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Consumer perceptions

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Perceptions rule our lives and create our reality. They are the lenses through which we see the world. But we see only what we are conditioned to see and this limits our horizons. We don’t see with our eyes but with our brains. So, if we want to change everything, we must change our perceptions.

Just as the northern hemisphere’s summer is our winter in Australia, financial institutions also see the world upside down to those on the outside looking in. When it comes to banking, the view differs depending on whether you are on the customer’s side of the counter or the financial institution’s side.

When you take out a loan, you (the borrower) acquire a debt which is a liability that you must repay. However, to the institution that advanced you the funds (the lender), your loan is an asset or investment on which it expects a return. The return comes in the form of the interest you pay on your loan which is an expense to you but income to your lender.

The same logic applies when you invest money with a financial institution. Your savings are an asset to you but a liability to your financial institution. As an investor, you lend money to a financial institution which, in turn, pays you interest on the funds it has borrowed from you.

What I have just described is financial intermediation and it is a pervasive feature of all the world’s economies. Gateway is in the business of financial intermediation. In simple terms, this means that we act as an intermediary (go between) in moving money between investors and borrowers.

We pay interest to investors on the deposits they keep with us and we receive interest on the loans borrowers take out with us. The difference between the interest we receive on loans and the interest we pay on deposits is referred to as our margin or spread.

The size of this spread is a major determinant of the profit generated by a financial institution. With borrowers understandably wanting the lowest interest rate possible and savers naturally wanting the highest rate they can get, margins are constantly being squeezed.

Whether this is a good thing again depends on one’s perspective. If you view margin squeeze through the eyes of a customer, it means more competitive rates. If, however, your view is through the eyes of a shareholder, it potentially means lower profits.

Interest rate wars between financial institutions exacerbate margin squeeze. Every price war (whether for deposits or loans) has winners and losers. In Gateway’s case, our Members are also our shareholders. We serve only one master, so it’s a win-win for us.

To be clear, there are two kinds of banks in the world - those owned by customers and those owned by shareholders. Gateway is a customer-owned bank and is therefore owned by its Members and not some outside group of external shareholders.

Australia’s major banks believe, quite rightly, that they did a great job in weathering the financial storm in the wake of the Global Financial Crisis (GFC). Notwithstanding this, these colossal institutions are viewed with disdain by politicians, the media and customers.

The current Royal Commission into banking has seen the tide of consumer sentiment turn further against the Big Four banks. The revelations from the Royal Commission have added to public perceptions that banks are not treating their customers fairly.

This brings into sharp focus the importance of brand reputation. A company’s most valuable asset is its reputation and some consumers see banks through disillusioned eyes. The way banks and other financial institutions manage their reputation and reputational risk has become the focus of increased scrutiny.

Brand perception is whatever consumers say you are and not what you say about yourself in your brand advertising. A brand, therefore, exists in the minds of consumers. A financial institution - and indeed any company - can influence what consumers think but cannot control customer sentiments.

A brand is a promise of what a company (or product) will provide to customers. Volvo promises safety, Ikea hangs its hat on affordable furniture while Disneyland excels at creating happiness. Companies with strong brands are perceived as providing more value to the customer.

For centuries, banks have been seen as businesses based on trust. However, following the GFC, the populace became disillusioned with the banking sector. Around the world, there was widespread anger that taxpayer funds were used to prop-up Wall Street.

The public backlash to what many saw as rewarding bad behaviour is understandable. I too felt annoyed. However, that does not mean that finance is not good for us. Yale economics professor, Robert Shiller, argues this very point in his book: Finance and the Good Society.

Professor Shiller is no apologist for the sins of the banking sector. Indeed, Shiller was one of the earliest critics of our modern-day financial theory, which posits that financial markets are basically efficient. He predicted the housing bubble burst in the 2005 edition of his book, Irrational Exuberance.

Yet, in Finance and the Good Society, Shiller writes that “imperfect as our financial system is, I still find myself admiring it for what it does, and imagining how much more impressive it can be in the future.” Shiller sees finance as a powerful tool for solving common problems and increasing the general well-being.

We all crave a better society and finance - notwithstanding its shortcomings - can help humanity achieve that goal. The challenge facing the financial services sector is to rebuild the trust deficit with the public. This will require banks to see the world from the customer’s side of the counter.

I believe that all is not lost and that faith can be restored. Let the healing begin!

Paul J. Thomas, CEO


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CEO Paul Thomas