Dr Ken Henry AC Speech – The future of banking

Dr Ken Henry AC – Address to the AFR Banking & Wealth Summit
Sydney, 5 April, 2016

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It is a pleasure to be here with you this morning.

I want to say something about several topics that seem to me to be central to the future of banking in Australia. I am addressing this topic in the shadow of the Global Financial Crisis and the subsequent regulatory focus on conduct and culture.

I want to take the opportunity to explain why the execution of the roles played by banks demands an intense focus on customer interests, including because of digital innovation. I want to discuss the extent to which that customer focus drives an alignment of interests as between bank boards and banking regulators. And I will offer some comments about the importance of purpose and values in supporting a banking culture that enhances shareholder value sustainably.

Ethics, culture and conduct

I was recently asked to write a foreword for a book written by Dennis Gentilin[1], following his experience as a whistle blower in the FX trading scandal at NAB in 2004.

The book contains some confronting lessons for corporate leaders. All of us have a responsibility to insist on compliance with rules, regulations and other artefacts of governance. But as Dennis’ research attests, our most important obligation is to lead, through character and morality, the development of an ethical business culture.

Dennis emphasises that successful leaders will embrace humility. All organisations are fallible. And the coercive imposition of rules and regulations, even credible transparency mechanisms, cannot be relied upon to ensure ethical conduct; in certain cases these ‘command and control’ approaches can even make things worse.

Much more important than the monitoring of compliance risk management is the role played by corporate leaders, including boards, in framing and communicating the organisation’s purpose and values.

Tone from the top is not everything, but it does matter.

When a board is made aware of an instance of poor conduct, it should respond. It cannot always know whether the particular incident is isolated or indicative of a deep or widespread cultural problem. But it should take the opportunity to speak to the organisation about the incident; to explain why it sits uncomfortably with the purpose of the organisation and why it is inconsistent with the values of its people.

The Banking and Finance Oath – with its emphasis on trust, integrity, justice and ethical behaviour – provides an opportunity for leaders in banking and finance to get their heads in the right space for these sorts of conversations. You may be aware that each of the members of the NAB management team signed the Oath last year. Having looked at it myself, and assessed its compatibility with my personal values, I couldn’t see why I would not want to sign it too. So earlier this month I did. If you haven’t already accessed the BFO website and confronted the challenges presented by the Oath, then I would encourage you to do so.

People values matter. And corporate culture matters.

The core message in my remarks to you this morning is that the culture of an organisation derives overwhelmingly from the way in which its people think about and engage with its customers. Not only is that the principal driver of culture, it is also the principal driver of corporate success.

Running a bank successfully means having a good sense of shareholder expectations. It means attracting, motivating and retaining high performing staff. And it means knowing what it takes to attract reliable funding from depositors, institutional pools and other banks. But most importantly, it means having a very good understanding of what the banking customer wants.

As Chairman of NAB I have been learning from our customers, understanding what success for them looks like, and what that implies for the performance of our people. The NAB Board has introduced performance measurement tools with a customer focus. The Net Promoter Score is one of three key metrics by which we now determine executive remuneration. One-third of the performance bonus outcome for the CEO and each of the Group Executives at NAB is linked to customer advocacy. Remuneration outcomes are also dependent upon the executive demonstrating that he or she is living the values of the organisation: a passion for customers; a will to win; being bold; having respect for people; and doing the right thing. These values align with NAB’s goal to be the most respected bank in Australia and New Zealand.

Putting the customer at the centre of banking

Banks provide several services to a modern economy: (1) they intermediate credit; (2) they provide savers with a secure means of storing wealth and accessing liquidity; and (3) they play a key role in the payments system.

Banking matters to bank shareholders, obviously. But it matters to a lot of other people as well. It delivers several services that support economic and social development. Banks lend to businesses wanting to grow, perhaps wanting to access new customer markets. Banks provide finance for people wanting to buy a home or a car. And banks are able to arrange financing for both private and public infrastructure. In these and other ways, banks play a key role in supporting economic growth and individual prosperity.

I spent three days in Moree, recently, meeting with a number of our agri-banking customers. Next week I will be travelling to the Northern Territory to meet with other NAB customers. On other occasions I have met with business bank customers in Melbourne and Sydney to understand what they expect from us.

What has struck me most is that our customers are looking for a relationship with a bank that understands their business, and the markets in which they operate, well enough to anticipate their financial services needs. Many of them want to think of the bank as a reliable and trustworthy partner. Not just a business partner, a partner that helps them realise their aspirations; aspirations they harbour for themselves, for their families, in some cases for future generations, and for their communities.

It’s worth considering what would be the cultural attributes of a bank that could credibly promise to live up to that sort of challenge.

This is the challenge we are embracing at NAB.

The importance of a deep interest in the aspirations of our customers is being driven, Board down, through our business. We are determined to be customer-focussed. We know that this is what will drive our success.

