"Banking on Change"
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Barbara G. Stymiest
Chief Operating Officer
RBC Financial Group
The Economic Club of Toronto
June 20, 2006
Toronto, Ontario
Thanks very much for that kind introduction, Mark, and good
afternoon ladies and gentlemen.
More than a couple of decades ago, back in 1983, a British
rock musician by the name of Gordon Sumner --- whom you might
recognize more immediately as Sting --- joined other band
members on a little stage down on Queen Street West at the
Horseshoe Tavern and broke out in a song that was to become
the year's most popular.
Every Breath You Take propelled "The Police"
into stardom and "Sting" into a position among Rock
Royalty that still endures today.
There were about 18 people at the Horseshoe to witness the
one-night-only event and there were probably just two or three
who recognized that something significant was happening.
Needless to say the internet chat rooms had yet to be built.
Pictures allowed that night were captured on film.
And no one was able to call anyone and implore them to come
on down to the Club in a real big hurry because the Horseshoe
had only two payphones and one of them was always broken.
Ladies and gentlemen, as much as everything changes it seems
true that everything stays the same.
1983 was the same year in which the US invaded Grenada.
And it was the same year that terrorists using explosives
killed 237 US Marines in Beirut.
It was the same year that a Harvard Business School "guru"
by the name of Theodore Levitt proposed in his book The
Marketing Imagination an outrageous notion: the real purpose
of a business is not making profits but creating and keeping
customers.
And it was the same year, almost in reply to Levitt, that
a schedule "A" bank known then as the Toronto-Dominion
Bank decided to offer a discount brokerage service to the
public. It was called TD Green Line.
Now he has lent his name to a number of noteworthy causes
but I doubt that Mr. Sumner would offer himself up as a proof
point of any business theory and the related adages that inevitably
follow it into the market.
Still, if you were among those 18 who listened to the Police
that night nearly a quarter of a century ago you would have
been watching a man who today is worth hundreds of millions
of dollars.
After breaking out on his own, he has released more than
20 albums that have sold something greater than 15 million
copies in the US alone. He has appeared on television. He
has had an acting role in 18 motion pictures.
He has appeared as himself in more than 130 films or television
programs. He has performed his music either directly on or
behind the scenes in 30 other films. He has produced one film
himself, that very recently. And he has written an autobiography.
If you are searching for something to wear that bears his
name let me refer you to Sting.com. There you can purchase
anything from clothing of every description to wall art to
accessories, including downloads for the cellular phone you
didn't own in 1983.
Sting has reached out to his market in every way possible.
He has simply done what Theodore Levitt suggested a successful
entrepreneur must do.
He has focused not on profit but on ensuring that he is reaching
his customer in every conceivable way possible, attempting
to extend his reach and refresh the relationship at every
turn.
The fact that he has endured and that nearly every one of
you in this room is familiar with his name, suggests to me
that he has proved the theory. The money speaks for itself.
Levitt simply asks business builders to recognize the obvious:
without customers in sufficient and steady numbers there is
no business and without business, there is no profit.
It all sounds rather axiomatic. At least it certainly did
in 1983.
What's changed?
Well as much as I might suggest, as I did earlier, that change
always exists in a world that largely stays the same, I think
there are some trends that have developed over the last 10
years and are here to stay; that promise an essentially new
and I think lasting construct within the marketplace.
And I am not talking about the kinds of trends that the "cool-hunters"
of the last decade from the fashion industry searched for
in the back streets of Brooklyn or Berlin.
These people might have been useful in their brief moment
in fashion history but knowing and caring about trends in
popular culture is increasingly nothing more than table stakes:
every retail business leader needs to connect with today keeping
an eye on tomorrow.
In fact, if anything killed the cool-hunters off I think
I agree with Grant McCracken, the self-described ethnographer
and tireless blogger, who recently placed the blame on pop
culture alone.
Quite simply an easy knowledge of consumer trends became
infinitely more available toward the close of the 1990s.
