What's wrong with America's banks?

Crumbling bank facade

We asked three experts with decidedly different views to explain what’s wrong with our banks.

One says banks have abandoned the customer in pursuit of shareholder profits. A second says banks need to offer more services to attract customers. And a third says banks must return to simply being banks and shed their investing dark side.

It's hardly breaking news that the twin blows of recession and regulation have left our neighborhood banks reeling, unsteady on their feet and devoid of the friendly optimism and confidence that used to greet us at the door.

The recession exposed a seedy underbelly of self-serving financial advice and unfettered greed while the resulting regulatory snapback laid bare a widespread business model that could charitably be called "offer less for more." Whether consumers will ever trust mainstream banks again remains to be seen.

Philip Augar, former securities managing director at Schroders in London and author of Reckless and The Greed Merchants, says bank-bashing, while understandable, misses the central point: We all need banks.

"Banks take surplus cash from people, businesses and sovereign states and lend it to counterparties that need money," he wrote in the Harvard Business Review recently.

"If banks did not provide this intermediation service, money would stick with those that already had it and the existing distribution of wealth would be entrenched and magnified. Home ownership could only be achieved through inheritance, it would be hard to start new businesses and progress in the developing world would be slower. Banks, then, are the agents of the economic mobility that underpins a fair and fluid society."

What we don't need, in Augar's opinion, is banking's overriding obsession with shareholder profits that accelerated with the 1999 repeal of the Glass-Steagall Act, which enabled banks to invest in securities and underwrite such trade instruments as mortgage-backed securities, collateralized debt obligations and structured investment vehicles.

"(Today), banks exemplify rivalry rather than the type of tooth-and-claw competition that would lead to differentiated service levels and prices," Augar says, drolly adding, "I am not aware of any evidence that links (that) with lower customer prices and improved service levels."

Linda Verba couldn't agree more. As executive vice president of store operations and service programs for Toronto-based TD Bank, she says many U.S. banks have forsaken their customers.

"What tends to happen to banks in an environment like this is, they tend to focus internally on how to deliver shareholder value," she says. "So they focus on the score as opposed to the experience that's going to lead to the score, and they cut the things that matter most to their long-term growth and survival."

Those cuts usually begin with employee programs. No more university coursework, seminars, personal development performance reviews -- or raises. Then, to compensate for an ill-trained workforce, they strip power from the teller -- the one person in the bank that Verba calls the linchpin of customer satisfaction.

"Sales is the highest form of service," she says. "Who's going to buy something from you if they don't trust you? If you're not offering kick-ass service to the customer, what makes you think they're going to trust you with more of their money?"

Tony Plath, a finance professor at the University of North Carolina-Charlotte, says banks must look to new products and services to attract customers now that the shell games surrounding hidden fees have been curtailed by regulation. Likely candidates include insurance, wealth management advisory and convenience products, and services such as tax preparation, family office advice and small-business accounting.

"You have to have something your customer wants to buy from you that you can sell for a profit. But there are all kinds of impediments to making that happen. The typical insurance person thinks differently than the typical banker," he says.

Poppycock, says Philip Augar. What banks need today is to return to being banks.

"The way out of this is not to ban banks or to replace them with a different type of financial institution but to refocus them on their basic purpose," Augar writes. "The other things that today's banks do involving excessive leverage and frenetic trading as a means of making money for themselves and their clients have no place in the core banking system."

His solution? Split banking down the middle, a Dr. Jekyll/Mr. Hyde proposition.

Dr. Jekyll banks, which he calls specialist trading firms, would be free to trade on their own behalf but could neither advise nor trade on behalf of their customers. Mr. Hyde banks, which he calls advisory firms, would trade only for customers and would be prohibited from trading for themselves.

Great concept, but who has the power to make this happen? Don't expect banks to reform themselves, Augar advises.

"Shareholders have a role to play in banking reform by placing a higher premium on the quality of earnings and paying less attention to growth rates," he says.

Translation: It's time for banks to become banks again.

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