TBTF Means TBTM (Too Big To Manage) Part III

Banks that are too big to fail or TBTF are by definition also too big to manage or TBTM. In Part III of the series we look at the role played by customers in this phenomenon. The link for Parts I is here and for Part II here.

In Part II of TBTF Means TBTM we looked at how the belief that the markets are a zero sum game has created a banking culture obsessed with the size of a bank’s market presence and to what extent it can exert dominance. Allied to this philosophy and in many ways intrinsic to it, has been an approach where banks have strived to become all things to all customers.

All things to all customers by definition imposes a requirement on banks to offer all products or at the very least as many products as possible. For a number of different reasons this does not make any sense. Foremost amongst these reasons is the fact that it is highly unlikely that a single institution can be proficient in all products.

The following anecdote illustrates the point.

I vividly recall a series of sales training events I once organized at ABN AMRO some 12 or so years ago. The events were unique in the sense that we invited some of our major customers to talk to our staff and tell them, without holding anything back, what they thought about the Bank’s performance in delivering its products and services.

The customer feedback was both very clear and remarkably unanimous. They stated that they very much preferred that ABN AMRO only offered those products which the Bank was good at rather than trying to offer all products in a less than adequate fashion. What they said next was even more surprising not just for ABN AMRO but for the entire industry.

The customers advised us that they admired ABN AMRO for its honesty because if we believed that we were unable to meet a specific customer request we would actually hold up our hands and simply say we couldn’t do it. They then proceeded to contrast our approach with the action of what they deemed to be the more aggressive banks (we took that to mean our US competitors) who would push for the business and then not deliver what they the customer wanted.

This told us two things. The first is that customers preferred a values-based customer service proposition over a product-led customer proposition. The second is that it is simply not possible to be all things to all people.

Unfortunately, ABN AMRO did not use this knowledge to build a values-based customer service proposition primarily because most of the senior management in the global financial markets division came from a trading rather than a sales background. We also know that the behavior of the other banks has not changed—if anyone is in any doubt about this then they only have to look at the size of many banks and the number of customer lawsuits they are facing.

UBS provides another intriguing example of what happens when banks strive for growth and a need to become all things to all customers. UBS had an exceptional asset management business and like many other banks, UBS believed that growing the investment banking business would supplement and reinforce their ability to provide a full range of products and services to their customers.

We all know what happened next. The rapid expansion in the investment banking business led to huge losses and a $50 billion bailout by the Swiss government post the financial crisis. However, this was not just an investment banking loss as UBS also experienced a major blow to its asset management business, including a large and significant exodus of clients.

Customers are telling banks that TBTF strategies are not effective. The fact that we are not surprised that the banks are not listening tells us everything we need to know.

Jonathan Ledwidge is the author of the book Clearing The Bull: The Financial Crisis and Why Banks Need a Human Transformation. Use this link to give your opinion on the performance of banks post the financial crisis.


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