Successful businesses put the customer at the centre of everything they do. In a successful business the customer drives product design and the suite of products offered. No customer is encouraged to buy something they don’t need or charged more than they need to be charged to cover the cost of providing the product. No customer of a successful business buys something that they don’t understand well enough to have a high degree of confidence that the product will deliver what they want, when they want it.

A bank that puts the customer at the centre of everything it does will ensure that it has sufficient shareholder capital to finance business expansion and to absorb unanticipated shocks of some order of magnitude; sufficient to be able to attract reliable pools of deposits and wholesale funds at reasonable cost in all but the most extreme circumstances. It will ensure that it has sufficient liquidity to be able to ride out short-term funding gaps.

A bank that truly puts the customer at the centre of everything it does should not need regulation. It should not need prudential regulation or conduct regulation. The fact that our regulators are taking such a keen interest in banking culture, right now, means that they are not satisfied that the Australian banks are always sufficiently customer-centred.

A customer-centred bank would not need to be told by APRA that it should be concerned about the security of its deposits. A customer-centred bank would not need to be told by ASIC that it should never treat its customers unconscionably. Customer-centred banks would not need to be told by APRA or the RBA that they need to hold sufficient shareholder capital to be able to attract quality wholesale funding or to avoid contributing to systemic instability.

Another way of putting this is that the interests of a truly customer-centred bank are likely to be closely aligned with the interests of its regulators.

The regulatory interest in culture is understandable; culture drives conduct.

Of course, there is a risk in viewing organisational culture through a conduct lens. Internally, it encourages a focus on the management of compliance risk. But the effective management of compliance risk is not the same thing as a healthy organisational culture, just as slowing down whilst passing stationary speed cameras is not the same thing as safe driving.

There is a risk for bank boards, including in discharging their obligations under paragraph 13(b) of APRA’s CPS 220, of adopting a ‘command and control’ approach to organisational culture[2]. Command and control approaches to driving culture have long been used in military organisations; in organisations that are ‘enemy-facing’. It isn’t difficult to see why they might not be so effective in a customer-facing organisation. Rather, as one commentator has argued, recently, ‘(i)f the banks want to contribute to ethical practice they need to let go of …… control, and be open to criticism, welcoming of debate, and vulnerable to dissent’[3].

This seems right to me. Indeed, any business that really has a passion for customers has to be open to criticism and it has to welcome, even encourage, debate. Importantly, being open to criticism and welcoming of debate is not only in the interests of customers, it is very much in the interests of shareholders. This is an important part of what it takes to create a strong and sustainable business.

The regulatory response to the Global Financial Crisis and new challenges

Thus far, the prudential measures that have been implemented, or are close to being implemented, in response to the Global Financial Crisis have had just two objectives: First, reducing to some extent the maturity mismatch in financial intermediation through liquidity coverage measures and the proposed net stable funding ratio; and second, increasing the probability that private shareholders will bear all of the pain when something goes wrong in a bank in the future. Higher risk weights and higher capital ratios applied to risk weighted capital ensure that private shareholders now have more at stake on every loan.

For the most part, ensuring that shareholders are more exposed to risk enhances the attractiveness of banks as places for savers to store wealth and access liquidity and as places for institutional lenders to obtain secure returns. But they do have the politically sensitive consequence of increasing the margin between bank borrowing and lending rates.

Continuing interest in so-called total loss absorbing capital (TLAC) has a different motivation. Its objective is to reduce the probability that public sector balance sheets might ever have to be used to supplement, or replace, private shareholder capital in systemically important banks.

But TLAC won’t protect public sector balance sheets fully. Were we to have a repeat of the funding and liquidity stresses that precipitated the Global Financial Crisis, our regulators would have no option but once again look to use the public sector balance sheet to underwrite funding guarantees. The only thing a TLAC would achieve in those circumstances is reducing the stock of liabilities sitting on bank balance sheets that would be guaranteed by government; the entire flow of new funding would still have to be guaranteed. The question to which none of us knows the answer is whether a creditor who had already taken a haircut on a pre-existing loan, which is what is being proposed in discussions on TLAC, would front up to extend a new loan, even with a government guarantee.

The other big question is whether the public sector balance sheet still has sufficient strength to be able to provide a credible guarantee. All I will say on this is that governments have not matched the improvement in the strength of bank balance sheets that has occurred since the crisis.

Regulation is not the only thing that has developed a pace in recent years. Just as notable has been the explosion of digital financial innovation. While people want their money safe, and the institutions looking after their money strong, they also want the increased convenience and better quality service that digital offerings promise.

We are finding that customers have liquid expectations; they want the best practise service they experience in one sector to be matched across all sectors.They want the experience they have when shopping with, say, Amazon to be the experience they have when they do their banking.

But digital financial innovation also poses the possibility of disruption; that is, the disruption of banking incumbents.

