Brett King

Posts Tagged ‘Trust’

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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Transparency, Broken Risk and the Loss of Physicality

In Bank Innovation, Customer Experience, Economics, Engagement Banking, Future of Banking, Strategy on October 19, 2011 at 12:33

Recently I’ve been discussing with bankers, economists, strategists and futurists the future of the banking industry. At a time when we’ve got the likes of the “Occupation of Wall St” (#OWS) through to discussions in various camps about the very survival of banking as we know it, a question you might ask is how did we get here so quickly? 10 years ago, discussing the collapse of the modern day banking system and widespread loss of trust in bankers, might have been ludicrous, unthinkable – but today it is happening.

The New Normal is inherently unstable
As bankers most of us would have preferred if things had just stayed the same as they were, or at least returned to the ‘good ole days’ once the dust from the global financial crisis had settled. Instead we’re faced with talk of a “New Normal”, of increased volatility and of sustained uncertainty. There’s now a growing concern that a Greek default will trigger a crisis in the Eurozone, which in turn will bring on a new ‘great depression’. It is not lost on the public at large that this is a financial crisis we probably didn’t need to have. It is a financial crisis that was bought on by the ultimate in speculative investment behavior, the creation of financial instruments designed to create wealth and trading momentum from underlying, sub-prime debt that really should never have been readjusted as collateralized ‘AAA’ rated securities. So here we are today with so called blue-chip or developed economies which have higher volatility and risk, than so-called emerging markets. Since when did China and Brazil become better bets than the US as investments?

The perfect storm for a financial system in crisis is not just the failure of the banking system to self-regulate, or the default of sovereign nations in respect to servicing their national debt. The perfect storm is driven by three primary mechanisms that aren’t normally discussed as macro-economic factors, but are critical as part of a discussion around reforming the banking industry. They are:

1. Increased Transparency and Visibility
2. The Reassessment of the role of Risk and Regulation, and
3. The Loss of Physicality

Adjusting to a Transparent World
The response to bailouts, banker bonuses, new rates and fees structures, and to the financial crisis itself is indicative of the fact that bankers can no longer just assume that the public at large will trust that banks know what they are doing. How has the industry at large responded to this increased transparency? At first with incredulity, then with a defense of the indefensible, and finally with begrudging acceptance.

There are still many banks today, for example, who not only prohibit the use of social media in the bank workplace, but refuse to engage with end consumers in any really useful way through social media. In a world where dictators can be overturned, where public opinion is expressed in mentions, tweets, likes and fan pages, and where consumers can be as loud and effective as your most expensive marketing initiative – how do you adjust?

Understanding that you now answer to the public and you need to defend your positions with openness, logic and fair value, Brian Moynihan’s defense of BofA’s recent fee hikes shows a lack of nuance in this new, socially transparent world:

“I have an inherent duty as a CEO of a publicly owned company to get a return for my shareholders,” Moynihan said in an interview with CNBC’s Larry Kudlow at the Washington Ideas Forum… Customers and shareholders will “understand what we’re doing,”… “Understand we have a right to make a profit.”
Brian Moynihan, CEO – Bank of America

As a bank you do have the right to make a profit, but customers now understand more acutely than at anytime in history that they have rights too. It’s not that customers don’t want to pay for banking, it’s not that they are unreasonable; it’s that they now demand value and they are assessing that value, and exposing your shortcomings when you don’t meet up to their expectations.

In this way, what we need to do as an industry is better understand our value in the system. Right now we have trouble articulating that because we’ve become too historically focused on ‘banking’ as the system, rather than banking as a financial service to those that have the right to pay and choose. The balance has tipped in favor of the voice of the consumer.

There are bigger Risks than Risk
I was in a conference in Oslo earlier in the year and talking about the need for retail banks to adjust to serving their customers better, no matter when or where they needed banking, and a banker in the audience defended the need for a strict, traditional approach to physical KYC (Know-Your-Customer) because banking is first and foremost about ‘managing risk’ – at least that’s what he said. With our almost myopic focus as an industry on risk management and risk mitigation, we’ve perhaps missed the biggest risk of all – the fact that we are putting so much of the risk workload back onto the customer and the front-end of the business, that we’re starting to become a problem.

