What is the core of the new banking model? Trust!

The Theory in Action

What will the new banking system be like in practice? It will be all about how a bank uses Trust. The traditional balance sheet will diminish in relative importance and trust will become the new basis of leverage. This link will show you the reasons why this is so. 

Now we go beyond the theory and this post will offer case study of the emerging realities of the new post-industrial agricultural system – the Pasture Based system.

In it we will see all the rules of new Networked Banking system applied. In it we will see how Trust imbues everything.

Pasture Based Food is a response to the Trust and the Margin problems in our current food system.

I have picked the Pasture Based Food System because it is the Tipping Point of the shift from the prior industrial model to the new networked model. If we see this model clearly, then we see all that is to come. Remember there was an Agricultural Revolution before the Industrial Revolution. (More on this here)

Here we can see the Network characteristics embodied in the Pasture system. See how they change the essential idea of value towards Trust. See how this need for Trust changes relationships and then imagine how banking will have to change to serve this model.

  • It is made up of very small nodes. In the Pasture system, herds and operations have to be kept small so as the ensure the best fit with the animal to the environment. The farmer is selling Trust. Trust that the food is safe and that her practices help the environment. To do this, farms have to be small. They cannot scale vertically. These small limits are governed by how nature works and not by engineering.  500 hens drop 200 pounds of nitrogen an acre. The most that land can take up is 300 pounds. Any more is wasted or worse runs off. (Joel Salatin) The nodes are all designed around nature’s limits. The traditional farmer is locked into a war with Nature and so locked into the costs. Traditional farming cannot compete on its own terms with this as Scale is the opposite in the two systems.
  • Small Nodes are Scaled by Networks. 500 hens is a small supply but 1,000 flocks of 500 hens is a large supply. This is how “small” can be big and powerful. Visa International does a multiple of the transactions of any single bank. Visa is a Trust Mediator and Group Former. Thousands of banks are connected in a network of trust. This is how the small becomes huge and powerful. What bank wants to be ejected from Visa?
  • Most of the resources in Networks are attracted in for free. In conventional farming the war against nature drives most of the costs such as diesel, machinery, chemical inputs. All have to be purchased. It’s an arms race that the conventional farmer has to lose in the end. But nature and the animals do most of the work in the pasture system. Nature becomes an ally rather than an adversary.  So the need for capital is diminished and so is the need to draw down the natural capital and so lose trust. So in Networks, margins improve over time and effort is reduced. It is the opposite in conventional farming.
  • Over time Networks become increasingly diverse and dense which increases resilience. Pasture systems use several breeds of animals in rotation on the pasture. Each adds its own value. Even labour!  All the time the underlying core assets, the soil and the attendant natural systems increase in real value. The  Traditional Farmer is locked into monoculture and hence the progressive devaluation of the soil and natural systems. In the end the traditional farm has to fail.
  • Networks are governed by a purpose and by a few protocols. Pasture Systems have a declared purpose and a clear set of protocols or standards. Health is at the heart of this purpose. The epidemic of chronic disease is seen by many to be rooted in our industrial food system. There is a powerful convergence between the new farmers and the new market for Real Food. Such a high purpose drives trust and so brings in a broad movement of members that include the end customers and processors. The Traditional Farmer is locked into making a profit at the expense of all else. He is “owned” by the larger players in the system who all have their sole financial success as the goal. Over time the traditional system has to work against the interests of all except a few. In so doing they have to lose the trust and support of society.
  • Networks are based on real relationships and not transactions  – Most Pasture Producers sell direct to the public. Your real identity is vital. Even Whole Foods identifies its Pasture Farmers by name.  Quality and Trust are personal.  (This link shows you the math behind the limits to group size and trust) A personal system is trustworthy by design. Being personal means that the node cannot scale beyond the personal.
  • In the traditional system the vast scale makes all relationships impersonal. So quality is mediated by regulators. These are often gamed and co-opted. Over time quality declines and trust is lost.
  • As Networks Scale the value builds for all the members and not just for a few. Every class of member gets value. The producer, processor, distributor and the end customer. All add value to each other. This applies to services and goods than come in for free. This process is enhanced when formal trust mediation is established. Interac is a good example of this. The very opposite to the Traditional System where all the value accrues to a few at the top and trust is progressively lost over time.

So let’s now look more deeply at the new needs of the Network and see what a Credit Union would have to understand to meet these needs.

It’s complex but possible to understand

This map is of the farms in Ontario that are part of this new system. They are the local nodes who have committed to a purpose and to a set of protocols. They are a subset of a larger Canadian Network that ties into a US Network that ties into a Global Network. All share the same purpose and increasingly the same protocols.

This is what a real network looks like.

