A Dictator or Retail Bank. Which is Easier to Save?

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?

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 the 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.

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.