I organised a fascinating dinner focused upon what banks could learn from retailers the other night.
As the evening transpired, various thoughts popped into my head and felt it worth recording them here.
On the one hand, we are in awe of technology retail brands, especially Amazon; on the other, retailers have no idea about banking, as demonstrated by Andy Hornby and James Crosby. These were the guys who destroyed HBOS with their Asda style pile ‘em high and sell ‘em cheap loans, never mind the risk.
Adam Applegarth at Northern Rock and several other retail-oriented managers tripped over the same mistakes.
The retailing of credit is not a good market if it is not inhibited by strong credit risk management counterfoils.
I learned that lesson way back when the head of risk and the head of marketing in a bank’s board meeting I was facilitating started going at each other, hell for leather.
The marketing head blamed the risk head for foiling his achievement of bringing in new business. Apparently, applications for loans had shot up 200% in the last year thanks to his marketing efforts.
The risk head countered that the applications he was bringing in were fundamentally subprime and not worth the risk.
There’s a balance.
That balance was broken during the build up to the crisis, but it’s also the reason why the solution to the crisis is not in splitting retail and investment banking activities.
The only reason why the Hornby, Crosby and retail sales crowd got into so much trouble is because they had access to easy wholesale funding thorough the investment markets.
HBOS and Northern Rock didn’t have investment banking arms of any note, but they imploded because they offered credit without risk management.
That is one fundamental difference between retailers and banks.
As one of the guys said over dinner: “dealing with the data and the messages is the easy bit; managing global exposures to counterparties is what we do best and that’s where others struggle”.
Another theme we explored is the barriers to entry into banking, and this led to an interesting dialogue about why it is so difficult to do the risk piece.
Risk management takes years of learning and skill. It is not something found in the blood or culture of retailer overnight, and one of the retailer banks explicitly said that they felt it would take around 50 years to really get into doing banking properly for their organisation.
Half a century seems like a long time, but this was in answer to my query: how come after almost 20 years have we not seen a strong retail brand get into banking?
Sure we have Virgin Money and Tesco Bank, but neither has made a huge impression in the mainstream banking market … yet. Then we have Metro Bank, a Burger King Bank as I like to think of it; and Handelsbanken.
Of the four, Handelsbanken is the one that seems to get the most plaudits, but then it is a bank by background, isn’t it?
A final difference I see between the two breeds of thinking is space.
Banks pride themselves on having large bank halls, with lots of space.
Retailers pride themselves on having packed stores, with every square foot of space packed with goods for sale.
This was best illustrated to me by the story of Harrods Bank.
Harrods does have a bank. A very prestigious one that goes back to the 1890s.
In the back of the lower ground floor of Harrods store in Knightsbridge you will find the bank which caters for very high net worth Sloane Rangers.
What is it about this bank?
Well, I always remember the story from the 1980s of the store hiring a very senior manager from the then Midland Bank, to run the branch.
The new man was a fusty old banking sort, and was very upset with the way the branch was run, especially as it was located next to the toy department.
In particular, he took objection to the idea that his rich clientele had to walk past a large teddy bear display to get into the branch, and so he complained to the store owner about the situation, asking for the bears to be moved.
The answer came back: “when your branch makes as much profit per square foot as those bears do, then we will move them. Until then, live with it.”
There’s a lot more I could write about the difference between retailers and bankers, such as the competitiveness in the retailing versus banking, but will save that for another occasion.