Wake Up

Newsflash: the world has changed fundamentally and will never be the same again. If your business looks anything like it did five years ago or is still trying to make money the way it did five years ago, then prepare yourself for a long, slow extinction.

This isn’t the casual opinion of a researcher and an unlicensed economist; it’s the opinion of the greater Australian public and at least the people running HSBC Bank.

Right now in Australia we are running what we are calling a “second shoe” economy – that is, despite what the Government is telling us, we don’t really believe that we have dodged the GFC bullet and we are now waiting for something bad to happen. Economically speaking, we are waiting for the second shoe to drop.

The HSBC Bank, one of the longest surviving and most venerable of the worldwide banking cartel, announced this week that after a tidy profit of $10 billion (enough it seems to purchase an entire American State on a cash flow basis) that it is cutting 30,000 jobs, shifting its focus to Asia and essentially abandoning a bricks and mortar strategy.

In short, HSBC Bank is bidding a fond farewell to the American dream of easy credit, a comfortable lifestyle and a long and happy retirement.

The clues to this change are all too easy to see in the research CoreData is doing. Twelve cents in every dollar is being saved (by those who can save); business debt is drying up (a handy little proxy for growth) and money is being sucked straight out of the retail system and into bank savings accounts as consumers batten down the hatches waiting for the second shoe to hit the floor.

But what does that mean to Australian financial services? How do we cope with an era of instability, when new technologies, Government-mandated transparency and the disdain of consumers are all combining to keep financial planners up at night.

The answer is that we change our model. Like the American Marines, we adapt, we improvise and we overcome. We learn to communicate to our customers about the value we add, about how the work we do is valued and we focus on providing clear utility against the current need.

But what is so far unreported is just what this instability means to operating margins, which have been pretty static in financial services since 2003. Now it’s almost impossible to see who is doing well and where.

In the past, simple sums on funds under management or the number and value of loans on book would act as a reasonable proxy for the current and future value of the business, but as far as we can tell, all the old models have evaporated.

A great example of this is what’s been happening at NAB. The bank has “broken up with the banks”, killed its fees and lowered its home loan costs and charges and from every measure we have, it’s worked.

The fact that it’s an expanded Ubank strategy seems to have escaped everyone. The work first done by Gerd Schenkel and Alex Twigg is now being mimicked by NAB – success, they say, has many fathers.

But what has it been worth? Has there been a fundamental shift in the cost of the bank doing business; has the bank been able to lower the cost of customer acquisition to zero; or has NAB just created a future problem?

According to data leaking out of the USA the volatility of business operating margins has more than doubled, as has the size of the gap between winners (companies with high operating margins) and losers (those with low ones).

It turns out that market leadership is even more precarious. According to Bain Consulting, the percentage of companies falling out of the top three rankings in their industry increased from 2% in 1960 to 14% in 2008.

Added to that, market leadership is proving to be an increasingly poisonous chalice: The once strong correlation between profitability and industry share is now almost non-existent in some sectors.

I caution you now that all the sectors that are getting explosive growth will wake up in a couple of years with a business growth hangover. These low fee customers will at best squash profit growth for years to come and at worst send the businesses to the wall.