Digital disruption

All of the roles played by banks are contestable. In fact, banks only get to play these roles today because they out-competed earlier providers of each of these services. This is worth bearing in mind as we think about the contestability posed by digital challengers.

The digitisation of peer-to-peer lending is new, but peer-to-peer lending is old; older than banking. Similarly, the development of so-called ‘crypto currencies’, which digitise value in a non-currency form to facilitate electronic payments is new, but the use of non-currency forms of value to facilitate payments is ancient, pre-dating banking by thousands of years.

Banking is continuing to evolve and the pace of evolution has accelerated.

Within NAB, digital innovation is being embraced as a key element of a customer-centric culture. Rapid change has become business as usual. Everyday, our people are exploring how digital technology can be an enabler of a much better experience for our customers. We have moved to design an innovation system; one that is scalable and reliable, run by the people within the bank itself.

In recent years, the whole NAB Board and, separately, the entire Executive Leadership Team have visited the West Coast of the United States to experience, first hand, some of the latest developments in customer-led digital innovation.

We understand that we need to keep pace with our customers’ expectations. We know that we have to be forward-looking; not looking to what our competitors are doing, and matching them, but looking to ensure that our customers have the best of what digital innovation can deliver.

Already, we have made investments in simplifying our technology platforms, removing complexity, delivering quick and simple digital experiences for customers.

We are investing in NAB Pay to enable customers to use their mobile phones to make purchases, without the need for a physical card. We are rolling out our personal banking origination platform (PBOP) to reduce the time it takes to deliver products, including credit cards, personal loans and home loans. NAB Ventures is enabling the bank to access leading ideas and capabilities from around the world through partnerships, alliances and investments in innovative companies.

And we have recently announced NAB Dash, a mobile app that helps our customers and merchants avoid long lines at sporting events by giving them a simpler, faster way to pay; and Business in One, a cloud-based ‘one stop shop’, where small businesses can access multiple apps on one platform, using a single NAB sign-on.

Historically, banks have been pretty successful disrupters. If we were today living in a world without banks, but with digitised peer-to-peer lending and a digital payments system built around a ‘crypto currency’, I would venture the prediction that we would shortly see the disruptive emergence of banks. And not all of the services provided by these disrupters would be digital; a business that offered face-to-face contact between a customer and a banker would pose a truly disruptive threat to digital-only financial services providers.

Yet today’s digital challengers are targeting all of the roles traditionally played by banks. Each of these roles is of significant interest to governments and regulators. So far, policy makers and regulators have barely begun to respond to the challenges posed by digital innovation and disruption; but they will.

Just what that regulatory response might look like is too early to judge. There is a respectable argument that fintech developments will lead, ultimately, to less regulation. One reason for this is that digital innovations supporting enhanced data accessibility and faster and more complex computation could reduce information asymmetries. But information asymmetries do not arise only from a lack of data or computational power. The processing of data into information that is useful in credit decision-making absorbs significant human capital; it is not cheap and it cannot al be fully automated. There is a place for so-called ‘robo-banking’, but not all banking relationships, nor all credit decisions, can be left to digitised algorithms. That’s why I think it likely that robo-banking will prove most successful in established banking businesses capable of offering a richer set of customer experiences.

Thus, while the digital revolution poses a substantial challenge to contemporary models used to deliver banking services, it doesn’t spell the end of banking, nor of banks per se. Rather, it suggests that banks will transform, probably quite dramatically, as they become even more significant digital players.

No doubt there are a large number of fintech entrepreneurs wanting to test what I have just said. And there may well be governments and regulators, including in Australia, who want to see them do it. We are all learning, after all.

Concluding remarks

This is an interesting time to be in banking. The Australian banking system survived the stress testing of the Global Financial Crisis in a stronger shape than could reasonably have been anticipated. Yet our regulators are not convinced that all is well. And so-called fintech disrupters pose new challenges for incumbent players. Increasingly, the banks are being forced to demonstrate that they really are as ‘customer-centred’ as they say they are. This is no bad thing.

The financial services providers, including banks, that navigate the challenges of the next decade most successfully will be those that have a strong sense of purpose, driven by a deep appreciation of what is in the customers’ interest, and a culture that is determined to deliver it.

Customer-centred Australian banks will continue to create value for shareholders.  This is no small thing. Bank shareholders include large pools of superannuation savings. Most adult Australians are relying on the ‘big 4’ banks to provide a strong and sustainable return to help fund their retirement.

The board of NAB feels the weight of that responsibility. We want to ensure that the business is capable of generating strong shareholder returns sustainably.  Our expectation of the culture of NAB is that it is absolutely customer-centred, and continually driving change within the business to improve the customer experience.


[1] Dennis Gentilin, The Origins of Ethical Failures, Lessons for Leaders, Routledge, London and New York, 2016.

[2] See, for example, Carl Rhodes,’”Command and control” banks have got ethics and culture all wrong’, The Conversation, March 2016.

[3] ibid



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