The new legitimation of banks

In the wake of the financial crisis, a new attitude in society toward economic and financial issues has emerged. A recent GfK survey shows this quite dramatically: 43% of Germans have lost confidence in their bank. This alarming figure reflects, firstly, a change in consumer expectations: when buying financial products, retail customers want more product transparency and high-quality advice. But this is only part of the story. The survey’s findings also mirror widespread public mistrust of the activities of banks as such. Their legitimation as organisations which are accountable first and foremost to their shareholders has come under close scrutiny.

Banks should now focus even more strongly on customers in order to legitimise their business models and win back public trust. The way forward when it comes to adjusting business models in the retail customer segment is thus clear. The aim must be to create maximum customer value while obtaining an acceptable, risk-appropriate return for shareholders. This opens up a great opportunity for banks to take advantage of the epochal changes to refine their business models and to shape the new reality in the banking market on their own.

Upheaval in the banking sector has consequences for retail business
The financial crisis has far-reaching consequences for retail banking. There is growing customer demand for long-term financial planning. At the same time, customers face more short-term uncertainty and higher volatility. This means that today they have to devote more time to planning their finances than they used to. The days when recommendations were made, decisions taken and then no longer questioned are over. In future, asset formation and financial provision arrangements will have to be constantly reviewed and adapted to take account of changing personal circumstances and market situations.

A wave of new customer expectations is thus rolling towards banks. Customers want better accessibility and more frequent contact with advisers. But, above all, they want transparent advice that pinpoints both chances and risks and an adviser who is looking to meet their needs instead of his own sales targets. Today, investors often feel that they are not advised in the best possible manner and that the risks attached to their investment are not explained to them properly.

But, while constructive criticism is welcome, it is unfair to condemn advisers in general as ruthless salesmen who, driven by the thought of the commission they will collect, take advantage of customers instead of giving them tailor-made advice. Though such populist rhetoric may go down well, it doesn’t do justice to the issue or the vast majority of advisers – these are honest bank employees who are passionate about their job and provide their customers daily with competent, professional advice to help them make the right financial decisions. 

But, regardless of whether the criticism is warranted or unwarranted, the new reality in the banking sector will lead to stronger differentiation between banks’ business models. A pricing model featuring low prices and simple basic products is incompatible in the long term with a quality-based model which satisfies the growing demand for advice on investment and financial provision products. Any bank which believes it can combine both models will not be able to manage this balancing act for long.

Fair share between customer value and profitability
Profitability must not be achieved at the expense of customer value. The acceptance of banks’ retail business will depend on this to an increasing extent in the future. The commission-based sale of financial products – whether stipulated by an employer who monitors the sales performance of his employees on a daily basis or adopted voluntarily by financial intermediaries or advisers to better their own salary – is seen by critics as one of the main reasons for the current crisis of confidence. Everyone knows the examples of bad practice that have been reported in the media: the bewildered pensioner who was sold a long-term home loan and savings contract or the family man who thought he was investing in a safe retirement product and lost money in high-risk certificates instead.

Good, objective advice on the one hand and attractive sales remuneration on the other seem to be mutually exclusive. So calls for the commission-based advice model to be regulated more tightly or dropped entirely in favour of a fee-based advice model are growing louder. There are a number of arguments for or against either model. One trend appears inevitable, on the other hand: purely results-oriented sales incentives will no longer be part of the new reality.
Deutsche Bank’s retail business is not geared to price but to advice as the distinguishing factor in competition. Consequently, we have refined our business model despite the fact that our business was actually hit much less hard by the financial crisis and the loss of customer confidence than that of many competitors. The business model of the future must satisfy social legitimation requirements more strongly than it has up to now. It is basically a question of delivering the fair share between shareholder value on the one hand and customer value on the other that customers have missed so far. Customer value will increasingly become a parameter of the entire business model. We have therefore taken a number of measures to highlight more strongly the customer value in products, corporate performance management and the qualifications of our executives and advisers.

Transparency on costs and risks comes first
At Deutsche Bank, we introduced a new type of consumer-friendly labelling code for retail investment products at the end of 2009 (GRAFIK 1). Seven symbols provide a simple and transparent guide to price/terms, risk class, capital repayment, investment instrument, investment category, investment region and maturity and allow these to be compared at a glance. This product labelling code was the first of its kind in the German marketplace.

And in February 2010, we launched a financial product information sheet for customers, also known in the marketplace as a “package leaflet”. We were the first bank in Germany with a branch network to do so. Deutsche Bank’s financial product information sheet enables customers to tell at a glance: how do I benefit and what does the product cost? It provides full transparency in this respect, setting out all the costs incurred by way of, for example, loading charges, placement commission, administrative fees and trail commission or performance fees and service charges. So customers see right away what the product delivers and what their bank earns on its sale.

Consumer protection doesn’t stop at national borders
Alongside the current German standards – Deutsche Bank’s product information sheet complies with the recommendations made by the Ministry for Nutrition, Agriculture and Consumer Protection – European rules will be important as well in the future. That is why the foreseeable requirements resulting from EU rules which are due to be introduced in mid-2011 should be taken into account today. Deutsche Bank’s product information sheet already accommodates these requirements. After all, consumer protection doesn’t stop at national borders.

