Brett King

Can Social Media Bring Down a Bank?

In Economics, Future of Banking, Social Networking, Strategy on November 23, 2011 at 00:26

Bankers often talk about the ‘trust’ consumers have in banking as a defining characteristic of why customers give banks their money instead of simply keeping it under a mattress. Some bankers might have difficulty understanding why customers of today seem perfectly happy to give money to the likes of PayPal, M-PESA, Lending Club or Zopa. The fact that I trust PayPal to send money on my behalf, in lieu of banks, might have been unthinkable just a few years ago. The concept of lending money through a social network would have seemed laughable too. Part of this is that we just don’t trust banks like we used to, and alternatives seem far less risky comparatively.

Reputational risk is surfacing in the sector as a whole today through social movements like “Occupy Wall Street”, “Bank Transfer Day” and other actions led by frustrated consumer groups and collectives. As an industry, we’re not organizing a structured approach to this challenged perception of ‘banking’. Instead we’re often trying to defend the indefenisble, a system saddled by inertia that assumes we have far greater responsibility to our shareholders, than we do to the customers we are supposed to serve.

Not the Regulator’s problem

At the European Retail Banking Summit held in London on November 8th, 2011, I pitched to European regulators the issue of Social Media, the Occupy Movement and what their position was towards the increased transparency that retail banks were facing. Martin Merlin (Head of Financial Services Policy and Relations with the Council, European Commission) and Philip Reading (Director, Financial Markets Stability and Bank Inspections, Oesterreichische Nationalbank) were at a loss to understand the role of regulators in defining a coordinated industry response. Martin’s response was telling:

“It’s simply not on our radar yet as regulators”
Martin Merlin, Head of Financial Services Policy, European Commission

Customers finding their voice

The new voice of the populace is demonstrated with no greater effect than through the so-called “Arab Spring” across the MENA region. If Twitter, YouTube and Facebook can overturn regimes in Egypt, Tunisia and Libya, I’m pretty sure they can totally undermine the brand of a bank that we’ve previously thought was “Too Big To Fail”.

To add credibility to that notion, in just months we have seen the Occupy Movement develop into a global protest against the economic and social inequality promoted by the current “system”. Consumers today have found their voice. Increasingly that voice is about choice, about rewarding organizations that listen and punishing those that think their decisions are immune from public debate or dialogue.

Prior to social media, the thought of rapid political change in a country like Egypt would have been considered extremely unlikely, a real outlier. Is there a measurable effect of this voice of the consumer on retail financial institutions today? Absolutely.

In January 2011, Bank of America’s (BofA) post financial crisis share price had recovered to $15.31 at its peak. As of this blog post, BofA’s stock is ranging at $5-5.50. This is instructive. Stocks with a historical Beta (β) of 1 are generally tracking flat for the year. So why has BofA lost more than 50% of its value in the last 12 months, compared with a market and contemporaries that have remained flat over the same period?

Bank of America's share price is at a 2-year low

Overlaying stock trading volumes and pricing, against average and cumulative sentiment (via social media analysis) shows that public displeasure with the company direction and engagement has been a core driver in BofA’s troubles. What is clear is that BofA would not have considered consumer sentiment a significant driver in their share price in the past. They simply could not have run their retail bank badly enough to result in this type of dip in the past unless there was some sort of significant and very public scandal resulting in massive losses. The market is obviously now pricing in concern about the long-term viability of a brand that doesn’t have affinity with the consumers it serves.

A great infographic from EvoApp showing the correlation between sentiment and share price for BofA

What to do next?

Understanding consumer sentiment, and actively managing the brand in this open dialog is going to be a key skill in the near term. This is not about ‘spin’ or control, because as Egypt and the Occupy Movement has shown, you can’t control these forces.

Instead what will be critical is the capability to respond visibly to the markets concern, to improve sentiment. In BofA’s case, the leveraging new Debit Card fees, claiming BofA had a “right to make a profit” and then dropping the planned fees – is no way to demonstrate strategic understanding of consumer sentiment in the social age.

We need a lens on sentiment that drives strategy. This requires a very different board room and executive feedback loop that simply does not exist today.

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  1. Great article we the people are waking up

  2. Absolutely agree. The key is to serve your customers. If you build great products / services, everything else will come, including great profits – as Jobs has said and proved with Apple!

    It is clear that banks need to make money, we all do… But it has to be by adding value to your customers’ lives. Clear, well articulated value that is also clearly priced. No hidden fees, no small print. ‘What you see is what you get’ type of attitude.

  3. […] understanding this blog, that’s the big challenge for bankers. Even banking regulators are struggling with the emergence of social banking. Yet,these are all things banks should understand. GA_googleAddAttr("AdOpt", "1"); […]

  4. I read your blog and have found your comments generally insightful. However your thesis explaining the more than 50% fall of in BOA share price is weak. The fact is that since Jan 1, 2011 the share prices of the next 4 largest banks in the USA (JP Morgan Chase; Citi; Wells Fargo and HSBC) have declined by 25 – 52%. I suspect the main reason for the decline in the price of BOA shares is more related to factors that you have not mentioned such as continued exposure to the US mortgage market etc. Rather than consider “stocks with a beta of 1” you should consider the record of bank stocks with a beta of 1. Many if not most bank stocks worldwide have taken a beating this year.

    It is certainly true that BOA’s stock price has taken a beating. I am not sure that there is a prima facie case that the reason is because of bad publicity and customer action.

  5. Allan,

    Good feedback, but your figures aren’t entirely reflective of the sector as a whole. The NASDAQ BANK benchmark index is indeed down Y-T-D by around 20%. That’s a big difference from 52%.

    http://money.cnn.com/quote/quote.html?symb=BANK

    The index benchmark performance still doesn’t explain BofA’s net decline as per the market average. In your comments you cite a 25-52% decline. My argument would be the additional margin between the cited index and the share price of the poorest performers, is strongly correlated with negative sentiment towards those brands combined with serious missteps over things like debit card fee changes arising from the durbin response.

    The question is a horse and cart one though – I’ll give you that. How much of the negative sentiment and perception of loss of future customer revenue drove the price down, and how much is due to pure negative sentiment in the sector driving the price down?

    Remember the old adage buy on rumor, sell on fact. I would argue we’re seeing a sentiment driven response that is indeed driving price down by a factor of 150-200% further than the fundamentals (continued mortgage exposure, etc.) and that this correlates too strongly to #OWS and negative SocMed sentiment to be just passed off as coincidence.

    Given that there are Hedge Funds now trading off Twitter sentiment, etc I would argue that that correlation is more than just a hunch or the ravings of a mad futurist…

    http://www.newscientist.com/blogs/onepercent/2011/05/twitter-based-hedge-fund-launc.html

    Comments welcome…

    Brett King
    BANK 2.0

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