I’ve talked at length previously about the huge amount of time the front-end staff and customers spend in an attempt to reduce the potential legal or regulatory enforcement risk. When I, as a customer, am spending 50%, 60% or perhaps 90% longer doing a simple task like opening an account or applying for a loan than I did 20 years ago – do I see that as progress, or do I feel it a burden? Do I see such moves as a reduction of risk, or do I merely see it as an increase in complexity? In such a risk adverse environment, the bank is no longer serving the customer, the customer is serving the bank – and the customer is increasingly getting intimidated by the thought of having to navigate this complexity before he can get to the actual product or service he wants.

If you look at the biggest consumer shifts in the last 15-20 years, the biggest shifts have been driven around change in process or distribution that makes life simpler and easier. Here’s a few examples:

  • Mobile phone versus Landline
  • Google Search versus Catalog
  • Online Trading/Travel versus Broker/Agent
  • Multi-touch screen versus stylus/keyboard
  • iPad/Tablet versus PC
  • Kindle/eBook versus Paperbook
  • Online News/Streams versus Newspaper
  • Email/SMS/Facebook versus Mail/Telephone

The threat here is complexity, and invariably as we try to manage risk, we’re actually making customer facing processes more complex. This is bucking the trend of almost every other core customer interaction we’re seeing today.

The Loss of Physicality
I recently posted on American Banker | BankThink about my views around branches, checks/cheques and all things physical in banking. I suggest you read that separately, but a key consideration or thought in that article is as follows:

“The bank is no longer a place you go. Banking has becoming something you do. It is now contextual, and measured in terms of utility – how easily someone can use bank products or services to accomplish a task like shopping, traveling or buying a car or a home. The more a bank insists on physicality, the more it risks becoming irrelevant to customers who no longer cherish the traditional processes and artifacts. In just four years, that will be the vast majority of your customer base – not a marginal demographic, as some would prefer to believe.”

Conclusions
In this environment, retail banking is ripe for disruption. Why? Because instead of understanding the shifts around us, we’re digging in – levying fees, increasing complexity, and arguing that customers are just going to have to suck it up. After all, where else are they going to go?

Increasingly customers have a choice. Whether it is pre-paid debit cards, mobile wallets, PayPal, or other challenges to day to day financial interactions, the concept that as a regulated industry we’re protected from having to make the hard decisions and actually reform the way we work, is foolhardy.

We need to start working very differently…

The biggest risk: I won’t give you my money…

In Customer Experience, Groundswell, Social Networking, Strategy on November 18, 2010 at 00:23

During the global financial crisis, governments spent billions to bail out banks in an effort to keep liquidity in the banking sector, largely so that lending could continue at a time when businesses needed as much help as they could get. However, in a financial crisis when the economy is in recession, it is counter-intuitive for a bank to lend money to customers who might get into further trouble. So the bail out didn’t work in stimulating the economy the way it was intended. The autopilot ‘internal’ risk function kicked in and prevented it from doing so.

Some could argue that the ‘risk’ function within banking, while acting to protect institutions, may have actually negatively impacted the speed of recovery. While we have all sorts of classifications around risk within the business environment today (operational, legal, socio-political, financial and market) the greatest risk we potentially face in the banking sector is actually none of these. Our risk “compass” needs to be re-tuned in the light of customer behavioral shift.

Industry Reputational Risk

Bankers often talk about the ‘trust’ consumers have in banking as a defining characteristic of why customers give us their money instead of simply keeping it under a mattress. It’s also why many bankers 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 is trust in banking is stubbornly stuck in the doldrums, largely as a result of the whole sub-prime, CDO debacle.

So will trust return? This is a big theme this year. We are essentially dealing with reputational risk. Not for an individual brand or institution, but the collective reputation of the industry as a whole.

That’s the regulator’s job…

To assume we can fix this problem is to ascertain that we can have a coordinated approach to restoring consumer confidence as an industry. There are a few issues with this, namely that we generally leave such broader issues to the regulators. After all, what can one bank do about this on it’s own?

The problem with this approach is that regulators can only regulate, they can’t make us do good things for our customers. Despite strong regulation, 11 banks (Including the Big 4) are facing class action in Australia by customers over fees. Despite toughening regulation in the United States, the “Move Your Money” campaign continues to live on to this day. It is also why peer-to-peer lending networks are flourishing, why Mint and Blippy are garnering the trust of millions, and why PayPal is the world’s leading online payment network. Customers are moving on, plainly because the industry is no longer differentiated by a reputation built on trust.

Let’s face it – regulation is not going to restore trust. The only two things that will fix this gap is building transparency and delivering great service at the coal face.

