Two Models of Finance

In recent weeks, the global reputation of finance took yet another hit. A major bank admitted that thousands of its employees, under pressure to meet aggressive personal sales targets, had opened more than two million accounts in the names of non-consenting consumers. While public recriminations reverberate and many voices assign blame, one fundamental implication is beyond dispute – the world of finance continues to operate under a dark cloud of mistrust.

As scandals have come and gone over the last years, from LIBOR fixing to rogue trading to FX front-running, many commentators have posed a thoughtful question: do the scandals that plague finance stem primarily from individual bad actors, or from systemic issues within the industry that inevitably produce them? For instance, can a CEO credibly cite individual failure to honor vision and values, when required sales targets may be unachievable for employees and undesirable to customers? Is finance so structurally compromised that it cannot produce any societal good beyond economic returns?

Thankfully, there are numerous hopeful green shoots popping up as financial firms seeking to expand their prevailing operating paradigms. We’ve written about firms’ leveraging their core capabilities to solve global problems, like Munich Re’s broadening its product set to help vulnerable farmers in India; about companies’ seeking to address root causes of societal problems, like National Australia Bank’s reframing debt collection as a means to help customers cope with financial hardship; and about banks’ investing in their societal ecosystems, like Banco de Credito in Chile’s tutoring of entrepreneurs and startups. As more financial firms engage in such pursuits, they may inspire impactful action from others within their own spheres.

More broadly, perhaps significant restoration of trust to the financial sector will only come as firms embrace a different model altogether, a foundational redefinition of entrenched viewpoints on:

CONSUMERS. One model states the most important question as this: “What will consumers pay for?” The other model asks instead: “What will ultimately benefit consumers?” The choice is extremely important; after all, the first model might lead an institution to set an extremely high goal for total products sold to a single consumer, while the other might ask how many total products would actually be of benefit to that consumer.

EMPLOYEES. One model might view employees as a resource from which to extract maximal value, while the other could instead aspire to treat employees with dignity and extend them opportunities to thrive. In the first case, establishing unrealistic sales targets with the threat of job loss would be suitable; but the second model would reject it because it neither promoted dignity or thriving.

INNOVATION. One model seeks to profit from innovation defined as ever-increasing opacity and complexity (think highly structured and exotic financial instruments that are difficult to price and illiquidly traded). But another model seeks to innovate in order to promote the democratization of access of financial services. One such example is the mPesa mobile-phone-based payment app that has literally transformed Kenyan life, permitting millions of individuals to receive income and make person-to-person payments without intermediaries or extortions along the way.

PROFITS. One model views financial returns as the bottom line, the very raison d’etre for the organization. However, another model views financial returns as a bottom line to be prioritized along with others, or even a fuel to propel the organization towards its other goals. If financial returns are the only bottom line, this will drive a distinct set of decisions, some of which may actively detract from client, employee, or societal benefit. But if financial returns are one priority among several, more nuanced decisions may be reached that actually benefit all bottom lines.

If every scandal that erupts in finance is the result of individual counter-cultural bad behavior, there may be little recourse but to await the next one. However, if there are systemic issues that combine to form a culture that fosters bad behavior, then perhaps a wholesale change to the animating vision of the financial firm is in order and, as more companies embrace that different model, they will collectively burnish rather than blemish societal trust in finance.

 

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