In the Beginning There Was Manufacturing
Picture, if you will, an image of a modern-day car factory. Where once the production lines were dominated by people there are now complex machines doing most of the simple construction which requires speed, accuracy and consistency (like welding). The complex construction still requires human intervention. The code that runs these machines is designed to make the machines perform tasks in a series of steps. The machine is incapable of doing anything else unless a different code (and perhaps different hardware) is up-loaded to it. The machine does not have a mind. It never has and will never experience consciousness.
Then Came Banking
Now, picture a modern-day bank. Unlike a car factory the workers on the factory floor in banks were once paid to think. To exercise discretion and use authority. Yes, in days gone by a banker could override the rigid processes that banks have used since banking began. These days we have automated each of these human roles. We have devised processes and “uploaded” these processes into the human production line. The main difference is that in a bank the interaction is with a human being. In a car factory the interaction is with a production line.
How did this happen?
There are many explanations for this phenomenon. But I have had my own theory for many years now.
Process engineering or re-engineering was once the sole domain of manufacturing firms. There were many talented engineers who designed factories and processes within these factories to maximise efficiencies.
Then as manufacturing in the west began to wane and manufacturing moved where labour was cheaper these engineers, armed with MBAs and Six Sigma Master Black Belts, migrated their skills into banks as consultants.
They took one look at banking and started re-engineering processes to make them more efficient. Boards loved them because they reduced costs. Equity analysts loved them for the same reason.
Perfect. Except it wasn’t.
I have a lot of respect for engineers in manufacturing, construction, technology, chemistry and other roles where engineers are required.
Indeed engineers, given their solid mathematics background, have been hired in banking roles for many decades as traders or quantitative analysts.
Similarly, banks have always had processes. To say that banks couldn’t function without them would be a tremendous understatement.
People Business
However, where car making was predominantly a manufacturing process, banking primarily has always been a people business. The famous Henry Ford line about his Model T “you can have it in any colour as long as it’s black” says a lot about that industry.
Many bankers genuinely enjoyed their jobs. They helped people achieve their dreams. They weren’t well remunerated but there was more to life than money. Processes were there as a guide rather than a business dogma. Many customers come into a bank with individual problems. Once upon a time a bank manager could apply some logic and solve many problems. The bank manager had experience, authority, capability and most importantly the respect of the community. Oh, and he could also decide that the process did not apply to a unique set of circumstances and make an exception. Given all the processing and back office work was performed manually at the branch anyway it made little difference. This respect was enjoyed by most bank employees within the community.
So, the bank was flexible enough to engineer a product to fit around their customers. Some processes were rigid others not so much.
As computers were adopted by all banks and processes at banks changed over time and bank managers were replaced with loan officers it became more and more difficult for anyone to exercise any level of authority without getting fired. If the computer told them the loan was declined in many banks there was no recourse.
Banks were no longer flexible. Now, customers had to fit in with the banks’ processes or seek funding elsewhere. When they didn’t fit in, some unprincipled bankers, mindful of their KPI targets, would invent information so that otherwise ineligible clients would slip into the process. Of course, this is an over-simplification of the technological revolution which required processes be more rigid but the outcome was the same.
Unlike a robot, bankers experienced consciousness and once had a mind of their own.
Mindlessness
The problem arises when you ask a human being to park their mind and principles at the front door in order to carry on mindless and inflexible processing tasks. When experienced bankers spoke out about these practices, they were quietly but very efficiently “managed out” via unfavourable appraisals or threats.
They were replaced with people who didn’t know any better. Who had never exercised their financial skills to find a better solution for a customer. These new people simply followed processes. That’s all they’d ever known.
If you doubt this, cast your mind bank to a major bank senior executive who was a witness at the Royal Commission. When pressured by counsel assisting to answer why the bank had failed customers his defence was that the bank had followed proper processes. In other words all was jake because processes were followed.
Just think about that for a moment. This is a senior executive who really struggled to find the right answers. He thought nothing was out of order because processes had been doggedly followed. Nothing about the lack of skills by staff to identify where processes fail the bank. Because staff members that dared raise those “problems” were long since managed out and the remining staff had been witness to that rout.
This genocide of financial skills by banks is the reason why we’re in the mess we’re in today.
Banks have literally lost their minds (and sadly their principles).
What’s the Solution?
Imagine an engineer who has designed the perfect bridge to span a river. The design is flawless in its technical specifications and all the forces have been calculated so that the bridge will withstand ten times what is intended. Excavators begin digging the foundations on either side of the river to construct pylons that will support the bridge. They discover just below the surface of clay is mud. If the engineer doesn’t intervene what would happen?
Well, we’ve built the entire banking system without the ability to intervene. Not because we don’t want to but because those who would know what to do have largely been lost to the industry. The industry is sinking under the weight of inaction and the refusal to acknowledge they have a problem.
I’m not suggesting we rid banks of processes. Banks just wouldn’t function without them. I’m suggesting that – like with bank managers of days gone by – we train bankers once again to identify where intervention is required for the mutual benefit of the customer and the bank. Processes should be flexible enough to enable this to happen.
Change Must Come at the Top
Banks need to go back to selling what they’re good at. Credit. Stop buying fund managers, insurers, aggregators and other parties which are a competitive threat to them. It’s simple really. It’s all just been overly complicated by people keen to prove their worth on boards and management as well as consulting firms.
Next time you see a takeover by a bank. Look at the target. Look at what benefits have been offered that target and their board? Has a former senior executive of the target been hired by the acquirer? Has the acquirer announced that the former senior executive had no input into the acquisition process? If so, a criminal investigation should proceed immediately. If found guilty, board members of both the target and the acquirer as well as the former senior executive should be facing criminal charges and jail terms.
Further, just look at all the acquisitions by banks in the last three decades. Did the acquisitions increase shareholder value by being a bolt-on company able to immediately contribute to the revenue line of the acquirer? Or did the acquirer progressively white-ant the target by ridding itself of the majority of staff and systems? In other words did the acquirer simply pay a price to take out the competition?
For any change to occur the boards of banks must look at themselves and see if they have the right people to take the industry forward. Without change at the top we will not have the right people steering the ship in a more appropriate direction. It’s time to stop loading boards and management with consultants, marketing people, HR experts and professional networkers and return to ensuring experienced bankers are running our banks. In their defence, some banks had already begun this process prior to the Royal Commission.