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I need a case study regarding how Commonwealth Bank (from Austrlia) worked to become a market leader in financial services by focusing on customer service and customer experience, and then lost that primacy (from scandals and other business decisions)
Hello! Thanks for using Wonder to request a case study regarding the Commonwealth Bank and how it became a market leader in financial services by focusing on customer service and experience, and how it eventually lost that primacy through a series of scandals and business decisions. In short, Commonwealth Bank of Australia (CBA) has a long history dating back to the early 1900s. Over course of 100 years, CBA was able to continuously grow through a long series of mergers and the implementation of customer-centric business practices and programs which were designed to meet the evolving needs of the bank's customer base while simultaneously making banking more simplistic and convenient. Over time, this focus shifted the company's culture to become more focused on a service and sales business model, which put high pressure on employees and executives to meet sales and profit targets in exchange for financial reward, rather than enforcing a company culture built around integrity and a customer-first mentality. In recent history, these practices resulted in a series of scandalous activities (money laundering, lies, trickery, inappropriate allocation of funding, cover-ups etc.) which destroyed CBA's long-standing reputation of loyal and honest customer service. Below, you will find a deep dive of our findings.
METHODOLOGY
In order to answer your request, we searched through a wide range of business/academic journals, industry reports, corporate websites, trusted media sites. Through this collective research, we have provided information on the history of the Commonwealth Bank, which helps to contextualize the company, offers insight into their business activities, illustrates how these activities created customer value, and analyzes the outcomes of those activities. We have also provided information regarding scandals the bank has been involved in, including details of those scandals, which help to illustrate how these activities have decreased customer value and the outcomes these activities produced for the company. The information we have included also shines a light on the company's KPIs and how these measures have been involved in the aforementioned situations.
the early history of commonwealth bank
The Commonwealth Bank was founded in 1911. The bank was initially founded as a government bank. Government banks in Australia at the time were being "established to promote land settlement and rural development, and to accept savings deposits." The Commonwealth Bank specifically "was empowered to conduct both savings and general (trading) bank business, with the security of a Federal Government guarantee." This made Commonwealth Bank a one-of-a-kind entity, because, at the time, "no other institution in Australia was involved in both of these traditionally separate areas of banking, nor did any other bank have a Federal Government guarantee."
The bank quickly grew through its early decades, via a series of large mergers. Additionally, Commonwealth Bank continued to grow as it played significant roles during WWI, as the bank "assisted other federal authorities to organize war loans, primary production pools and a merchant shipping fleet," in addition to providing banking services to "thousands of servicemen both home and abroad."
"In 1920, responsibility for Note Issue had been transferred from the Commonwealth Treasury" to the Commonwealth Bank, allowing the bank to assume the powers of a central bank. "These powers were codified by emergency legislation enacted during the early days of World War II." During this second world war, "the Commonwealth Bank was actively involved in the war effort both as an agent of the Federal Government and as banker for numerous scattered Australian and allied service personnel."
After the war ended, new legislation revoked the Commonwealth Bank Board's power over the bank and transferred this power to the Governor. It was at this time that "a general bank division was established and special facilities created to provide finance for post-war activities such as housing construction and industrial development," along with home loans. The bank grew rapidly after WWII, opening hundreds of branches in order to meet the demands of the growing population, even catering to the needs of migrants.
the major shift towards a customer-centric business model
"By the end of the 1950s, controversy over the organization’s dual functions as a central bank on the one hand, and a trading/savings bank on the other, came to a head." The Commonwealth Banks Act 1959 and the Reserve Bank Act 1959 forced CBA to divide these duel operations. Central banking activities were allocated to the newly established Reserve Bank of Australia, and all remaining banking activities, "together with the newly constituted Commonwealth Development Bank, became the Commonwealth Banking Corporation." This move, we assume, acted as a huge tipping point which allowed the bank to focus more exclusively on its customer base moving forward, as evidenced by the customer-centric business actions that were to follow in the coming decades, which is discussed in the next section).
creating customer value through company evolution
Below is a time-line of business decisions and programs that were implemented between 1960 and 2008 which illustrate how the Commonwealth Bank significantly grew its reputation for outstanding customer service and experience during this time-frame:
1960's -- Implementation and development of "decimal currency, Christmas Club Accounts, personal loans and variations on traditional savings accounts." At the very end of 1969, the bank introduced "the ‘Black Light’ Signature System, which recorded ‘invisible’ signatures in passbooks enabling withdrawals at branches other than the customer’s own without making prior arrangements.”
1970's -- CBA "expanded into the field of home insurance and travel," and established a finance company called the Commonwealth Bank Finance Corporation. "Plastic credit and debit cards began to be used as the basis for transactions." The bank started to spread internationally and widened its "foreign exchange dealings and provision of services for customers engaged in business overseas."
