The WelderDestiny Compass

Bad Banks - Bad People - Issue #067

Wednesday, May 09, 2018 / Perth Australia / By Niekie Jooste

In this edition of "The WelderDestiny Compass":

  • Banking Royal Commission
  • Self Interest And Incentives
  • Banking Landscape
  • Don't Waste A Crisis

Banking Royal Commission

For our international readers, let me take a few sentences to bring you up to speed.

There is currently a royal commission (an independent body with wide ranging powers of inquiry) that is investigating the dealings of the banks, and other financial institutions. This investigation was called, because there was widespread dissatisfaction with the advice and performance of the products from the financial institutions.

To sum it up, the evidence so far has been very damning, resulting in the resignation of a number of bank CEO's and other board members. It is clear that the financial planning organisations associated with these institutions are very conflicted, giving clients advice that is extremely poor. Poor for the clients, that is. Very lucrative for the financial planners and the banks though!

Our beat here at The WelderDestiny Compass is not really banking, but the lessons coming out of this exercise can really be applied to any industry, because it is all about human psychology and industry change due to technology. Now those topics are certainly part and parcel of our beat.

In addition, the financial industry is actually not that different to the welding and broader engineering industry. It is a multi billion dollar industry that has government and industry watch dogs monitoring their every move and practice. Not only are companies required to "register" to be able to provide services, but many of the "professionals" within their ranks also need to register on a personal level. All of this, to protect the average citizens out there. Does it sound familiar?

Today we look at the lessons we can learn from the "reality TV" currently surrounding the financial industry in Australia.

If you would like to add your ideas to this week’s discussion, then please send me an e-mail with your ideas, (Send your e-mails to: or complete the comment form on the page below.

Now let's get stuck into this week’s topics...

Self Interest And Incentives

The picture emerging within many of the banks and financial institutions is one of greed that has been fueled by sales incentives. By their very nature, incentives are designed to appeal to people's self interest. When these incentives are so designed that they are more concerned with what is good for the bank, rather than what is good for the client, then the current outcome was inevitable.

The role of self interest and incentives, are topics that we have dealt with a number of times in The WelderDestiny Compass. If you have been a long time reader, then I am sure that you have heard our advice that as a general rule, incentives need to be used very wisely, or not at all. Within traditional organisations, incentives are a poor substitute for leadership, but it is certainly an easy one!

Let's face it, when a financial planner / adviser is incentivised with sales targets and bonuses, s/he becomes a sales person, not an adviser.

This management by incentives is rife, from company boards all the way through to the bottom of most organisations today. And not just financial companies either. It is a model that has led to scandals in the engineering industry also. Think no further than the Volkswagen emissions scandal or the BP scandal surrounding the gulf of Mexico oil spill disaster.

While there is a certain satisfaction to be gained from seeing financial "cheats" squirming under questioning, let us not believe for one minute that the engineering industry is immune to this type of conflict of interest.

In the final analysis, this is about human nature and the models of leadership that are employed within organisations.

Banking Landscape

In the last few decades, the financial industry has started to take over the economies of the developed nations. Financial engineering certainly seemed to pay better than technical engineering!

While financial institutions are still making a lot of money, the technical landscape surrounding the banking industry has started to shake and become a lot less stable in the last few years.

Fintech companies that have developed "lean" online business models have started to undermine the cost structure of the bricks and mortar banks, slowly chipping away at their revenue streams. Added to this, the development of artificial intelligence (AI) systems have reached the level where many human analyst and planner roles could be replaced by machines.

To compound these problems, crypto currencies and distributed ledger technology (DLT - such as blockchain technology) are starting to get to the point where they can be more widely adopted. Given that banks are largely just "trusted intermediaries", and that the main role of crypto currencies are to eliminate the need for such third party intermediaries, the current banking business model is further threatened.

In short, the change that is rushing towards us all, has arrived earlier in the financial industry than most others. Those same pressures are on their way in our direction. Take note!

While the challenges and pressures listed above are no excuse for the scandalous behavior of the banks and their employees, by understanding the current pressures on the industry, we can possibly predict how all of this will play out. Not just for the banks, but for us all.

Don't Waste A Crisis

What I find quite interesting about the testimony that I have seen in the royal commission, is that the banks don't seem too interested in protecting their people. The "rotten apples" are pretty much thrown under the bus when the sordid details of the poor financial advice is discussed.

This tends to suggest that the line of the revelations could possibly serve some deeper purpose for the banks. What could this be?

Most of the banks have indicated that they need to shed many people. As an example, six months ago the National Australia Bank (NAB) announced plans to get rid of 6000 employees and replace them with 2000 people with "digital skills".

Given that the banks are making good money, firing employees to further increase profit margins does not go down well with the general population. It is just poor public relations when it looks like banks are driven purely by greed. Unfortunately for employees, profit is what business is largely about. This leaves the banks in a difficult position. They are being squeezed between the inevitable changes rocking the financial industry, and their public image.

In the spirit of never allowing a perfectly good crisis to go to waste, it seems that there could be a significant win for the banks even in this scandal.

Given that the "restructuring" of the banking system to a leaner industry is inevitable, the loss of the jobs could be cast in the light of machines being less susceptible to giving poor financial advice than humans. The AI's could be held up as the answer for banking clients to get the best impartial advice at the lowest cost.

Such a transition of the banks could enable them to redesign their systems to incorporate many of the advantages of distributed ledger technology and AI while greatly reducing their cost base due to salaries.

This is the future for many industries, including the engineering industry. The use of DLT and AI will reduce the amount of duplicate work in the system, greatly reducing the cost base of large engineering projects.

And what will happen to the people? Well, be one of those with the "digital skills" that will be in demand in the new machine age. Apparently NAB is still struggling to find them!

Yours in welding

Niekie Jooste

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