Magazines, television, music, the Internet ---- all these
points of reference (all of them the important touch points
of Sting's distribution network) began to paint a new face
on an increasingly fast-paced, complicated society. And corporations
of every shape and size were starting to pay attention.
As McCracken put it earlier this month, "Increasingly,
even the corporation had a clue."
In the madhouse that has become our lives the difficult challenge
is often described by the gap that exists between the point
of view of the seller and that of the buyer.
It might be narrowed with great marketing and a good product,
competitively priced but truly meeting expectations in a lasting
way requires an understanding, not simply of the buyer's needs,
but of the changing circumstances that influence any determination
of what those needs are.
I suggested a short time ago in Montreal that understanding
the banking client of today meant understanding the influence
of three pressing challenges I believe really have an impact
on buying decisions.
Challenges of too little time, not enough trust and way too
much choice combine, in my view, to really make an informed
buying decision more difficult.
I still think that these pressures and concerns seriously
influence buyers. What I hadn't reflected upon at the time
is who those buyers have become.
In his book Treasure Hunt, Michael Silverstein explores
a new universe, one that has apparently unfolded before our
very eyes without a great deal of rapid response from retailers,
even as many today admit to being caught scrambling.
As the "cool hunters" wandered the streets through
the 1990s searching for the next great trend, the demand they
were working to satisfy remained quite compartmentalized with
the rich at one end and the poor at the other and a rapidly
growing middle class jammed uncomfortably in between.
The rich were buying expensive things and the poor were buying
cheap things and the middle class….well the middle class
was buying everything else.
It is a spending spree that was predicted more than 10 years
ago by Canadians David Foote and Daniel Stoffman. You might
remember their book, Boom, Bust and Echo.
In it they concluded that money, which passed from grandparents
to grandchildren, from people born before 1940 to people born
after 1967, would be of an amount sufficient to give a truly
measurable boost to the economy in the first two decades of
the new century: this decade and the next.
They predicted that consumer spending would increase in the
face of decisions to have fewer children and of ambitions
to spend more on cars, houses, cottages and the other apparent
necessities of life.
Silverstein captures this phenomenon but takes it further
in his thinking. He argues that there has been a sort of quiet
revolution over the last several years that has seen the middle
class break out of their confinement into a new buying paradigm,
one that has them "trading up and trading down"
at the same time.
So sales at the top end of the market, the luxury items that
middle class consumers have historically said they couldn't
afford, have taken off driven by the middle class "trading
up".
And sales at the bottom end of the market have grown enormously
as well largely because of the same middle class "trading
down" in search of a deal or bargain that will partially
offset the cost of the luxuries they have chosen to buy. Just
look at the success of Walmart and Costco.
What's happened to retail in the middle, the mid-market?
Considering these trends, the Economist magazine recently
suggested that at least some of the woes of General Motors,
an archetypal mid-market manufacturer, stem from the fact
that between 1994 and 2004 the market segment choosing to
trade up to luxury vehicles grew by eight percentage points.
The segment that chose to "trade down" into a more
inexpensive vehicle grew by four points.
The mid-market? That shrunk by twelve.
Much of the momentum within this new dynamic is coming from
women. If you didn't see it in the Globe a few weeks ago let
me recall for you the conclusions reached in an article written
by Heather Scofield and Tavia Grant: women are making the
economy "go around".
58 percent of all women of working age in Canada now have
jobs. In the United States women are responsible for 100 percent
of the growth in real household income between 1970 and 2004.
48 percent of stock market investors are women. In developed
markets around the world, women control or influence more
than 75 percent of discretionary spending.
In the April 12th edition of the Economist magazine it is
suggested that "…women are more likely to provide
sound advice on investing their parents' nest egg: surveys
show that women consistently achieve higher financial returns
than men do."
I think retail is changing. And banking has to change with
it.
Canadians tend not to look at banks this way but really,
we are in the retail business. We exist and operate on the
ground floor like nearly every other retail operation reaching
out to our category of the "shopping public" just
like any of the stores you might be familiar with around town.
Architecture and design combine with signage to move the
retail customer through the bank more easily in search of
the determined necessities. As Paco Underhill points out in
his book Why We Shop, banks actually sell things -
"…every service a bank performs or financial instrument
it offers produces a fee."
