INTERVIEW WITH JOHN McFARLANE  By Bryan O'Connell specialises in providing strategic and marketing consultancy services to banks and financial service providers. He has more than 18 years experience in the industry both as a banking lawyer and strategic consultant.He has worked and acted for a wide range of banks, non bank financial institutions and corporations involved in the financial services industry.

John McFarlane, the chief executive of ANZ Bank, was appointed chairman of the Australasian Institute of Banking and Finance in October, 1999. His career has included several years with Citibank and Standard Chartered.

Competition has increased, and interest rate margins are so slim that it is no longer feasible to subsidise traditional services.  

As a result, banks now charge customers for transactions and services to bolster their return on equity, and there is increasing pressure for banks to merge with their peers to cut costs and build businesses of sufficient scale. 

As well, all organisations face relentless transformation as the influence of the Internet and electronic commerce permeates all levels of management and customer service. The Internet ''doesn't understand borders, and it poses a new opportunity, but also a new threat for the players wherever they are in the world, and that includes Australia''. 

Australia's banks operate in a relatively small market, yet the continent's vast distances generate unique pressures in providing services to all areas: ''The solutions are really much more urgent and necessary, and you can see the political pressure that is being placed on governments today to try to resolve that issue.'' 

Further, transaction and service fees triggered more reaction in Australia: ''Perhaps the increase in fees was felt more deeply by customers (in Australia), particularly the lower end of the economy. Perhaps it hit them hardest, and was more noticeable, and therefore the outcry has been greater.''  

Finally, Australia's geographical isolation has led it to adopt ''a more domestic attitude in some ways, like certain parts of the United States. If you are in France, the euro is in your face and your relationship with Germany stands at the heart of what you do. In Australia, we have a large domestic agenda and a more restricted international agenda, and so the internationalisation of financial institutions has been somewhat less than what would be normal in several countries.''  

John McFarlane: 
So one of the challenges I believe for Australian organisations is how do they find their way in a globalising world intelligently. This issue is facing everyone. But I think that it uniquely faces Australia, which is on balance a little bit more domestic than some other countries.  

While the isolation presents a more favourable climate, by allowing more time to reflect on these matters, the need and the forces (of globalisation) are inevitable. At some point, we need to see the emergence of an international strategy by the major players, with more urgency than perhaps we have seen in the past. 
 

HOW MUCH TOUGHER IS IT GOING TO BE FOR BANKS TO COMPETE OVER THE NEXT FIVE YEARS?

I am in no doubt that there will be greater change in banking and financial services in Australia in the next five years than there was in the last five years - the issues get harder, and the forces get stronger. You will see far more innovation, far more transformation, far more differentiation of strategies among the participants then you have seen before.  

Principally, this will be because: 

• the competitive forces will increase, 
• shareholders will be more demanding for performance. They will be looking for points of uniqueness as to why they should invest in particular companies; 
• the school of internationalisation will increase, and the global players will advance; 
• the need for Australian organisations to become more international will become greater; 
• margins will continue to come under pressure, on net interest margins (and) on services; 
• customers will become more demanding; 
• the Internet will allow customers to really be able to unbundle their financial services and choose who they wish to deal with for a particular service; 
• technology will be embraced in a far greater way than ever before, particularly Internet protocol technology which will start to revolutionise the way that banks deal with their customers and with how they run their own organisation; and 
• there will be greater domestic pressures. We are seeing increasing political and social pressure on banks (and) other corporations to embrace a much more 'stakeholder' view of their priorities ... to be more sensitive to the needs of the communities, and enter into a dialogue with the community in general as to how they take their organisations forward. 

Customers will become increasingly more demanding and more selective, and your ability as an organisation to compete across the board will diminish; particularly as niche players enter parts of the market. Therefore, banks will have to focus more on key areas of their business and key customer segments, rather than trying to do and be everything to everyone ... (Banks) will increasingly start to try to dominate their niches, rather than be big, broad market players ...  

We haven't yet seen any of the global mega-players enter Australia in a serious way, other than in niches, (and that is because) the banks in Australia are efficient, they produce good returns for shareholders, and are effective in the way they run themselves. It makes it hard for someone from the outside to make sufficient improvement in that ... This, combined with the size of the market, and the remoteness, which causes a management challenge for foreign players, has not made (Australia) the number one destination for foreigners in the marketplace.  

That said, there is no reason why foreign players and their domestic operations will not become more powerful in parts of the business ... and so it will not be a safe environment at all. It will actually be a very competitive environment. It will be in the competition for selective spaces, rather than for acquiring banking conglomerates.  

(But) if you don't perform, you get taken out, and therefore the need to continue to produce results for shareholders and for your customers is absolutely fundamental. If you don't do those things frankly you deserve to be taken out. 
 

YOU HAVE BEEN A STRONG PROPONENT OF TECHNOLOGY AND ELECTRONIC COMMERCE IN BANKING. HOW WILL THEY CHANGE THE BANKS' OPERATIONS PROCESSES AND MARKETS IN THE FUTURE?

