How Would Banking be Different if it Focused on the Customer?

Indeed, as we have all heard, clients were typically described as ‘muppets’.

The core of the problem, it seems to me, is that the bankers bonuses that we hear so much about are never based on the amount of money made for the customer, but instead on the amount of money made for the bank. This means that, at every decision point, the incentive is to find a way to make more for the company even if this means less for the client.

For many years I had a personal pension primarily invested in the Stewardship Fund, managed by what was then Friends Provident. At an awards ceremony I met somebody from the company and mentioned that it hadn’t done very well. “Oh really?” they replied. “The Fund Manager is hugely well regarded and gets big bonuses for the performance of that fund.” But, after commissions and costs are taken out I had calculated the return over 18 years at 0.5% a year, after inflation is deducted. The Fund Manager might be doing very well, but I certainly wasn’t.

Most people have a similar experience. Whether it’s our endowment, our personal pension, or our savings we have generally seen lousy performance (even in the stock market boom years of the 90s) at the same time as many in the financial sector receive massive bonuses. Now I don’t know if it’s always the same people who manage these elements who get the money and, like most people, exactly how the financial sector works is slightly hazy to me. But let me use an analogy to explain my view.

The cat and the cream

Let’s say I leave a bowl of cream on the kitchen table, planning to cook with it, and leave the room. If I come back and find no cream left in the bowl but a very contented cat strolling around the kitchen floor, I may not have seen what happened but – with me now having no cream and the cat clearly looking well-satisfied – I can make a fair guess.

The same for me is true for bankers. We gave them our money, in various forms. We ended up with not much money and they ended up with lots. It’s pretty clear there is something odd about what happened and continues to happen.

We also know that the same is not true of other European countries. In Denmark for instance, where I understand banker bonuses are much lower, the pension you would get is said to be 31% higher than for somebody making the same contributions in the UK.

Back in 2008, just after the crash, I remember being told by a colleague in the financial sector about the effect of the way the system worked. “I know of cases where people knew the deal they were making did not make sense in the long-term. But the bonus they would earn on that one deal would pay off their mortgage. It was so great that they put aside their reservations and did what they were incentivised to do.”

One simple change – pay bonuses based on how much money has been made for the customer

Incentives, such as bonuses, are intended to drive behaviour and of course they have that effect. So here is my suggestion: Let’s change the nature of bonuses so that they are paid on the basis of how much money has been made for the customer. If that was the case, then perhaps Goldman Sachs directors would start talking at their meetings about how they could help clients.

Do you work at a company where bonuses are based solely on income or profit for the company? if so, how would behaviour be different if it was based on benefit to the customer?

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