1980's -- By the end of this decade, CBA "entered the managed investment and life insurance arena with the establishment of wholly-owned subsidiaries Commonwealth Life Ltd and Commonwealth Management Services Ltd." ATMs were launched at the very beginning of the decade, and Electronic Funds Transfer at Point of Sale (EFTPOS) launched in 1984. In 1985, "electronic home and office banking became available." Due to deregulation of Australia's banking industry during this decade, competition increased, which prompted CBA to restructure its internal organization, develop new products and services, and target different types of consumers. "This process culminated in the organization’s conversion from a government-owned entity into a public company.”
1990's -- "On 26 August 1990, the Commonwealth Bank entered into an agreement with the Treasurer of Victoria for a merger with the State Bank of Victoria," making CBA the largest domestic bank in Australia. "In 1992, a computerized customer service program, ASSIST, was initiated." "The Maestro and Cirrrus services were introduced in April 1993, enabling worldwide EFTPOS, Keycard and credit card transactions." "In 1994, CBA restructured their back-office processing activities in order to allow customer-facing branch staff to "focus exclusively on retail customer service." Between 1993 and 1994, CBA established Business Banking Centres, Customer Service Centres, and introduced a new business model, The Customer Relationship Model, which "featured uniform branch interior design and new ways of interacting with customers." The company's website was launched in 1995, along with the bank's new stockbroking company, Commonwealth Securities Limited (CommSec). Finally, "in 1997 the Relationship Management Program was introduced which provided a personalized and dedicated level of service through Relationship Managers to the Bank’s High Value Clients." Additionally, 1997 saw the launch of NetBank, "a totally online service, offering 24-hour internet transaction banking services."
2000 -- A 2002 restructure of the bank's Institutional Banking segment (est. 1990) "provided niche services for premium and business customers as well as refocusing services for institutional customers." In 2003, "The Which New Bank program aimed at 'great customer service, engagement of people and simplified process.'" Also, in 2003, CBA began rolling out CommSee across the company. CommSee was a customer service system which was intended to support the bank's "premium customers and has developed as a relationship management service model aimed at providing a single view of dealings with individual customers, accessible from any branch across the network." "In 2004 Private Client Services became Commonwealth Private Bank, catering to the financial needs of high net worth and high income earning individuals." In 2005, Ralph Norris, CEO, made customer service a strategic priority, and by April 2006 a new business unit had been developed; the Group Sales and Service Support department "had the purpose of embedding a service and sales culture across the Group."
the eruption of scandal
During the 2008 banking collapse, CBA announced that it had "frozen seven CBA-owned Colonial First State mortgage funds valued at $3.3 billion." Don Nguyen, a financial planner working with these funds "tried to warn several investors to move their money before the funds were frozen, [as] advisers were given lists of clients on the day who had been affected and told to hose down their fears." This freeze was disastrous for 61,000 investors, many of whom were never able to have their funds returned. In the months preceding the freeze, "numerous bank customers had been persuaded to switch from the safety of term deposits to these funds with higher rates, which gave the financial planner and the bank a nice trailing commission that they didn't get from a humble term deposit sold by a teller over the counter at some suburban branch across Australia." This was done by financial planners in an effort to "reach their sales targets and boost their funds under management so that they could earn their June 30, 2008, bonus."
At the time, Don Nguyen "controlled up to $300 million of client money." Shortly after the freeze, "whistle blowers urged that there was some urgency in securing the files of Nguyen as they were being 'cleaned up' and that the issue had much broader implications than one dodgy planner." However, the ASIC didn't begin investigations until March 2010. As of 2013, only $23 million was paid as compensation to Nguyen's clients, and in total only $49.9 million of the billions frozen had been compensated. CBA had promised that it would make vast changes with regard to "remuneration, more rigorous systems and processes, better document management and enforcement of higher standards by new management."
A former employee of Commonwealth Bank soon came forward as a whistle blower regarding the aforementioned scandals. Russell Phillips was an "assessor within the bank's Open Advice Review Program." According to Phillips, the review program "was unfair to clients and designed to minimize the compensation paid out to customers," because assessors were not "allowed to meed with clients of Commonwealth Bank's authorized financial planners to aid in their reviews of customer files." The Open Advice Review Program was set up by the Commonwealth Bank "following a Senate Inquiry which called for a royal commission into the bank's financial planning scandal following revelations the bank had tried to cover up the illegal behavior of its rogue financial advisers who engaged in forgery, fraud and cheating customers." Fourteen months into the program, "the bank [had] only compensated 19 customers less than half a million dollars – despite receiving over 8000 requests for file reviews from clients."