Commercial transactions are only rarely conducted in cash. Basically, we just have electronic signals, which then debit one bank account and credit another. So really a bank, like other service companies these days, is simply an aggregate of people, capital and electronic signals. 

Customers have increasingly got used to electronic means of transacting, whether through EFTPOS or by using credit cards; through the Internet or ATMs ... But you will start to see televisions and wireless making the Internet available to people in the home, bringing banking right to the television set or to other electronic devices in the home. That will cause a fundamental difference in how customers interact with their bank. 

(Automated processing of transactions is more reliable, cheaper, and it) reduces the level of fixed costs and the risks for organisations by having the costs more variable ... But you will also see - given that customers will be more demanding - banks need more information on their customers in order to structure the services and/or provide a better service.  

I believe that people who have tried to build pure e-commerce banking businesses have struggled, and certainly struggled to make any money. And the model that seems to be emerging is one where you (also) have a face-to-face presence with your customers because people want to meet people in dealing with the major financial issues ... 

E-commerce presents a tremendous opportunity to transform organisations, to help (find) new ways of getting services to your customers and to get into new businesses (for example, procurement). I think it will be very exciting.  
 

HOW DO YOU BUILD A DISTINCT ADVANTAGE, GIVEN RIVALS HAVE ACCESS TO THE SAME TECHNOLOGY?

Competitive advantage usually starts with where you are. For example, it is part of our history at ANZ that we've been traditionally a very large player in the corporate banking market in Australia ..., (so) we would have a competitive advantage in corporate banking ... Companies like Lend Lease have got enormous amounts of talent in their organisation. Competitive advantage isn't just about your dominant position in a particular niche market segment.  

The e-commerce space though is new one, and so there is an opportunity for those that are fleet of foot, and have the technological capability and the talent to enter the space - provided they are fast. So e-commerce presents threat, but also an opportunity. Big companies that haven't been in existence for more than five minutes will start to penetrate parts of our business, and we've got to be very smart, very selective, but also build capability in order to fend off this threat.  

But I also believe that those who are very focused and who create the right environment can win in this space. The Internet and e-commerce ... will be a fundamental force that we have to embrace. It is for that reason that we gave heavily subsidised computers to all our staff to use at home - not in the office, to use at home - because in this new world we cannot afford any of our people to not be (a) computer literate and (b) web enabled.  

ALL THIS POSES NEW DEMANDS ON STAFF SKILLS 

The old paradigm of land, labour and capital as being the sources of production has changed quite dramatically. It isn't the land that is delivering the value today, although there are businesses who still do that. Nor is it capital, because capital is freely available to anybody who has the right economic idea and can execute it. 

The only real resource that any organisation has to differentiate itself is talent. It is also the scarcest resource, and the one that is the least developed, and it is not given high enough priority by organisations today.  

Our priority as an industry is to recruit, to retain, to develop, to skill, to free up talent in order to create the future for our organisations. That's where the AIBF really can help.  

The obligation is on us to harness the talent we already have inside the organisation and bring out its true power. An organisation like the AIBF really is fundamental to doing that. At the same time though we must search the universities, colleges, and of course our competitors and other industries for talent. 

We have got to become better employers. We've got to provide more opportunity for our people, exciting opportunities, and offer learning and new experiences for people.  

It is the organisations that are going somewhere, that are vibrant, that are entering new spaces, that are creating an environment of opportunity for the people, that care about their people rather than use them, that develop people, that don't rush into businesses and then rush out of them and therefore have massive dislocation ... and unnecessary redundancies ... (that) are going to be the ones that people will want to gravitate to.  

There is a real competition for people today, and therefore companies like ANZ have got to become much more people-orientated.  

People also want to work for companies that are admired, and companies get admired not just because they make a profit for shareholders, but how they are regarded by customers.  

We have made mistakes in the past with customers. We have made mistakes with our people, and we have made mistakes in the community. We've got to be a lot better, and we have to push these agendas, follow up the management agendas and the leadership agendas of corporations in the future if we are going to be one of the companies that people admire, and therefore the companies that people with talent will want to join and spend their lives investing in.  
 

THE AVERAGE COST-INCOME RATIO AMONG AUSTRALIAN BANKS, AT LOW-50 PCT, NOW RIVALS WORLD'S BEST PRACTICE. HOW CAN YOU IMPROVE THAT FURTHER?

Australian banks have done well and are efficient in world terms. But I do believe also that competitive forces will continue to drive down margins, and the need for more efficiency and productivity will be permanently with us. 

That said ... the main objective for the banks should be in improving the customer experience and improving returns for shareholders. And sometimes, driving down the cost-income ratio is consistent with that, but sometimes it is not.  

For example, if you drive down your costs to the level where you are no longer able to provide service and value, then that is clearly not in the interest of your shareholders. On the other hand, not taking out unnecessary levels of bureaucracy is also not in the interest of your shareholders, and not responding to and embracing new technologies and finding new ways of doing things is also not in the interests of your shareholders.  

We have also got to be careful that if we drive the cost-income ratio too hard, we will stop investing in businesses of tomorrow - the returns (from those businesses) are not going to be today; they are going to be tomorrow. 

