The Age, November 9 2000

Dear Sir

As a professional corporate strategist, I am amazed at the non-sustainability of the corporate and industry-level strategy adopted by the major Australian banks over the last ten or so years, despite the recent massive net profit declarations of our major financial institutions.

Historically the major Australian banks have enjoyed advantage from potential competitors for three key reasons (apart from Government protectionist policy). The major banks presented potential competitors with barriers to entry by virtue of their vast physical retail networks which made effective emulation almost impossible without enormous investment over a long period.

Secondly, the manning policy at branch and Head Office enabled banks to build strong personal relationships between them and their clients.

Thirdly, such relationships were robust and hard to replace through any competitive strategy. Through these relationship were built strong customer loyalties.

Recent banking strategies have effectively destroyed the very attributes that have enriched them and this now seriously threatens the long term sustainability of bank performance and seriously jeopardises shareholder equity.

1. There has been an almost frenzied pursuit of dividend maximisation enabled by the new technology based on the assumption that all shareholder want only dividend maximisation. This has been a flawed assumption. My doctoral research into the banking sector (1998) demonstrably illustrates that chairmen, directors and managers erroneously believe that all shareholders in the registries of the major banks desire dividend over all else. The research showed that shareholders have varying objectives and some of them, in fact, flee those registries that deliver high dividend at the expense of other desired outcomes, such as asset growth or strategic positioning. These chairmen, directors and managers do not ask shareholders their objectives, but naively rather rely on a handful of institutional investors, analysts and brokers to act as proxy for all shareholders. This is a flawed strategy.

2. The dismantling of the physical retail structure in pursuit of dividend maximisation (through lower costs) is a disaster for strategic, competitive and marketing reasons. It has removed the principal barrier to entry of potential competitors. Competitors are now free to enter the Australian market (regulation aside) and compete on a technological platform instead of a physical platform. Since banks are forcing customers to differentiate between them on largely a transaction cost basis, any technological oriented financial institution can offer services at a probable lower cost than existing banks which still have legacy costs and structures to accommodate.

3. Banks have destroyed the foundation upon which customers developed a relationship with them. Their policy of deliberately rotating management in order to avoid entrenching relationships (and therefore improve their poor risk management record) between management and clients has successfully destroyed not only the relationship between manager and client, but also between bank and client. Most commercial organisations operate in the reverse direction seeking to build the relationship in order to make the "pain of exit" more profound.

We now see a banking environment where dividend maximisation is supreme, retail structures are being phased out, customer/bank relationships have been destroyed, brand loyalty has been diminished, and where customers are being deterred from buying banking services where those services don't generate immediate net margin for the bank.

I am a strong proponent for the supremacy of the shareholder since organisations ultimately exist to satisfy shareholder objectives. However the Australian banking sector is failing its shareholders despite massive net profits.

1. The blind pursuit of dividend maximisation is driving all bank strategy and such pursuit is based on a false premise.

2. The principal non-balance sheet assets of banks are their customers. There is absolutely no doubt that recent bank strategies have disenfranchised customers and have destroyed any semblance of "relationship and loyalty assets" they once held. It is through customers that deposit reserves are held, transactions are undertaken and through which new lending and service opportunities are leveraged (eg home and business loans). A bank (or any organisation) without customer will eventually cease to exist.

3. Destroying the banks' physical retail structures (and its principal barrier to entry) is inviting competition and thus threatening both the viability and sustainability of operations, and more importantly, the equity value of each bank.

4. Customers are furious with the destruction of service, destruction of convenience and the imposition of costs on activities deceptively promised to be lower cost, such as ATMs and Internet banking services. It is convenient, yet incorrect to believe that everyone wants to conduct their banking over the Internet or through ATMs.

I have little doubt that we will soon see two major trends in the banking industry in Australia: Firstly, we will see new digital banking specialists enter the market without the burden of legacy cost structures where their costs will be much lower than anything that existing Australian banks can match (or make money from). Some of these institutions will be local while others will be international. This will destroy the viability of the digital banking channel/segment of most, if not all existing Australian banks.

Secondly, the service gap created by the abolition of the retail structure will be filled by niche players, such as the "community banks". These banks will offer the convenience and relationships inherent in the physical banking structure, yet will provide the breadth of service and accessibility through alliances with the new digital bankers.

The demise of the major Australian banks is as certain as the dawning of a new day, and the blame for the destruction of the assets of its shareholders must rest fairly and squarely on the shoulders of the chairmen, directors and managers of the existing banks who have adopted such short-sighted and naive strategies.

Published Version

Dear Sir

Australian banks enjoyed advantage from competitors for three reasons (Government protectionist policy aside): barrier to entry through enormous physical retail networks; manning policy enabling strong relationships between them and clients; and customer loyalty stemming from such relationships.

Recent strategies have deliberately destroyed these attributes thus threatening long-term sustainability and jeopardising shareholder equity.

The frenzied pursuit of dividend maximisation enabled by new technology based on the flawed assumption that all shareholders want only short-term dividend maximisation.

The dismantling of the physical retail structure in pursuit of lower costs is disastrous for strategic, competitive and marketing reasons. Destroying the retail structures (and the principal barrier to entry) invites competition and threatens the sustainability of operations and the equity base of banks.

The policy of deliberately rotating management to avoid entrenched client relationships (and thereby improve poor risk management capability) has unquestionably destroyed both the relationships between manager and client, and between bank and client. It is through customers that deposit reserves are held, transactions are undertaken and through which new lending and service opportunities are leveraged (eg home and business loans). A bank without customer will eventually cease to exist.

I predict that we will see new digital banking specialists (local and international) enter the market without the burden of existing legacy cost structures This will destroy the viability of the digital banking channel/segment of most, if not all existing Australian banks.

The service gap created by the abolition of the retail structure will be filled by niche players, such as the "community banks" who will offer the convenience and relationships inherent in the physical banking structure, yet will provide the breadth of service and accessibility through alliances with specialist digital bankers.

The demise of the major Australian banks is as certain as the dawning of a new day. The blame for the destruction of shareholder equity will rest fairly and squarely on the short sighted and naive strategies of chairmen, directors and managers of existing banks.