Why The Big Four Bank Brands Will Weather The Royal Commission Storm

“We’re all innocent and we’re all guilty." 

So said an infamous Italian mafia boss after being jailed along with scores of associates, numerous politicians and members of the judiciary in Northern Italy in the late 1990s. He wanted to make the point that the culture of corruption in the city had become so institutionalised, so routine and so widespread that it didn’t even seem wrong to anyone any more. 

In light of the interim findings by the Hayne Royal Commission, such normalisation of bad behaviour based on greed is an accusation you could equally lay at the door of some of the leading players in Australia’s banking and financial services sector over the past decade. As the Royal Commission has pointed out, the problems within the big four banks and other major institutions are widespread, cultural and not the result of “just a few bad apples”. The findings to date and the fallout have been damning.

But how damaging will the revelations eventually prove for the big four bank brands? Perhaps, surprisingly, there is reason to believe they may not be as negative as one might initially think and may even present an opportunity if any bank is brave enough to seize it.

Recent data from Roy Morgan shows that although customer satisfaction with the big banks has declined over the past year, the falls have been quite small. Compared to the previous year, in the six months to June 2018 customer satisfaction at CBA is 78.3% (down 2.7%), NAB is 77.1% (down 2.7%), Westpac is 76.4% (down 1.5%) and ANZ is 76.1% (down 2.7%). The percentage point declines seem modest and the overall satisfaction levels are still well above the long term average for all banks of 73.8% (calculated since 2001). Further, the Roy Morgan analysis attributes a large part of what declines there are to increases in interest rates amongst home loan customers over the period rather than the revelations of the Royal Commission on its own.

This is not to say the Royal Commission into banking isn’t bad for the reputation and profitability of the big four Australian banks. Quite to the contrary, the regular, widespread and sensational revelations of poor and potentially criminal behaviour represents a watershed moment in the history of the Australian financial services sector. There will be far reaching implications in terms of regulation, customer compensation, compliance and bank culture that will rightly have lasting implications for the banks for years to come. The big banks have already written off hundreds of millions of dollars and their share prices have been hit hard.

However, there are reasons to believe that on the demand side bank brands may be able to see out the current crisis of reputation in a way that limits the damage to negative sentiment rather than to customer defection.

We Still Trust The Big Banks In A Vital Way

We typically are told to think of trust as a singular concept. You trust someone or something or you don't and possibly there are levels of trust in between on a continuum. But in truth, trust is a much more elusive and complex concept. The nature of the trust relationship in banking and finance is unique. On a certain level you could argue persuasively that we never really trusted the banks to begin with, even before the Royal Commission and certainly in terms of acting fairly, with transparency and accountability, our trust in them has gone down from an already low base. However, there is one significant way in which we do trust banks. We trust them not to fail. Perhaps the most important factor of all that underpins the ongoing strength of the big four bank brands is that we trust them to be there, to survive and to keep our money safe. If there is one thing that matters more than anything else to consumers in banking it is the financial security of their savings.  Yes, they may be driven by profit, yes they may charge fees that are too high, yes they may be out of touch with community standards, but at the end of the day your money is safe. 

Our long held trust in the stability of the Big Four banks was only reinforced in the recent global financial crisis of 2008. At a time when banks and other financial institutions all around the world were were failing, our banking sector (with help from the government of the day) held firm. Even the widely used phrase ‘the four pillars policy’ underscores the idea that it is the big banks that hold the structure of our financial world intact. 

Banks Now Do Everyday Banking Very Well

This isn’t something we like to talk about in our anti-bank culture, but without making much of a fuss banks have quietly gone about totally revolutionising the banking experience over the past decade with technology. If you are not so inclined, there is little if any reason to go into a bank branch these days. Internet banking is fast, seamless and ubiquitous. Cash machines are everywhere, if you even need cash. Banking via mobile phone apps is mostly easy and instantaneous. Payments have become as simple as tap and go. No card? Just use your phone. In the process they have removed queues, paperwork, red tape and the inconvenience of branch banking. Yes, problems remain, but by and large banks have gotten out of the way in everyday life and most people are grudgingly quite grateful for this.

There Are No Easy Alternative Choices

The fact that all four banks have been so embroiled in the Royal Commission’s negative findings is also, strangely enough, protective of each of them individually. There isn’t a like for like swap that consumers can easily make. And even if people want to go beyond the big four, as many no doubt will, changing banks is time consuming and difficult. As technology has found its way into our financial lives the big banks have us more “entangled” than ever with multiple product holdings, direct debit arrangements and familiar online systems that are not easy to set up or re-learn at other institutions. Changing banks today means a pretty substantial re-organisation of one’s financial life. This is likely to reduce the likelihood of switching behaviour even for disaffected consumers unhappy with what the Royal Commission has revealed about big bank behaviour. 

The Opportunity Within The Storm

It would be a brave person to predict that the worst of the financial scandal surrounding bank behaviour has come out. The Royal Commission and the ongoing enquiry by parliament may still uncover more skeletons from the closets of the big four banks. However, unless something emerges that challenges our collective sense of the security and ease that the big banks provide their brands will have the time and opportunity to bounce back. The recent experiences of Volkswagen on emissions and Toyota on product quality show that big brands with long histories have the ability to recover strongly over time from reputational damage if corrective action is taken from the top down.

So far there are lots of contrite and positive noises coming from bank leadership, but we will have to wait to see the extent to which it finds its way into meaningful change. The prospects of this happening would be significantly enhanced if consumers had more genuine choice. And the question of competition policy in banking is an issue that regulators and government will now have the opportunity to address. 

Beyond the obvious defensive actions, the maelstrom of the Royal Commission presents a rare opportunity for at least one of the Big Four banks to seize the initiative over its rivals. Olympic marathon runners will tell you the best time to make a move during the grueling race is over the closing stages when running up hill and everyone is feeling the heat. Can one of the banks break from the pack and tilt the balance more in favour of customers at the short term expense of shareholders to ultimately achieve greater long term gains for both? When everything else is stripped away this is the tradeoff that would need to be made. This is change that goes way beyond eliminating bad behaviour and actually creates a culture that more proactively encourages outcomes that are in the best financial interests of customers. It would be a bold play indeed if any of the banks was brave enough to pursue it. Recent history might suggest this is unlikely, but then again, tomorrow is another day.