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What loss of confidence in banking really means...


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 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. Theperfect 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...


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.

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!



Comments: (3)

John Dring
John Dring - Intel Network Services - Swindon 21 May, 2010, 11:43Be the first to give this comment the thumbs up 0 likes

Excellent perspective.

Many will jump at the chance to circumvent traditional banks, even if its riskier and sometimes more expensive - the perception and trust of mainstream FIs in general is extremely poor.  Right now they are colluding with low savings interest rates but high lending rates (relatively, not historically), and high arrangement or management fees to boot.

But they will survive - protected as they are by the establishment and banking regulations that protect their positions and monopolies. These rules hamper alternatives to protect the consumer from here-today, gone-tomorrow schemes. It is the Banks longevity that counts - not many have gone bust compared to dotcom type newbies.  And its one thing to buy something virtual in SecondLife, or spend a few cents buying digital content(music, games..) using those alternative schemes, but when it comes to getting a loan for your business or house (i.e. the big bucks) - you need the old school again.  They really shouldn't be able to lose, in good times or bad!

Brett King
Brett King - Moven - New York 21 May, 2010, 14:04Be the first to give this comment the thumbs up 0 likes


I'm not naive enough to think that this spells the end of traditional banking models, but I do believe that it will further hurt margins and profitability.


John Dring
John Dring - Intel Network Services - Swindon 21 May, 2010, 14:30Be the first to give this comment the thumbs up 0 likes

Maybe, but doesn't the current level of profits suggest that even in crunch times these established monopolies make bigger margins not less, albeit on lower volume?  They don't compete on a level playing ground and so don't have to compete in the Social Networking game.  In fact, its ironic that in these tougher times have made the traditional lenders much more powerful, not less, and so even less likely to listen to the consumer. 

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