiming for.

Case in point—the most recent article from BCG’s Industry Insight series, The Next Billion Banking Consumers. (The piece shares two authors and whole paragraphs verbatim with a more general piece from BCG’s Perspectives article series, titled The Next Billion).

BCG’s article series—particularly Perspectives—have been the source of breakthrough thinking for several decades now, including the experience curve and the barnyard portfolio theory, and the general concept of strategy as the pursuit of sustainable competitive advantatage.

The article opens big:

The problem of financial exclusion—individuals’ limited access to or use of formal banking services—looms large around the world. It both reflects and contributes to the stark socioeconomic divide that pervades many emerging markets…

By embracing innovative business models, however, banks can upend the economics of reaching consumers long considered impossible or unattractive to serve.

Great—energizing the banking sector to help accomplish what microfinance suggested might be possible. Cutting-edge capitalism, bringing the next billion—“just above the poorest of the poor and just below those who are currently targeted by most banks”—into the mainstream of the global economy.

Indeed, much of the article addresses the need for changes in product development, distribution, marketing and organization structure, listing some exciting innovative practices.

Then there appears this paragraph:

Unfortunately, regulations sometimes make it difficult—if not impossible—to offer products that suit the financial means of the next billion consumers. Our analysis shows, for example, that Indian banks would need to charge a 32 percent interest rate just to break even on the kind of small, short-term personal loan that the next billion consumers would want.  Yet national regulations prohibit banks from charging interest rates to priority sectors that exceed the prime lending rate, which currently stands at about 12 percent.  This problem underscores the need for regulatory reform that complements initiatives to reach the next billion consumers.  (italics mine)

The need for regulatory reform?  Let me get this straight.  A banking industry in a country with 5% inflation and 6% one-year t-bill rates needs 32% interest rates to break even in a new market, and the problem is—the presence of usury laws?

How about—oh, I don’t know—a banking industry that can make money on less-than-32% interest rates?

Unless I am seriously missing something—always a possibility—the inclusion of this paragraph, alongside discussion of radical product and distribution redesign, is socially and politically tone-deaf.  Narrow.  Myopic.

It feels like a hammer seeing an all-nail world.  If your constant goal is the pursuit of corporate competitive strategic advantage, then of course regulatory “reform” is inconsequentially different from product innovation—it all adds to competitive advantage, right?  (Except of course for the poor schmoe trying to make a buck with his feet in plus-32% debt cement shoes). 

In an increasingly connected world, the view of competition as the be-all and end-all of business—even just of strategy—is antiquated.  Out of sync. Competition without commerce just doesn’t add up to much.

The world is connecting more.  And it isn’t about just the connections, or the connected.  It’s about the synergy in the combination.

Kind of like IQ and EQ.