If we have advantages many other retailers don't these probably
connect to automation and to the Internet, two increasingly
popular options that provide greater access to our products
and services in a new century.
But we can't move up or down the value chain quite as freely
as other retailers in an effort to meet the new trends in
the marketplace that I have spoken about. Despite images anyone
might hold of our retail bank much of our business is positioned
squarely in the mid-market as any close examination of the
demographics makes clear.
Very wealthy Canadians tend to search out unique arrangements
that capture investment management and advice within private
banking. And low-income Canadians may avoid banks entirely.
So really it is the financial service needs of the new middle
class, and the expectations that attach to them, that have
evolved in ways that are enormously important to us in our
effort to create and keep customers.
Perhaps the most compelling of these is the increasingly
obvious desire to simplify a congested lifestyle with the
help of a single financial services provider.
This entails a consolidation of accounts, investment portfolios
and debt - essentially trying to meet new needs inside the
same client relationship. You know….trying to keep the
client you have created.
And it involves other service and product options that Foote
and Stoffman identified more than a decade ago as being areas
of obvious growth for those in the financial services industry.
One of these is insurance.
They suggested that an older population is likely to acquire
a lot of things that will need to be insured.
And an older population would likely produce large numbers
of travelers who would be interested in travel insurance.
At the same time they predicted that a lot of younger people
buying new things like cottages and cars would be looking
for insurance to protect those investments.
It appears clear that insurance buyers are changing in the
face of new and more immediate needs, needs that I remain
convinced attach to the three issues I raised earlier; no
time, no trust and too much choice.
Last week the federal Minister of Finance released a White
Paper outlining the details of a recent review of banking
rules and regulations.
It was noticeably mute in response to the stated desire of
Canadian banks anxious to offer a full range of insurance
as part of the basket of products available through our branch
network.
Nothing was said about our selling of insurance in other
ways, however. RBC Insurance provides a wide variety of protection
products to millions of Canadians and many more millions of
North Americans.
We are pleased with our progress in an area of expansion
that remains comparatively new. And the response from the
public is encouraging.
So let me for a moment return to where I began by suggesting
to you that the more things change the more they stay the
same.
Because I remember when the Toronto-Dominion Bank introduced
TD Green Line in the spring of 1983. At the time, they took
unsolicited orders for stocks and relayed them to brokerage
firms through a relatively advanced information system.
The Bank Act had been revised in 1980 preceded by a White
Paper in 1976, which was anything but mute in its definition
of a bank's power to "deal" in securities. "The
power of banks to underwrite corporate securities or to act
as agent in the private placement of corporate securities
will be withdrawn."
In April of 1983 the Toronto Dominion Bank jumped on the
deregulation of brokerage commission rates and offered a discount
brokerage service to the public. They wanted to reach Canadians
who wanted to invest in the market but in a less expensive
way.
The industry went berserk.
The Toronto Dominion Bank was hauled before the Ontario Securities
Commission where to the great angst of everyone with a vested
interest in brokerage in Canada, the Commission eventually
ruled in favour of the bank and confirmed the deregulation
of brokerage commission rates.
TD Green Line was in business.
A year later, then Royal Bank Chairman Rowland Frazee really
put the cat among the pigeons when he suggested in a speech
to the Canadian Tax Foundation not simply that banks should
be able to underwrite securities. No, he went further and
argued that the traditional separation of functions in the
Canadian financial system were coming apart with or without
government policy changes.
Now everyone went berserk.
Fears that the investment dealer industry would disappear
were shared with any audience who might listen. The rhetoric
was shrill. The facts conveniently assembled.
Research studies were commissioned that produced unequivocal
findings: investors didn't want their brokerages and their
banks to be connected in any way.
But slowly the hysteria cooled down. In February of 1986
OSC Chairman Stanley Beck told the Empire Club that allowing
the six major banks and five major insurance companies to
compete in the financial markets, "…would be to
the great advantage of Canadian capital markets, Canadian
issuers and Canadian investors."
