Northern Rock sealed its fate by betraying consumers’ trust

Andrew%20HarissonThe lessons to be learned from the consumer run on the bank at Northern Rock will fill the marketing text books for years to come. For those brand managers who have ever struggled to justify marketing’s role to the accountants, it’s a dramatic demonstration of the intangible value of the brand – and the dangers that lurk in financial measures alone.

“People outside the financial sector must view the events of the past week with utter bemusement,” Bank of England governor Mervyn King said to furious MPs last week.

There is less bemusement for marketers, however, as most of them will recognise two fundamental truths in this story. First, that great brands – whether in soft drinks or financial services – start with a product benefit rooted in consumer understanding. A mortgage is the biggest single investment any of us will ever make. It’s the classic fail-safe financial product – after all, it’s your home we’re talking about – with repayments spread over a whopping 25 years or more. Think how much most brand managers would love brand loyalty to be locked in for that length of time.

Your mortgage was traditionally a product you bought from the local building society – a mutual organisation at the heart of its community. Everyone understands the way it works – people pay in deposits to generate modest, but guaranteed returns. From those deposits, the building society offers mortgages. Simple.

So, what happened to the marketers when that simple consumer and product understanding transformed into a highly-leveraged extension of the financial markets? Rather than funding mortgages from savers and deposits, Northern Rock funded mortgages from the financial wholesale markets run by other banks – betting that it could profit on the difference between the interest it received from its own mortgage holders and the interest it paid out to rival banks.

This sounds like arbitrage to me (which is almost an anagram of “rage a bit”). None of those savers expected that a safe investment in their local building society would be, in reality, a highly leveraged punt on the global markets. A company with the consumer at the heart of its thinking would be unlikely to play so fast and loose with their savings.

Take Principality Building Society, which has the same community role in Wales as Northern Rock in Newcastle, but which can cover more than the value of its funds from deposits alone. Between December 2006 and June 2007, 72% of Northern Rock’s funds were available via riskier, wholesale markets, with 31% available via the safer option of loans (covered by deposits). By comparison, Principality’s figures were 13% and 100% respectively (source: Fitch). Which of these two institutions would you consider to be a better place for your life’s savings?
The second truth is that brand trust is the tangible result of years of intangible investment in brand equity. Northern Rock was not insolvent financially (if it had been, the Bank of England would have refused to act as lender of last resort), but it had too few deposits in the consumer ledger under trust and confidence. The immediate trigger was a cash-flow problem – but the run on the bank was driven by the lack of long-term brand equity, not the lack of short-term cash.

It’s when you need that trust that you realise why decisions to use offshore call centres, close down branch networks (Northern Rock’s estate was only 73 branches) and move all your transactions online lose you the personal relationship between your brand and your consumer. You might just need that one day. It’s why some companies can survive a run on their product (think Cadbury with the salmonella scare last year) and some can’t.
So, lessons on product truth and brand equity are fairly obvious, but worth thinking about every time you close a factory or branch, or outsource.

I think there will be one final lesson in weeks to come – that an active, well-resourced and well-intentioned corporate social responsibility (CSR) programme cannot paper over the cracks of fundamental weaknesses in the long-term building of product and brand equity. CSR is an enhancement, but not a replacement. Northern Rock employs 4,600 people in the North -east and its foundation has given £175m to 1,520 local charities and good causes over the past ten years – an example to many.

So, what happened in the community the moment trust broke down? That local CSR heritage wasn’t a strong enough legacy to prevent queues around the block, waiting to withdraw deposits. At the Newcastle United match last weekend, my son bought the shirt with the Northern Rock logo, and we each took the leaflet urging fans to invest £2,000 in a personal account. If every season ticket holder were to do so, the bank would raise £100m overnight and local people would return the favour of community investment. But I can’t see it happening – charity begins at home.

Andrew Harrison is chief executive of the RadioCentre.
You can contact him at

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