Published: November 15, 2010
Is Working With Customers Really Worth The Effort?
The forgotten bank customer
Researchers at the ESMT business school in Berlin say that if bankers had been asked this question five years ago, the response would have been a firm shake of the head. At least, they say, that's the only way to explain why virtually all European banks neglected their client-led business over the last decade. But according to their recent analysis of banks balance sheets, the answer is undoubtedly 'yes'.
Professor Felix Fremerey says, "Over the last ten years it has been clear that the banks that take our deposits and look after our current accounts, pensions and mortgages had been seduced by the high profits available to them from investment banking and capital market activities. Meanwhile, falling margins made traditional personal banking a less attractive area for them. It took the financial crisis to reveal how dangerous it can be to follow a business model that ignores your customers."
Professor Jan Hagen adds, "Many banks used investment banking as a way to compensate for the falling profits in their client-orientated business, increasingly looking to proprietary trading and treasury activities as a route to profit. Almost without exception, these are the exact same banks that then went on to need government rescue packages when the crisis hit. Only the top investment banks had enough capital to cover their losses without assistance."
And now the very customers the banks neglected want to know what business model financial institutions will adopt, considering the fact that they helped pay for their rescue.
"Some aspects of investment banking are now less appealing, given recent regulation announcements, the increased equity ratio's required by Basel III and massive restrictions on proprietary trading", says Hagen.
"All of these are good reasons for banks to return their focus to their customer business, but there is an even more compelling reason; analysis of their balance sheets shows that client-oriented business is the real key to success."
Fremerey explains, "The analysis shows that the lower the level of customer focus, the greater the disparity between risk and revenue. As a result, low return on equity is also an issue for banks with lower volumes of client-oriented business. This means that institutions that ignore their customer businesses are at far higher risk during downturns. Customer-led business is absolutely essential for sustainable growth."
So, it seems one good thing came out of the crisis. As Hagen says, "It showed bankers and investors that interbank-oriented business models are untenable. Customer business may not be as thrilling as investment banking, but at least the returns are proportionate to the risk."
Search News