There is a new force at work, which most of the banks are embracing, and that is the concept of economic value-added (EVA), which is essentially a surrogate for shareholder value.  

I think you'll find that organisations will increasingly focus on EVA rather than on ratios such as the cost-income ratio.  
 

YOU TOUCHED EARLIER ON THE PUBLIC IMAGE OF BANKS. WHY DO AUSTRALIAN BANKS HAVE SUCH A POOR PUBLIC PROFILE?

Some people try to explain it by saying, ''It's not our fault, you just don't understand''. It does stretch my imagination to wonder why that would be correct. It seems to me that we must have done something wrong somewhere along the way, something that we should have done better. If your customers don't have a good perception of you, then it must have something to do with you.  

We have got to be much more conscious about the image (fostered) of banks by customers, particularly our customers, but also by the community and by commentators and, of course, by the government. And we must do something about it ourselves. It isn't just going to go away without some action on our part.  

Of course, having said that, I am sure there are lots of circumstances where banks and the image have been unfairly represented. Banks are easy targets. They are the big organisations, they make lots of money, they produce good returns.  

I take the view that we don't have general obligations to everyone, but we do have obligations to our customers, to the businesses we are in and to those parts of the country where our businesses are ... if we have touched a community by our presence and we then withdraw from that community, then we bear some responsibility for any damage that is thereby caused.  

That said, business is tough today, and we are forced to make difficult decisions. But we have to make those decisions in a more enlightened way going forward.  
 

ARE THERE BUSINESS RISKS FOR BANKS IN HAVING A POOR PUBLIC IMAGE?

Whether it is a customer or whether it is society in general, banks are about confidence and trust. Confidence in a bank is very, very important and anything that shakes the confidence in a bank has to be important to the shareholders, and to the management of a bank. Because if left unchecked, it will cause damage to the confidence of the organisation and the industry as a whole. It is, given the reality of this situation, something that has to be very important to Australian banks, and something that we need to deal with and take to heart very seriously.  

We do at ANZ. I realise we are not getting everything right, but you can be assured that we believe in this. It is for that reason that we have had the moratorium on bank closures in the bush for some time now, and have adhered to that. 

It is for that reason that when the student fees issue arose we said 'That is wrong, we should apologise and correct it'. Which we did.  
 

ANZ BANK HAS SEEN MANY CHANGES SINCE YOU TOOK OFFICE, INCLUDING THE SALE OF THE ANZ GRINDLAYS INTERNATIONAL OPERATIONS. WHAT CAN WE EXPECT IN THE FUTURE?

Of course, a natural (development) for us would be that we should be more active in Asia-Pacific, simply because we have a capability of running businesses in Asia and in developing markets. It is likely also that our increasing capabilities in e-commerce will be emphasised, particularly in Asia.  

We will build on our traditional strengths in some of our existing businesses more on the corporate and on the consumer side, but we will be much more selective in the businesses that we enter. Therefore we are not going to go for size, nor are we going to go for consolidation. 

It will be more likely that we will be value-orientated as an organisation, which will cause us therefore to be less acquisitive and less reliant on extracting the economics from mergers than by building capability in segments where we can sell services to our customers at a premium. And so we will be very, very different. We have to choose our own destiny.  

We have plenty of growth opportunities in the organisations, both within our existing businesses where we have capability, and in businesses that we are not even in today. We have to think about the organisations differently, and not look for one general solution for all companies in the industry. That is old thinking. It is not the way the world really works, and it is dangerous.  
 

WHAT DO YOU HOPE TO ACHIEVE AS AIBF PRESIDENT, AND WHAT IS YOUR VISION FOR THE AIBF?

I believe you shouldn't do something unless you plan to make a real difference, and I have charged the board of the AIBF with a number of challenges, and I would like to see us make a real difference now, during my incumbency, and beyond.  

The first is in the strategic evolution of the Institute - in other words, where is this organisation going? How can we be a more meaningful organisation strategically? And how might we work with others in doing that? 

(Secondly), how can we increase the penetration of the AIBF in the financial industry? In other words, how can we be more important to the industry and gain a greater market position in it?  

Thirdly, we are in business to provide services to our members. How can we improve the range of services to our members so they value us more highly?  

Fourthly, we deliver education to our members as our key service. We have to make sure that our programs are of high quality at all times, but also relevant to the changing needs of the industry. The accreditations we give as an Institute are valued if our institution is valued, and we must ensure that we, year on year, enhance the value of the accreditation that we have given our members, and make this one of the most worthwhile accreditations that can be (achieved) in the finance industry. We need therefore to advance the credibility, the image, the reputation, the influence and the success of the Institute.  

We have set up working groups now on each of the challenges in order to see how the Institute can develop and make a difference in each of these areas. 

I am also very pleased that we appointed a new director, John Unkles. I think he will be extremely influential in how the organisation goes forward, and I look forward to working with him and of course with the members of the AIBF.  

These things will take time, but I do believe we will make a difference. It is important to the industry that we do.