When did banks decide to stop trusting their own customers? There was a time when every community had its own bank, where the bank manager knew you personally. It was the local bank manager’s primary goal to develop a relationship of mutual trust with the community. This relationship of knowledge and trust meant that the bank could hold the savings of their clients and make loans based on knowing who they were lending to. As banks became larger with multiple branches, this stopped being the case, and I believe this abandoning of trust is at the very heart of why modern banks continually disappoint us.
What do I mean by trust? Trust is living up to your promises and believing that others will live up to theirs. I mean a two-way relationship that allows both parties to rely on the other. I mean a relationship where we are fully aligned: a relationship where the whole we deliver together is more than the sum of our parts.
“The economics of a bank should be simple.”
The economics of a bank should be simple. A bank accepts your money in the form of a deposit and rewards you with an interest rate. The same bank lends out money at a higher interest rate. The difference pays for the operations of the bank and a reasonable return on equity to the owners of the bank.
It was during the four years I spent as Corporate Finance Adviser to HM Treasury (the UK Treasury Department) that the reality of modern banking became very clear to me. In September of 2007, Northern Rock (a mid-sized bank based in the North of England) faced a crisis that culminated in the first run on a bank in England for 150 years, and eventually the UK Government had to intervene and take ownership. This crisis planted me on the rapid-response team made up of HM Treasury, the Bank of England, and the FSA (the UK bank regulator). I was tasked with finding a private sector solution, which ultimately proved impossible. What I witnessed was the inner-workings of a modern bank. It was not pretty. This is when I fully understood the extent to which the current model is broken.
When you look into it, modern banks generate revenue from regular customers through the fees that they charge. Fees to have an account, fees to move money between accounts, fees for being late, fees for your money being in the wrong account. The list goes on, endlessly.
This shift in revenue channels has a more fundamental impact on the psychology of how modern banks think about their customers. In the simple model, you and the bank are pulling in the same direction: you make a promise, and if you meet that promise then everyone is happy. In the fee model, you and the bank are pulling in opposite directions: you make a promise, and if you meet that promise then there are no fees and only you are happy, or if you do not meet that promise, there are fees, and only the bank is happy. The first model is sustained by trust, the second breeds mistrust.
It was thinking about this shift that led to the founding of Earnest. To build a business based on trust. Real trust, not “too big to fail”, marble columns, and TV-advert based trust but I-trust-you-and-you-trust-me Trust. Earnest is not a bank but we are taking the part of financial services where mistrust is most rampant – consumer lending – and building a new type of company: a company with mutual trust at its very core.
Our goal is to combine the straightforwardness of traditional banking with the promise of modern technology. To be fair, transparent, build relationships based on real trust, and deliver products that meet the needs of our clients.
— Ben Hutchinson, Founder & COO