It looks complex and it is. But here is the good news. To understand how to serve any size of network, no matter how complex, we only have to learn how to serve one node or local hub such as the Ontario group here. For in real networks the laws of fractals apply. The entire network scales back to the smallest node just as the smallest scales up to the whole. You just have to open your eyes and see what is in the slide below.

Or look here.

This principle enables us to explore a very complex and novel opportunity by using a very small and low risk series of experiments.

Think of your participation in Interac. A tiny subset with a few banks, a few merchants and a few customers reflects the entire system. We can be confident if we can work out how to serve a tiny Hub like this, then we can ourselves scale the knowledge to any size.

The cultural challenge will be great but not the scale of the work. So if we study and then work on a small node, we will learn how to work with the larger system.

The New Customer Need – Trust!

So what would a Farmer in this local node need from his “banker”?   Much of what is needed is old but forgotten. Most cannot be offered by a traditional bank.  This link will show you why.

Traditional banking is based on the leverage we can get from a balance sheet and the new will be based on the leverage we can get from Trust.

The new power will be Trust. Trust is the foundation for the new market. The work and the value will be to use Trust to grow healthy communities. The full context for this major statement  is here. 

So let’s see how this works in practice.

Long Term Capital – Much Less –  The core capital items such as heavy-duty tractors, equipment and buildings are much less than of the traditional farm’s. (See why here) The amount of acreage is much less as well. It is also not essential to keep scaling up the acreage to get the revenue. “Growth” is an entirely new concept here. Growth here is growth of the quality of the local on farm network and growth in the quality and number of connections in the larger external network.  It is NOT the growth of the scale of the operation. Needing less long-term capital means that the farm balance sheet and income statement will be of a higher quality than the traditional farm. The pasture farm will not be on the inevitable trajectory of over capitalization.

The New Banker ServiceCommunity Investments – While the need for long-term capital will be much less than in the traditional system, there will still be a need.  Traditional investing has become detached and entirely mechanistic. Now more and more people wish to invest in projects that are real and that have meaning for them. They want more connection to their investment. The very people who will buy the products of this network wish to be part of the network. In the new economy every part will align to the Network including finance.

So a new role for the banker is Investor Group Forming so that Community Finance is possible. Alterna is already involved in this type of deal  Offering Community Based Long Term Finance.  This example shows how CSI in Toronto is financing its space through its members who share its purpose and who trust it.

The Members of this group who invest in Pasture Farming, will share the values that will lead them to invest in other projects like this. These new customers will demand a broad portfolio of such opportunities. Starting in food will offer the Bank the learning to create a very large new business here. All will be based on businesses and operations that build value for the community. Co-working Spaces, Hacker Spaces, Energy Projects – we can all imagine where this could go.

Working Capital – Much Less – The need for a host of external items such as seed, feed, diesel and chemical inputs will be much less. Even vet bills will be much less. Without critical time sensitive harvests, it will be possible to share more equipment.

By selling direct, the farmer naturally captures more margin. By selling direct to a market that has no mega food broker involved, the farmer can get better pricing. By selling direct mainly into the local market, the farmer can keep his distribution costs relatively lower than the traditional farmer.  By selling evenly throughout the year, he can even out his cash flow.

So the demand for working capital will be much less than for a traditional farm. There are also new sources of working capital that are not dependent on the balance sheet of the bank. But where the bank can play a key organizing role.

The New Banker ServicesMore Community Finance and Sharing – Increasingly customers are willing and keen to finance the operations of the production system. In many cases by using CSA, much of the of the production working capital can be supplied directly at no risk to the farmer by the customer. Group buying of animals is a new trend. Here customers buy animals and the farmer provides the service of raising the animal.

The opportunity for a bank is to be the Group Former for these kinds of systems. Farmers are very busy. Someone has to be the Trust Mediator. Money changes hands as does title. This is ideal territory for the right bank.

This idea expands into the group of farmers themselves. For they too can share equipment and share services. Such a system also demands a Trust Mediator or Trustee. Can you see how different the balance sheet looks in this system – not just for the farmer but also for the bank? A smaller balance sheet but a much higher ROI.

The primary role again for the bank is Trust Mediator or Group Former.

Innovation and Education – In the past farmers went to agricultural school and used the services of extension. Most of the R and D was done by the Seed and Input Companies. None of this will be true in this new context.

There is a significant opportunity to get behind the new organizations that will discover and codify the new knowledge. They will have to be new because of how paradigms work. The old will fight the new. The old schools will remain trapped in their old system as will extension. The Seed companies and Input companies will fight the new system.

New banker serviceEducation Farmers will have to create their own “schools” and their own R and D. But again, farmers are busy farming. The right bank will help “Group Form” these efforts. They will be based on Open Source principles. Topics could include Breeding, Techniques, Health, Natural Fit, Marketing and Small Business. The farmers will be both the teacher and student.