Whistleblower Russel Phillips presented his evidence to the Australian Senate, after which, Senator Sam Dastvari stated the evidence was extraordinary and quoted:
"It is unbelievable that 15 months after being given assurances by the Commonwealth Bank we are here hearing explosive evidence about a culture of cover-up and complacency. The Australian Senate was given assurances that this programme was about putting the victims first and providing justice. Well today's evidence, if found to be true, blows that out of the water. At some point it has to stop being about the bank and needs to be about the victims."
With regard to Phillips' statement about assessors not being allowed to speak with the clients, Dastyari said, "We know as a matter of fact there was fraudulent behaviour... How could you know which files were real and which were forged?"
According to Phillips, assessors were told that "unless the signatures on the files were wildly different, they [should] assume they were the same." He also stated that "CBA was using an incentive structure that tied 40 per cent of remuneration to timeliness, where each assessor had to complete a file assessment a day."
He stated:
"If we were assessing a claim that was inappropriate that would take longer, that was not accounted for in our KPIs. If we took longer because the advice was inappropriate, we would not meet our KPIs."
According to Dastyari, "the remuneration structure used by the bank on its review problem was 'extraordinary' and built in a way that rewarded staff for assessing files quickly by rejecting the claims."
In 2016, bank CEO's around the world came under fire "from experts and politicians for reaping million-dollar pay cheques despite ongoing scandals." The Australian Shareholders' Association stated that "bank boss pay is less and less linked to company performance and customer satisfaction" as it singled out Ian Narev, CEO of Commonwealth Bank, who received $12.3 million in FY2015 and $8 million in FY2014. These statements are in alignment with a revolt of Commonwealth Bank's shareholders against "the board’s annual Remuneration Report, which contained a recommendation that the CEO be granted a bonus based on what critics saw as 'soft' measures – that is, non-financial measures and subjective measures." These same reports go on to mention that "Commonwealth Bank is among an increasing number of corporates internationally which are moving away from using only 'hard' (financial) measures to decide on executive remuneration."
According to an article posted by Legitimate Leadership: "The Commonwealth Bank restructured its evaluation system so that 75% of CEO incentives came from the bank’s total shareholder return (TSR) relative to a set peer group, and 25% from customer-satisfaction results, bench marked against another peer group. Then, following an ethics scandal within its life insurance arm, the bank’s board took yet another step to include even more subjective measures. To help modify the bank’s culture to match its stated values, the bank’s remuneration committee and board recommended a change to the reward split to TSR 50%, customer satisfaction 25%, and people and community 25%. The latter was concerned with 'measuring long-term progress in the areas of diversity and inclusion, sustainability, and culture."
Currently, CBA is "is facing the country’s largest ever shareholder class action over a share price rout." This is resulting after the bank was recently "accused of more than 53,000 breaches of anti-money laundering and counter-terrorism financing laws by the Australian Transaction Reports and Analysis Centre." CBA has contributed these breaches to a "single IT error, related to tens of thousands of dollars in cash deposited in CommBank ATMs by money laundering syndicates and sent overseas." However, once these allegations were made public, shares of the company's stock dropped 5%, resulting in a class action lawsuit on behalf of 800,000 shareholders. Allegedly, "the bank breached its continuous disclosure obligations by failing to inform the market when the issues first came to light in 2015 [...] Instead, the CBA has said that its Board was aware of the breaches in the second half of 2015 but chose to say nothing to the ASX until 4 August 2017." This scandal as thus resulted in the announcement that Ian Narev, the bank's current CEO, will retire in 2018 along with an announcement that "the bank stripped all executive bonuses to demonstrate 'collective accountability.'"
As of September 8th, 2017, the Australian Prudential Regulation Authority announced "it would establish a prudential inquiry following a number of issues which have raised concerns regarding the frameworks and practices in relation to the governance, culture and accountability within the CBA group, and have damaged the bank’s reputation and public standing. It would include, at a minimum, considering whether the group’s organisational structure, governance, financial objectives, remuneration and accountability frameworks are conflicting with sound risk management and compliance outcomes. "
conclusion
To wrap it up, Commonwealth Bank of Australia (CBA) has a long history dating back to the early 1900's. Over course of 100 years, CBA was able to continuously grow through a long series of mergers and the implementation of customer-centric business practices and programs which were designed to meet the evolving needs of the bank's customer base while simultaneously making banking more simplistic and convenient. Over time, this focus shifted the company's culture to become more focused on a service and sales business model, which put high pressure on employees and executives to meet sales and profit targets in exchange for financial reward, rather than enforcing a company culture built around integrity and a customer-first mentality. In recent history, these practices resulted in a series of scandalous activities (money laundering, lies, trickery, inappropriate allocation of funding, cover-ups etc.) which destroyed CBA's long-standing reputation of loyal and honest customer service.
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