Seven months later, then Finance Minister Michael Wilson
traveled by helicopter and dropped from the sky onto the front
lawn of Chateau Montebello in Quebec to have a little Sunday
lunch with the chief executive officers of the six big banks.
By the serving of coffee they had agreed in principle that
the banks could go ahead and increase their access to the
securities industry in Canada either through acquisition or
by creating their own internal facility.
The rest is history as they say. The securities industry
in Canada has not collapsed. In fact it has never been more
robust. There are 206 investment dealers in Canada and nearly
52 percent of Canadians are investing in our equities markets.
So I think you will understand why amidst the current debate
I am feeling a little déjà vu. Most Canadians
understand that the insurance industry has contracted with
Great West Life swallowing both London Life and Canada Life,
Sun Life acquiring Clarica and Manulife ending up with Maritime
Life through its acquisition of John Hancock. The big six
have become three.
In everything that's been said or written lately, I believe
that most thinking Canadians are shaking their heads trying
to understand how it can possibly be that restricting new
participants into a marketplace that has seen enormous consolidation
over the last few years will somehow improve consumer freedom
and choice.
I don't think you need a high school diploma to recognize
the weakness in this argument. Less choice doesn't mysteriously
improve choice.
In a recent op-ed piece in the National Post Advocis Chairman
Gary McLeod states without qualification that Canadians have
said "they neither need nor want bank growth into an
area in which they already feel well served."
The thrust of Gary's argument is that the insurance consumer
shouldn't be confused with more choice even though that consumer
might be looking for more choice. The status quo may be caught
in the past but it is our past and isn't it great to be Canadian.
Gosh this kind of thing sounds vaguely familiar to me. It
will to anyone who was in Toronto around 1986.
But never mind. My question to Gary is which Canadians is
he talking about?
Certainly not the 5 million Canadians who continue to buy
a wide range of insurance products from banks in our country.
They do it over the telephone, over the Internet or in any
one of the increasing number of retail outlets that have been
built for the purpose.
So the rhetoric has been high and often distant from the
facts.
In April a fellow wrote a letter to the editor of the Globe
taking exception to my comments in Montreal. I said that it
was bizarre that an individual couldn't buy insurance at a
branch of our bank or be referred to our insurance professionals
but could certainly make that purchase at a grocery store.
This gentleman rebuked me in his letter saying, "nobody
can purchase insurance at a grocery store." My point
was simply that there is no regulatory prohibition against
grocery stores selling a full range of insurance products
unlike for banks, and today Loblaw's promotes insurance through
brochures and advertising in its stores and then provides
a toll free number.
We are not discouraged that the Minister of Finance has decided
to remain mute on the entire subject on selling or advertising
our insurance products through our branch network.
We are confident this time will come and until it does we
will stay the course.
We believe Canadians are searching for alternatives that
meet their needs. We believe we offer an alternative, one
that is entirely free of any of the baseless claims made about
our ambitions.
The consumer of the 21st century is changing and those of
us in financial services must change to meet the expectations
that increasingly become so very different from years ago.
No one will buy insurance from RBC Insurance if they believe
that they are well served by their present supplier.
Why would they? Like everything else, selling insurance is
all about creating and keeping a client. So if the traditional
sellers are concerned about the new sellers maybe they should
reflect on the new consumer in the market.
And when they pass our retail outlets in malls and street
corners across Canada or when they see or hear our advertising
for RBC Insurance, perhaps they will recall TD Green Line,
the discount brokerage that changed the face of the securities
industry in Canada….forever.
Every Breath You Take was one of the songs on the
Police's Synchronicity album. It was named one of the
50 best albums of the decade. Synchronicity was a name drawn
from Arthur Koestler's book The Roots of Coincidence.
Another song on the album was called, Walking In Your Footsteps.
The band also performed it that night in 1983 at the Horseshoe
Tavern.
The last verse goes something like this…
"Fifty million years ago,
They walked upon the planet so,
They live in a museum,
It's the only place you'll see 'em."
Thank you very much for your attention.
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