An open discussion about ethics in financial services and banking.
11 Dec
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Today I was activating a replacement credit card and as I sat on hold I listened to the banks recorded sales pitch for credit insurance or payment protection insurance, it made me wonder. And then I heard it and then it hit me.
An argument that I made recently was that shouldn’t banking contracts contain some leniency for consumer repayment problems instead of trying to hold consumers to the letter of the contract when they are having financial problems, and yes I do understand the concept of give them an inch and they’ll take a mile.
But what strikes me today is that the biggest problem that I run into dealing with the front line of banks is persuading them to take payments and to get repaid rather than just continue to force the delinquent debtor towards bankruptcy.
On the front end of the consumer relationship is a marketing message which encourages the customer to come on board with near abandon and impulsivity but at the back end of the relationship, in collections it certainly feels like a take no prisoner attitude. Truly a good cop, bad cop scenario.
So if creditors want credit agreements to be absolute and without flexibility then why do most banks around the world today sell credit insurance with the marketing message of “We all know life is unpredictable”. Isn’t this recognition that the lives and circumstances of the customer are not absolute and may be in adjustment of flux?
My question is, in light of this agreed unpredictability of life, what do you think the banks ethical responsibility is to their customer when they fall on hard times? Is it to hold them to the contract or to be individual flexible to the individual customer circumstances and allow the debtor to repay what they can afford without driving them towards bankruptcy?
4 Responses for "Why Are Banking Contracts Absolute When Life Isn’t And We All Recognize That?"
I agree with you Steve. I have worked in the collections department for one of the larger creditors and the collectors are rewarded for the money they collect. Their bonuses depend on this. Consequently this means that as soon as an account goes into arrears there is an urgency to contact the account holder and get sufficient payment to get the account back in order. So rather than taking time to look at the clients overall financial situation it is case of give us your money now. Quite often the collection process is subject to minimum levels of payment that they can accept. If you cannot meet their minimum level then the account will find its way to the debt recovery section. Here they will take the time to look at the overall financial situation and hopefully freeze future interest and charges ,but by then the damage may well have been done as the overall level of debt will have escalated and there is no way back.
The irony is that while the existing customers do not get the immediate help and support that may well nurse them back to financial health, the creditors are employing staff to take new customers on board, cross sell etc. They are missing the point that existing customers are worth trying to save.
Banks are bigger than the government and don’t need to behave to any standards other than their own IMO.
Maybe the world needs a google like version of free banking?
The problem is more complex than just holding the client to the contract. Experience tells me:
1. There are many complacent and exuberant consumers that do not take time to review the contract they are getting into. That is specially true in private banking in Switzerland, where the prospect looks at the banker in the eye and says: “I won’t read the documents because I trust you”.
My rule was not to accept that statement. Not because I did not like it, but because that type of client is the most dangerous to deal with. Yet, that type of client resented it when I would read out loud the contracts (In Switzerland, 40 pages to open an account).
Why did I insist? Because complacent consumers have lost track of their function in society: create through the market a rating system through pricing. How do you explain otherwise the lack of risk margin between emerging markets and US T-Bonds?
The consumer who exhibits complacency deserves what he gets. The banker who goes after him is fully justified.
2. Sales staff in banks (CRMs and the like) are inadequately trained to analyse client profiles. The focus of their training is on sales. I admit to the fact that I had problems getting them to focus on client analysis rather than product sales.
Banks that are focussed on sales volume rather than on client relationships, ie banks that are transactional oriented, deserve to go bankrupt.
Unfortunately, government intervention promotes client complacency. As long as we assume that the consumer is too stupid to understand, the social bank is flawed.
We need to introduce again the concept of risk into the market for the social concept to make sense.
It sounds like this is an ethical dilemma, involving two rights. It is ethical, and I think the law, for a company to protect the interests of its investors and make a profit. At the same time, it’s right to be a good corporate citizen and have a positive impact on the community in which the company operates. It seems though, that more value is placed on profit rather than the needs of the customers. The company who chooses to do that, however, will eventually endure a correction when consumers are allowed access to information or find a company who treats them better or is cheaper (think about the term life insurance business). But it’s all moot, because I don’t really believe that companies are really interested in profits for shareholders or doing anything good for the communities in which they operate. Deep down I think that corporate leadership for the most part is only interested in making sure they make big salaries and get big bonuses, even if it’s all smoke and mirrors (witness Enron). Again, I believe it’s all going to be self-correcting in the end–CEOs will eventually be prosecuted or dead like Skilling or Lay. The sad thing is that despite knowing what can happen, people still continue to do it again and again.
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