Restoring trust requires us to be un-bank-like…

I’ve heard many banks talk about service and being more transparent, but the reality is this is a tough target. When we look at service as a sector we see costs and those costs have to be justified – the question always will be; will an increase in service bring more revenue or simply translate to costs? When we look at transparency, this is counter-intuitive for banks. We have spent our entire existence finding ways to hide margin, fees, and to justify those elements as part of the banking ‘system’ in order to return EPS.

The problem is if you screw up with customers today when they’re standing in the branch in a lengthy queue during their lunch break, they are just as likely to start Tweeting or shouting out to friends on Facebook about how “hopeless bank ABC is in the city branch today, this queue is massive!”

How do banks respond to such communications?

  1. Most ignore these Tweets as inconsequential – does that restore trust?
  2. Some respond positively to the tweet, explaining how sorry they are and what they are doing to resolve it…
  3. Unfortunately, some Respond negatively; I’m sorry the customer feels this way, but this is not what we are like – really, some people are just never happy!

The only of these responses that will work positively to rebuild trust in the sector is to suck it up, respond positively, and figure how to create a better service culture or resolve the process problems that created them. You can’t do that if you aren’t listening.

Excellence is trustworthy

When you build a great service environment, then there is no need to worry about being transparent. Customers these days will pay a premium for great service. If service is not your thing, then be transparent about that, but explain you don’t charge as much as those other banks and that is the benefit of your bank. If, however, you want to keep fully loaded fee structures in place, then you’ll have to be transparent about the cost of delivering great service. If you aren’t delivering great service, and you are still leveraging fees like it was the 90s, you’ll find out that this strategy doesn’t work – just ask the big 4 banks in Australia. NAB, thus far, is the only bank to positively respond to this pressure by taking a new, transparent stance on fees.

There are some simple steps to take that will bring rapid improvements:

  1. Simplify bank language through a plain-language initiative – refer Centre for Plain Language and Whitney Quesenbery
  2. Make it easy to find the best phone numbers to speak to the right area of the bank on your website, circumvent IVR menu trees where possible. Citi in the US does this pretty well.
  3. Mystery shop, not competitors, but the most common processes in your multi-channel environment and see where these need to be drastically simplified, and use Observational Field Studies to see how customers work in real-world settings.
  4. Put a social media listening post in place and respond positively and openly at every opportunity – check out Gatorade’s Mission Control
  5. Review the biggest complaints you get in the call centre, and try to fix those customer journeys proactively. We call these Torch Points…

Building trust starts with creating great customer journeys that improve service levels and demonstrate a willingness to be transparent. We can’t rebuild trust without these elements. The biggest risk today, is simply that I don’t trust you enough to give you my money.

What loss of trust really means for the banking sector…

In Media, Retail Banking, Social Networking, Strategy on May 21, 2010 at 03:05

This week we have some of the world’s biggest banks recording staggering, record profits – despite this there are serious challenges heading the banks way in the short-term; consumer trust is just the start of it. As early as July 2008 we started to hear serious grumblings from consumers groups, customer advocates and politicians on how banks had “lost their way”. This loss of confidence and consumer backlash forced politicians in the US, EU and elsewhere to look at mechanisms like the so-called “Robin Hood Tax” or punitive taxes aimed at bankers who took huge bonuses while leveraging off taxpayer funding. Undoubtedly, proprietary trading activity hedging the declining capital markets reeling from the GFC (financed off the back of cheap government money) created the opportunity for arbitrage profits and subsequently huge bonuses/profits. The theory that the bank bailouts would free up credit for the average man on the street was quickly lost as banks chose super risk-adverse customer lending policies. But now the banks face a quandary…

Savings suffering = Balance Sheet suffering
Increased regulation of the banking sector and the GFC fallout mean essentially that wholesale funding sources for banks are under some pressure, both from a ‘reform’ perspective and simply as a result of shortage of funds. Additionally, with the revelations around Goldman’s Proprietary Trading games and the role banks had to play in generating the Global Financial Crisis in the first place, regulators have come down heavily on proprietary trading practices. Some commentators have claimed that the net effect of this could be a reduction in profits for big players by up to 20% moving forward.

Increasing deposits and savings from the retail consumer base, therefore, will be critical for the bank balance sheet in the next few years. But with consumer confidence at an all time low – the savings industry is already suffering. Banks are facing a potential earnings crunch moving forward because they just can’t rebuild their deposit base in the current environment. As a result banks like Westpac in Australia are seeing share prices decline, despite record profits.