At the same time, the provision of advice geared to the customer’s interests should not be confined simply to issuing a product information sheet. While such a “package leaflet” makes sense and improves transparency, it only partly addresses the crux of the discussion. In addition to the product transparency called for, new corporate performance management (CPM) processes are needed.

Integrated corporate performance management weights customer and shareholder interests equally
In 2009, we therefore enhanced our CPM model for Deutsche Bank’s retail business. It adds a second dimension to performance measurement via earnings – creation of customer value. Both benchmarks are embedded in a performance matrix: shareholder interests are measured on one axis of the matrix, client interests on the other. Successful performance then means ensuring equally weighted growth along both axes.

On the one hand, the new CPM model continues to take into account the classical shareholder interests, i.e. the bank’s sales performance and financial development. It does so by way of the usual trade indicators. These include the growth in contribution margin, the sales income earned by each employee, but also risk costs. Banks must, of course, be profitable in the new reality as well. Only a financially strong bank can operate independently in the marketplace, offer highly qualified jobs, invest in innovation, perform its role as a good corporate citizen properly and provide the security that customers seek for their financial decisions.

On the other hand, customer interests are identified too, which automatically raises this question: which indicators can be used to actually identify customer interests? Deutsche Bank has integrated the following indicators into its CPM model:

Customer loyalty:  Customers want reliable, long-term advisory services. Only customers who are happy with the advice provided by their bank will remain loyal to it. In contrast, customers who feel they are being badly advised will quickly look to switch banks. Sustainable customer satisfaction is reflected in growing customer loyalty and is thus a suitable indicator.

Growth in the number of customers and mandates: Only customers who trust their bank and are happy with its advisory services invest money with it or instruct it to manage their assets. If they don’t trust their bank, they will withdraw funds. Growth in the number of customers and mandates is consequently a sensitive seismograph of how much customers trust their bank.

Ensuring customer performance: An attractive return increases customer wealth and creates clearly measurable value for investors. Only if costs are offset by appropriate earnings do customers benefit.

These indicators were of course also measured in the past. What is new, however, is how they are weighted when included in overall corporate performance management. The new CPM model allows for the first time equal weighting between customer and shareholder interests via the performance matrix. These are now CPM management parameters with equal status. For employees providing advisory services, this means the following: only those who deliver both a good sales performance and clearly measurable value for their customers will be remunerated accordingly.

With this CPM model, we are breaking new ground at Deutsche Bank in our retail segment. We are moving away from a company geared to shareholder interests towards a company guided more strongly by customer interests. We believe that only a company that creates sustainable customer value will create sustainable shareholder value as well.

Premium advice requires premium qualifications
Following the once-in-a-century storm, the financial industry has a commitment to its customers to review and, where necessary, improve the qualifications of advisers. In Deutsche Bank’s retail segment, we feel we have an obligation to deliver premium advice in the marketplace. This means that our advisers must be suitably qualified, particularly in troubled financial times, to meet the standards we set in this respect. For this reason, they spent a total of around 60,000 days in training courses in 2009.

We train our customer advisers so that they have outstanding, verifiable qualifications and are thoroughly familiar with the relevant legal provisions. To achieve this, Deutsche Bank offers a structured, externally certified training course in cooperation with the renowned Frankfurt School of Finance and Management. The course ends with written and oral examinations and awards the title of “expert”. Our advisers are re-certified every three years to maintain a consistently high level of qualification. Similar training should be made mandatory for the whole of the marketplace to ensure the provision of reliable, customised advice. We are therefore in favour of nationwide minimum qualification standards for advisers.

Promoting economic and financial literacy early in schools
In the new retail banking reality, banks also have to help make sure that people are able to make sound financial decisions by themselves – that they have a realistic idea of the return that financial products offer, but also of the risks these involve. Transparent products and professional advice are vital in this respect. At the same time, the general public also need to be equipped with basic economic and financial skills. As we believe that a general economic education starting at an early age is vital, we promote financial literacy by sending suitably qualified staff into schools at our branch locations. Over 1,000 Deutsche Bank employees are already available today to help students obtain a basic knowledge of finance.

Conclusion: the new competition in the banking market
The financial crisis has led to widespread public mistrust of banks and their business. This mistrust can only be overcome through a new legitimation of business models. To achieve this, responsibility for customers – and thus automatically social responsibility as well – must be made an integral part of corporate performance management alongside shareholder value.

Before the financial crisis, “customer orientation” was one of the buzzwords in the German retail banking sector. As a consequence of the new reality in the banking industry, this term is being given further substance: today, customer orientation means creating specific customer value. It is only through better product transparency and higher-quality advice that customer value can be created. When buying financial products, this will be more important to customers in future than price.

Creating and measuring customer value is therefore more than just a short-term trend – it is a new benchmark for the retail banking of the future. This gives the competition between business models a completely new dimension: the best fair share. 2010 thus marks the beginning of a decade which will bring wide-ranging changes for retail banking in Germany.