Traditional and modern systems of wellness have cautioned against excess in nourishment, exercise and medication. Yet, things frequently go so out of hand that the only way out is a strict regimen of diet, workout and maybe even medical intervention.
Have different nations and their financial sectors come to such a pass? The drop in vital parameters suggests that this is indeed the case.
National economies are in need of a cure
A look at recent figures from the Organisation for Economic Co-operation and Development (OECD), International Monetary Fund and Central Intelligence Agency paint a worrisome picture for most economies in Europe, and especially the following, which carry the highest burden of Gross External Debt: Ireland, US$ 2.38 trillion (1385% of GDP); United Kingdom, US$ 8.93 trillion, including Government Debt (413% of GDP); Switzerland, US$ 1.3 trillion (401% of GDP); Netherlands, US$ 2.55 trillion (376% of GDP) and Belgium, US$ 1.32 trillion (335% of GDP). This is the result of excesses, which have gone unnoticed and unchecked, and like certain stealthy health hazards, are only exhibiting symptoms at a late stage of the disease.
Unfortunately, the epidemic has already spread, not just from one country to another, but also to their people. Each of these national debts has placed a burden on the common man, whether directly or indirectly, created much social unrest, and forced citizens to move to other countries in search of better economic prospects.
Such sudden large-scale migration will soon make its repercussions felt, as the immigrants start to burden the infrastructure and eat into the job opportunities of the host nation, to create a new wave of social upheaval.
Europe is now trying to undo the damage of its earlier excesses by going on an austerity diet. Only time will tell whether this will pay off, or conversely, set off its own vicious cycle of lower public spending – less investment – lower consumer confidence – lower demand – deflation – lower manufacturing output – retrenchment – and ultimately, a higher social security burden. Against this outlook, the OECD’s prediction of a 0.8 percent shrinkage in the Eurozone’s GDP in 2012 comes as no surprise.
And their banks are ailing too.
Europe’s vulnerability is compounded by the delicate financial situation of its banks, which hold combined assets that are nearly 5 times the total GDP of all the nations combined. In recent stress tests, European Banks were found to be way short of the capital prescribed to defend against future credit shocks.
We are seeing the ill effects of “Too Much Everything”.
The culture of excess is not limited to national economies or the financial sector alone. The retail industry in the United States is estimated to hold inventories in a staggering 1 million stocking units. Large supermarkets hold more than 40,000 different stocking units, when a mere 150 fulfill 80 to 85 percent of the average family’s needs.
In 1970, there were around 140 models of automobiles; today that number has swelled to 400. During the same period, the number of breakfast cereals has more than doubled to nearly 350; and 400 brands of PCs and 250,000 types of software have made an appearance. But the best example of all is the information and communications explosion, which has provided a surfeit of devices (there are more than 10,000/15 models of mobile phone / tablets respectively today!) to enable 5 billion and 1 billion users of mobile phones and Internet respectively to exchange a staggering 2 billion exabytes of data in conversation each year.
This overload of options is not necessarily a good thing for providers and consumers alike. Barry Schwartz, author of the renowned book “The Paradox of Choice”, says that beyond a point, choice can leave some consumers worse off than before or confuse them so much that they are paralyzed into inaction. There’s another theory that says that in the face of too much choice, customers perpetually defer the buying decision in anticipation of the next faster, better, or cheaper option.
Therefore, banks and other financial institutions, which have indiscriminately expanded their product offerings in a bid to satisfy each and every customer need, must now trim the flab to get into shape. They have at their disposal four important levers to do so.
These are the levers of banking health.
Product:The larger the product range, the greater the baggage of maintenance, service and support staff. Moreover, product variety does not always translate into a higher product per customer ratio or profitability. Therefore, the challenge before banks is to creatively destroy unnecessary products and proffer a select range of options that will satisfy most customers, without confusing them.
People:Retrenchment and job freezes have become standard fare in the banking world in recent years. However retrenchment is not the only panacea; a rationalised customer base is equally necessary for complete health. Banks need to find real differentiators to hold on to their profitable and satisfied customers, and also convert their dissatisfied customers into satisfied ones. And if they still have a number of less than satisfied or loss-making customers, they should consider divesting them.
Process:Process rationalisation is the equivalent of exercise, and like the latter, must be taken in the right form, at the right time, in the right amount. On top of what they have achieved so far through process transformation, banks can further improve efficiency by removing extra processes, standardising them as far as possible throughout the organisation and embracing Straight Through Processing.
Technology: Cutting the fat in technology consumption can significantly improve the health of banks. The goal should be to reduce “sunk” costs towards maintenance and sustenance, and deploy resources into new, enabling technologies instead.
Required, a holistic form of treatment.
How should banks employ the above dietary levers? The answer to that in two words - “in balance”.
After conducting a thorough check of vital parameters, banks must create their strategic health prescriptions with the four levers in balance, such that they all work towards the same fitness goal. In the past, some banks have employed just one tactic, without considering the implications on processes, people and technology, and achieved sub-optimal results. What they need is an integrated, holistic approach – a health matrix that lays down the extent to which each lever must be turned and the timing thereof – to restore the balance between all aspects of the business, on the way to total health.
At the same time, it is necessary to evaluate the impact of this regimen on customers and other key stakeholders. Behavioral analysts conclude that consumers on the cusp of making a purchase are primarily concerned about 5 types of risk – monetary, functional, physical, social and psychological. In the present context this could mean that customers might perceive their bank’s downsized product offering as less beneficial, or worry about what their friends might think of their decision to bank with an institution that has received bad press for laying off people, or fret over whether they should remain with a bank, which by withdrawing free services, has clearly stated that it puts valuations above values. Similarly, before proceeding to lay off people, banks must consider how this could affect the morale, productivity and service level of current employees, and their own reputation among prospective hires.
Also, banks must be cognizant of the possibility of being forced into additional / more stringent fitness regimens, such as the one prescribed by the impending Basel 3 capital norms, or the recommendations of the G20 bloc. Therefore, the levers of transparency, governance, reporting standards etc. will have to be balanced with those of product, people, process and technology to arrive at an overall health package.
Finally, it is important not to mistake suppressed symptoms for the cure. Banks need to evolve and monitor a “banking health diagnostic index” to ensure that their program is on track. This index must be a comprehensive and fair indicator of overall health that takes into account all vital parameters including but not limited to capital adequacy and quality, balance sheet movements, return on asset and equity, cost income ratio, productivity, products per customer, employee churn, channel utilisation, technology spend and average transaction processing time.
The ultimate goal must be to emerge as a robust organisation with the stamina to overcome the inevitable challenges of the future, and the immunity to withstand its unexpected shocks.