Branding doesn’t equal Trust
What we’ve seen in effect is the perfect storm for building and maintaining trust, but interestingly most bankers don’t have a clue as to why this decline in trust has been so ‘harsh’. These factors also explains why organizations like Goldman Sachs and others have performed so badly in public recently. The perfect storm was not just the Global Financial Crisis, but also shifting consumer behaviors and in particular the role of social media in forming public opinion. In April of 2009 a Nielsen survey showed that social media had already become the most dominant force in creating brand perception around ‘trust’. More recent surveys not only reinforce these trends but show that no amount of traditional advertising can match social media in it’s ability to create or destroy brand perception.

The problem for banks is that they generally aren’t participating in social media. Thus, their brands have been hijacked by customers who just aren’t happy. If I’m 3-7 times more likely to listen to what my friends say about your brand through social media, it doesn’t matter how much advertising you are doing – you’ve already lost me unless you demonstrate a reason for me to trust you…

Non-bank FIs don’t look so risky
Remember the saying that Banks are “as safe as houses”? Well it turns out thanks to Banks and CDOs that neither banks nor houses are particularly safe anymore! As a result, consumers have had to adjust their risk radar or doppler. In recent times we’ve seen the advent of some pretty interesting alternative savings mechanisms. Back during the dotcom phenomenon, Save Daily started experimenting with different ways of savings, but in recent times social lending networks like Prosper, Lending Club, Zopa, SmartyPig and others have burst onto the scene to offer an alternative to ‘greedy banks’.

We might have thought of these non-bank financial institutions as risky in the past, but with what we know about bank practices leading up to the GFC, coupled with how our portfolios, pension and superannuation funds have performed in recent times, such a new approach doesn’t look so risky. Undoubtedly there are some Banker’s sitting reading this right now scoffing at my suggestion saying “it will never happen”. So I’ll just say two words (well sort of one word) to give you a precedent in respect to the reality of consumer adoption of these new trends and approaches…

PayPal

I’m not my parents
The Y-Gen and so-called “Digital Natives” don’t have the same intellectual capital invested in ‘banking’ per se, that their parents did. These uber-connected, demanding and savvy consumers don’t think of banks as a safe place to put your money – they think of banks as service providers, a means to an end goal. In that respect, most banks suck.

Digital Natives are used to much more diverse ‘currency’ than simply cash or savings as well. My kids talk about credits on iTunes, PayPal, online gifting, Facebook credits, Linden Dollars, QQ coins, collective buying power, etc. It’s as if they don’t even conceptualize hard currency in many ways. As payments options in the P2P space accelerate and your phone becomes your debit/credit/payments card – this marginalization of ‘hard cash’ as a concept will intensify. It will be harder to get these segments to save until they get to a point in their consumption cycle where they start to get aspirational about real ‘asset-based’ wealth. In the short-term, the effect is simply that banks will no longer be a consideration in their day-to-day savings strategy unless they create outcomes.

Conclusions
The loss of trust in banks is accentuated by the social media effect, the lack of real responsiveness to the GFC back lash in respect to transparency and bank policy, and changing consumer behavior. The next effect of this loss of trust will be that banks have a much harder time in encourage deposits and improving savings participation – something that is essential for bank profitability moving forward as proprietary trading goes under the regulator’s microscope and as wholesale funding sources dry up.

What banks need to do right now is start honestly thinking about how to engage collaboratively with customers. It’s not just transparency, but a fundamental shift from the internal philosophy that if consumers want to be a customer of our bank they have to play by our rules…

As of today, if you’re a bank – you have to play by my rules!

Are retail banks innovative? Bank 2.0 – Infographic

In Retail Banking, Social Networking, Strategy, Technology Innovation on April 13, 2010 at 07:06

The banking and financial services sector is perhaps the oldest profession around. In recent times banks have come under heavy fire from customers, regulators and the media alike for their participation in and failure to prevent the global financial crisis. The introduction of Credit Default Swaps, CDOs, Asset Backed Securities and other structured financial instruments are thought to have contributed significantly to the failure of the global equity markets in 2008, and the subsequent global recession.

So are banks innovating in the right areas? Has the innovation in product produced greater customer satisfaction, higher margins and better banking?

I’ve compiled this infographic to put some of the thoughts in perspective. Let’s just put it this way, banks are not know for their innovation. But they better start learning, and fast…

Retail Banking Innovation Infographic

Is product innovation enough?