Trust, Bankers and Soldiers of Fortunes – You get what you pay

February 2nd, 2010 by Patrick Stähler

The Swiss private banks are under pressure to change their business model. It is not just pressure from other states that want to fight tax evasion via exchange of information on bank customers but also from employers that try to sell stolen customers’ data  to foreign governments.

The big news in Switzerland is that an informant, crook or thief – whatever you like to call him depends from your standpoint – has offered the German authorities data from 1,500 German customers of Swiss Banks that have allegedly dodged taxes. Last year, another informant stole data on 3,000 French bank clients from the HSBC branch in Switzerland and sold it to the French authorities. And in 2008, Germany already purchased data on German customers of the Liechtenstein Bank LGT. The LGT case cost the German government several million Euro but they received a far higher pay-back on its investment form all the taxes and fines that the busted tax evaders had to pay.

There will be more

And these three data thefts will not be the last. It is not only the authorities of high-tax countries like France or Germany that see their high return of investment if they buy data from informants but also there will be more willing bankers that will sell data of its customers. Why?

It’s the value proposition for the bankers, stupid!

In the business model canvas we see that we need also a value proposition for our stakeholders or partners in a business model. And that is what some banks forgot.

If you hire your bankers via a big salary you get mercenaries not trustworthy advisors to your customers.

If you use incentives that only measures the bank performance and not the customers’ than you transform even your most loyal client advisor into a short-sighted performance optimizer that cares more for its personal fortune than for your clients’ or your banks well-being.

And then you do not have to be surprised if ethics are low and your employers will be attracted by an even higher award when they become informants to government authorities or- less bad – takes your clients to his new employer that offered him more.

If you treat a human being as a mercenary be not surprised if he behave like one.

You need a value proposition for your employees that goes beyond money

The former business model of Swiss private banking relied on trustworthiness, professionalism and banking secrecy. And they had aligned also their total business model to this. Bankers were proud to work for their bank and to protect the interest of their clients. And customers trusted the Swiss banks.

But then came the hubris of the managers in private banking. They wanted to grown and be as well regarded in the banking industry as their friends from investment banking. And to do so, they hired teams from other banks by paying more salary and bonuses and selling complex structured products to their clients. The higher salaries were compensated by the higher margins the banks earned with the complex new products.

With this new game two things changed: First, you got a new kind of employees that were purely money driven and their loyalty was mostly to the money not to the bank anymore. Second, the banks jeopardized with their powerplay the value proposition they business is based on: trustworthiness.

So banks should not be surprised to see more informants (ex-employees) who will  sell data to foreign authorities. And with every new scandal the key value proposition to their current customers – their trustworthiness – will be diluted. The only solution is not to stick to the old business model but to build a new one that incorporates also a value proposition to your employees that is not purely based on money but on meaning.

2 Responses to “Trust, Bankers and Soldiers of Fortunes – You get what you pay”

  1. kay plantes Says:

    Great insights Patrick. Incentives and rewards for employees (and hiring criteria as well) must be aligned with the value promise to your customers or else you have an organization that will never deliver on its value promise. Stated another way, “You get what you pay for” as an employer.

    As an economist I have another read into the banking mess in the US at least. Banking in large measure became a commodity. To achieve earnings targets and lower costs banks consolidated from local to state banks, decades later to national banks and then to global banks. (Citibank represents the worst of this as they never did integration effectively and ended up as one bank with multiple systems, a big contributor to their profit issues.) In any commoditizing industry, look for consolidation to lower cost structures.

    Once consolidation was mostly done, how were earnings targets to be met? By taking on more risk. Years before the 2008 financial melt-down, these big banks funded the Anderson-Enron debt deals sold to the public as equity deals. Look into the footnotes of some of the US-headquartered global banks’ 10K’s and you’ll see the fortunes they paid to the US government for their involvement in Enron’s deception. Underwater mortgages yielded higher returns, with the risks of default offloaded to others through securitization. Only the banks (other than Chase and Goldman Sachs) held onto some of the securitized assets as they were earning good returns. Individuals in the banks made all these decisions because, as you say, they were paid on return. The Fed raised interest rates, underwater mortgages defaulted, housing prices started to fall adding to the default rate on mortgages and lowering the price of securitized pools of mortgages and therefore bank capital. And the rest is history.

    Giants for the most part compete as commodities. That’s OK for retailers like Walmart and Amazon. It’s not OK for banks, unless we impose walls that prevent them from taking undue risks with our money and government backing for personal and shareholder return. Obama has the right idea–unfortunately the US Congress’ races are largely financed by the financial services industry so what the US Congress will do is unclear. The US needs a louder voice from its business community overall. Unfortunately, US business has outsourced political involvement so only the special interests speak up.

    Best, K

  2. offshore company Says:

    You need a value proposition for your employees that goes beyond money. you gave employes incentive and growth and they must be alined with the value promise with customers.To achieve earnings targets and less costs banks consolidated from local to state banks.thank you for sharing vies with us……………..

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