Regulation

How to Fix a Broken Bank

“I almost never talk about quarterly profits,” said Royal Bank of Scotland boss Stephen Hester in a recent speech. Now, the bank’s focus is custome...
Andrew SawersOctober 10, 2012

It seems an incredibly simple idea, but Royal Bank of Scotland chief executive Stephen Hester wants to put customers first. Simple, yes. Easy to achieve? Less so.

Recall that RBS is, in the wake of the financial crisis, still 81% owned by the U.K. government. It has made provisions in its accounts for £1.3 billion to cover the cost of having missold loan payment protection insurance (PPI) to customers who didn’t need it or for whom it wasn’t suitable. It has still to settle with regulators over the LIBOR scandal. It suffered a humiliating computer failure a few months ago that locked millions of customers out of their accounts. And its investment banking arm behaved like, well, like many precrisis investment banks: making up financial products and then selling them without really bothering to understand what they were or what purpose they would serve the bank’s customers.

In a speech earlier in October, Hester, who was given the chief executive role in November 2008, told an audience at the London School of Economics that in order to make RBS a good bank, he had to make it into a good company. “Really good companies perform for their owners, employees, and communities if, above all else, they serve their customers well,” he said. “You can have a number of different goals for your company, but at the core great businesses are driven by their customers’ priorities — by their customers’ values, goals, and needs — and not by their own.”

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Hester added: “Banks needs to unambiguously recognize that their purpose is to serve customers well. And to serve them well in the context of their broader communities and the range of impacts that banks, as a huge industry, have on society, culturally and economically.”

Fixing LIBOR, money-laundering controls, or the way the bank markets its products is, Hester said, doing nothing more than treating symptoms. “We have to address the root cause of the industry’s failings … the need for better focus on serving the customer well in our collective cultural DNA.”

Sounds good — but Hester did address the question about whether the deeds match the words. Listing a string of the bank’s achievements over the past three years, he included staff pay reform, so that “customer satisfaction and risk control rather than just profit determine whether or not you get a bonus.”

“I take to heart the sentiment that we should pay people to serve well, not simply to sell well,” he said. This is supported by “customer and reputational filters and controls” that look at products and services offered to customers “through the lens of sustainability, transparency, and fairness.”

Cue the Q&A. One questioner, from Deloitte, raised the old canard that the only genuinely useful innovation in banking in the past 20 years has been the cash machine (or ATM). So, he asked, will there be any role for financial innovation in the future? And if not, will the bank be able to generate the returns demanded of it by shareholders?

Hester replied that it was most unlikely that we wouldn’t want advances in finance, just as it’s improbable that we don’t want advances in any other walk of life. However, he said, “I think our focus should be on moving finance forward in support of moving the world forward — but we need greater care about what use our technologies are being put to.”

A nervous laugh of anticipation came from the audience when one questioner identified herself as being a member of RBS’s much-derided PPI team. She asked Hester to explain more about the root cause of some of the bank’s failures. Here, his answer was eloquent, but seemingly difficult to implement in a useful way. “The unifying theme [across these issues] is, was your purpose about serving customers well and your success as a company derived from success in your purpose?” Hester posed as a rhetorical question. “Or was your purpose to be successful and your customer simply the vehicle for doing it? It may seem like splitting hairs, but I don’t think I’m splitting hairs.”

It’s not immediately obvious that a bank that has taken big knocks in its income statement while trying to shrink its balance sheet and increase its capital ratios is the sort of bank that is ideally placed to turn down the opportunity to make money out of dubious yet profitable product lines. But Hester did talk about saying no to customers who want products that aren’t appropriate for them (unaffordable mortgages being an obvious example). And when he conducts a business review with the people who run the businesses within the bank, “I almost never talk about quarterly profits,” he said. “The content of my meetings with them is much more about what’s going on in the business, how we’re adapting to the environment around us, how we’re serving customers.”

Moreover, it isn’t going to be regulators that will drive an improved focus on customers: “The best banks will be doing the things that they are doing, not because there’s a regulator sitting over their shoulders but because they think those are the right things to do,” said Hester.

If profit isn’t the narrow focus for the bank, then what is driving it? Some useful light, perhaps, was shed when Hester set out his attitude toward the metrics that will help him achieve his goal of rebuilding the bank around serving customers: for sure, there will be a lot of metrics.

“If you target a single measure, people aim for the measure,” Hester explained. “They aim for the measure rather than the truth underneath it. So there are a lot of measures like net promoter scores, surveys of customer satisfaction and queue-waiting time, and errors per million transactions. It seems to me the best way is to deploy all the measures you can think of as part of the picture you build up about how you’re doing — but to avoid elevating any one of them to a single point of religion that then fails because it then becomes a target in itself rather than a measurement of what you’re trying to do.”

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.