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

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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.

Banks Behaving Badly: Or Is It Just Me?

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You know how it goes.

The phone rings. It doesn’t show a caller ID, just a number. There’s a lag between when I say “hello” and someone comes on the line.

Why don’t I hang up right then? I really don’t know. My motives are opaque to me, but probably diseased.

This time it’s BankAmerica. They tell me there’s nothing wrong, my credit card has not been compromised—but hey, you never know!

Because they care about my security, they’re going to send me a credit report—free! Which I can then examine, and send in any corrections required.

In addition, they will send me—with no obligation! –an identity theft insurance policy, to protect all my cards. And all I have to do, if I foolishly decide not to take them up on this amazing offer, is to phone them within 30 days to say no thanks.

Otherwise, of course, they’ll bill me, in simple monthly installments, renewable automatically on an annual basis.

I assume that BankAmerica (and anyone else pulling this passive-aggressive “gotcha” marketing strategy) must have a high complaint rate, as people notice that it’s an opt-out, rather than an opt-in offer, and find an unexpected bill in their statement. And I assume that they end up reversing a lot of those “misunderstandings.”

Is it just me? Or does anyone else find this tactic not only annoying, but self-defeating?

What does BankAmerica (or any other bank) gain by having its name linked to a “sales” tactic associated with old record clubs and internet porn subscriptions?

Who is the analyst in the back room at BankAmerica (or any other bank) crunching the benefit/cost ratio of insurance fee income to the cost of processing returns?

Does it occur to him to factor in the cost to the brand? The drip-drip of negative reputation? The effect on BankAmerica’s deposit accounts? Its mortgage business?

And if not, why isn’t he being fired for destroying shareholder value? Because the market honestly does know how to distinguish between companies with good customer reputations, and those with bad ones.

Then again, BankAmerica just bought up Countrywide Financial, the nation’s largest subprime mortgage borrower—because, at these prices, it was a “good deal.”

Not for B of A’s mortgage business’s reputation. Countrywide’s own reputation can’t have added to BofA’s reputation among consumers.

Does reputation matter? I’d like to think it ultimately does. Read the comments to the above ABC News link, and see how many people are down on BofA as a lender. They can vote with their feet.
And now here I am complaining about their telemarketing, letting my fingers do the walking.

What about you?

If you decide not to continue reading this wonderful blog, all you have to do is write in and comment, and there’ll be no charge whatsoever.

Otherwise, I’ll simply bill you in painless monthly installments, renewable automatically every year unless you decide to notify me otherwise, whenever you want.

Trust me!

The Deeper Message of Financial Markets’ Volatility

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The Dow swung 600 points (high to low) in two days this week—and the week’s not over.

Key stock market indices in Indonesia and South Korea lost over 6% of their total value yesterday alone. Seoul’s Kospi Index had its biggest point drop ever. 

Katie Couric leads the CBS evening news with tales of homeowners who can’t find lenders to refinance massively increasing adjustable rate mortgages they (stupidly) assumed.

What’s it all mean?

The short story is the same as the long story—but the long story is much more interesting.

The short story starts with a classic housing bubble. People start borrowing to buy real estate. It becomes musical chairs, flip the property, sell to the greater fool. And use leverage.  Better yet, OPM (other people’s money).  Best—use both.

Lenders, like good drug pushers anywhere, develop new products and pitches.  Finance the first mortgage with the second; “liar’s” loans, no proof of income required. Wall Street packages loans, slices and repackages them and resells them. No one is left holding the bag—-everyone is left holding the bag.

National Public Radio reports that you can purchase complete lies about your income and employment history at sites like verifyemployment.net  to help fuel the game.

The short story is that the world has become so connected financially that a housing bubble in the US can decimate the stock market in Djakarta.  Everything is linked to everything.  This isn’t like 1929, where wealthy people lost money in the crash and soon couldn’t pay their employees.  This is far more integrated, international, intertwined, interdependent—and fast.  Butterflies flapping wings and all that.

True enough. But the financial markets are just a piece of a bigger puzzle. 

In the long story, the growth in connectedness of all things  exceeds the wildest dreams of rabid conspiracy theorists from just a few decades ago.

Tom Friedman’s The World is Flat is, at root, about how the world has become interconnected.  Time and space are being obliterated by always-on, high-bandwidth,  voice, data and video connections.  Capital flows easily around the world. The internet’s inherent freedom runs roughshod over the desires of industries and nations alike to maintain boundaries.  Even labor becomes mobile—if not through immigration, then through outsourcing.

Six degrees of separation has for some time now begun to look like an overstatement.

The first level of business implications is clear.  Pick one thing and do it the best in the world; outsource everything else to whomever is doing those things the best in the world.

But even that is old paradigm stuff—competing in a global world and all that. Increasingly, that’s so five minutes ago.

The really, really big lesson is this.

The game of competition is over. It’s not about vertical corporations competing against each other anymore.  It’s about collaboration and connectivity—with everyone. He who can get along with everyone better than everyone else will succeed.

Not “win”—succeed.

In a massively connected world, corporate strategy is less relevant than customer strategy.  It’s your ability to cut agreements with customers and suppliers that helps you—not your ability to squeeze pennies out of them.

This is a huge shift for people raised in business in the last 50 years, weaned on concepts like sustainable competitive advantage and shareholder wealth creation.

The business-strategic value of trust was always high.  It’s about to get far, far higher.  Those stuck with mental models built on inter-corporate competition are going to get left behind those who "get" the simple idea of service to customers, employees, and partners.