The Bank is the Trusted Group Former. The Bank leverages its trust.

Ultimately new education and research institutions will arise that will replace the old. These new learning institutions will not confine their curriculum to farming but if founded properly will expand into every part of the real new economy. They have the potential to topple the traditional system that is also over capitalized as is every part of the old system.

The Bankers who back this will be in the driver seat in the new education system.

Farmers will become real business people – Traditional farmers are not complete business people. They run a production system and they sell into a wholesale market. The new farmer has direct relationships with her end customers. She may also be a processor and a distributor or have direct relationships with them. She uses the web as her main tool. Who is going to teach her all that she needs? This is true for all the tiny new personal businesses that will make up the base of the new economy.

Business schools have nothing to do with this reality. They teach the old business and assume scale that does not fit the reality of the truly small business. They demand time and costs that do not fit either.

New Banker Services – Consulting and Business Advice – Who knows more about these things? The farmers who have done it. The consultants who have done it. Again the issue is structure. Who will organize the consulting network? Practitioners are too busy. Practitioners do not want to work for another.  Money and trust are key features of a network like this. Who better than the right bank to take this up?

Bankers have always offered advice. Smart clients are good clients to have. By using Group Forming, banks can leverage their own trust into a system that works to improve the quality of the portfolio.

Personal Business – (See this Post for more on the trends mentioned here) More Group Forming – So what about the non farm personal business of the farm families. Much will remain the same. We cannot live without a credit card etc.

But even here, as trust builds in the network more personal sharing of goods and services can take place.

Banks and Credit Unions can play a pivotal role as the Trust Mediator in such systems. So over time there will be less need for the traditional consumer lending but more and more need for acting as go between and for negotiating group deals.

With low borrowing needs in the personal and the business arena, we can expect healthy cash flows. The question is where to apply these? The answer may lie in the Credit Union’s ability to source healthy community projects that meet the values of the group. These might include investing in energy systems that reduce the exposure to oil – heat pumps, solar water heaters, local wind, insulation etc. It may be in investing in local processing and manufacturing.

New Banker ServicesCommunity Personal Investment Management will be a very productive field. The old system siphoned savings into the “market” which had become a detached mechanistic casino. The new could be based on the real and the personal. Want a 10% safe return? Add Solar Water Heating to your home. Want a hedge against oil and more cash flow? Replace your oil furnace with a heat pump. Want a higher return on your cabbage crop? Add a sauerkraut processing facility – preferably with all your other local cabbage farmers.

Who best to organize this?

Expanding the Scale and Diversity of the Network –  The network will expand in all sorts of diverse areas that cannot be anticipated. Those with sheep in the rotation will have surplus wool. Maybe a connection to the weavers and the craft wool folks,? Sheep also fits Halal. Maybe a connection to the Muslim Community? Sheep produce milk. A connection to cheese? There is no limit to how this may spread.

The local network also is connected to the regional, the national, the continental and the global network. This is where the reach issue of scale plays out.

Who will do the strategic work of facilitating this expansion into more diversity and greater reach?

Making these connections will be very hard for a local farmer. But straightforward for a bank.

But not for one bank alone. To add the value in more diversity and more reach will demand many more than one bank. The issue of trust is again the key here. Human Trust always has to be personal. So there is a limit to how many people we can know and trust. (More on the natural laws here)

What does this all mean for Credit Unions/Banks?

A revolution. For we have been part of the traditional system. It is all we know. It is will be very hard to change any of this because we are still inside the old system. But as you will see there is hope and there is a case study that I will share with you that shows you a path.

But first the bad news about the deeply embedded culture and way of being that is part of who we all are.

Leverage today is based on the balance sheet. Both for our customers and ourselves. As much as we might say we wish to cooperate, in the old system size matters and the successful acquire more size by buying out their colleagues.

The business is transactional. We still talk about relationships but in the end we are quite detached from our clients.

We are product driven and not client driven. We sell to. We tell not listen.

Internally we talk a lot about cooperation, but in practice the silos are everything. The manager that gives up resources to another is being naive.

The good news for Credit Unions is the ownership issue. This is a river that the banks cannot cross. But it may also be an area where a new entrant can stake a claim.

So what to do? How do we set in motion a transformation? We are talking caterpillar to butterfly here. How do we defeat the immune system of the old and its desire to kill the truly new?

I have found the answer in the realm of Public Media in the US where I have worked for the last 6 years. In the final post in this series, I will use one station’s story of transformation to show you a pathway that works.


One response to “What is the core of the new banking model? Trust!

  1. Pingback: How we get from Machine to Network – Culture | Queen Street Commons