Beyond write-downs - The world's banking system shows some disturbing trends

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DAVID WEIDNER'S WRITING ON THE WALL
Beyond write-downs
Commentary: The world's banking system shows some disturbing trends
NEW YORK (MarketWatch) -- The world's financial system is such a mess that no one is really quite sure where to begin fixing it.
It's as if all those runs on the banks withdrew banking knowledge along with deposits.

But the system's problems are far greater than the public or the people in the banks seem to realize. That's what some have concluded after looking over preliminary results of an ongoing banking study being conducted by IBM.

Normally, banking studies are usually throwaway surveys that are outdated the moment the data are released. But in this case, the people at Big Blue are going a little deeper. For one, they're doing 140 face-to-face interviews with middle- and top-level executives. They've also buttressed that data with a quantitative survey of 2,000 industry players, including educators, analysts and regulators.
The idea behind this global study is to find out how the financial pros think -- not just on a particular day, but over time. That's why the full study won't be finished until March 2009. However, the researchers were surprised by some of the early findings and wanted to pass them on. What they are unveiling is just a taste.
Much of what the IBM team, led by Suzanne Duncan, found can be summed up this way: Bankers and financial professionals are flabbergasted. That's my assessment, anyway. You be the judge. Here are some of the preliminary conclusions:

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The No. 1 issue that keeps bankers and financial professionals awake at night is a lack of strategy - or, as Duncan put it, a "business model identity crisis" -- according to nearly 80% of board and C-level executives. "They don't know what they want to be when they grow up," Duncan said.
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The other 20% are just worried about surviving.
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Financial executives are disturbingly out of touch with their clients. That could be institutions, "average Joes," as Duncan called them, or trading partners -- really anyone who pays money to a bank or financial firm.

IBM found that if you took a list of the top 12 things customers are willing to pay for, ranked them in order of value and then flipped the list over, you'd be pretty close to the list made by financial executives. In other words, bankers think we want one thing, and we want just the opposite.
It's that last point -- the idea that executives who are paid so much to know exactly what customers want and what to charge for it -- that is so disturbing. But it's also revealing why these big shots are so off base.
They think we want one-stop shopping. Sound familiar? It's the refrain we've heard from financial supermarkets like Citigroup Inc., Bank of America Corp.,and J.P. Morgan Chase & Co. for years.

Top executives like Sanford Weill and Ken Lewis have been pushing the supermarket model as a way to diversify earnings, but also because that's what they claim customers want. Customers, the CEOs say, want to have their brokerage account and their checking account at the same place where they have an auto loan and an insurance policy.

Ask yourself: Is that what you really want from a bank or brokerage? Of course not. When asked what they'd be willing to pay for, customers -- whether institutions or individuals -- tended to give the same answers. Their top answer, according to IBM, is superior execution - or "make my life easier," Duncan said.

Was that really so hard to guess? People want products that work and good customer service. They don't want a sales pitch for something else every time they walk in the door.

The problem is that financial-company executives don't think in the same terms as the rest of us. Buying a mansion in the south of France? A private jet makes the perfect add-on. Hiring a lawyer to deal with all of those subpoenas? You'll probably need a public-relations team to help out, too.

You get the idea. There's a serious disconnect happening between the executive suite and the front of the store. The good news is some firms are beginning to realize it. Duncan said she's seeing a trend in which financial firms are working to simplify their operating models.

It's not unlike what's happening at UBS AG , where wealth management is being separated from asset management. The idea is to have divisions feel more autonomous, less confused and more focused on serving their customers.

As for the credit crisis? Duncan said there's agreement on a few things: The profits of the past are gone forever; consolidation will continue at a break-neck pace; and a new breed of companies, called "alpha firms," will emerge on the landscape. They're called "alpha" because no one knows exactly what they will do. They could be hedge funds or private-equity firms or something completely different.

They will be the new Wall Street -- until they break and we have to start all over again.
David Weidner covers Wall Street for MarketWatch.