Can the banking industry re-engineer trust in the system?

I grew up in a world where a run on the ‘bank’ was never realistically going to happen. I grew up in a world where when someone wished to declare the truthfulness of their assertion they’d simply say “you can take that to the bank” or when it was a sure thing they’d say “you can bank on it!” I grew up in a world where the government ‘guaranteed’ my deposits, my cash, or my nest egg – as long as I deposited it with a recognized bank or financial institution. But that was then…this is now.

Long memories

In the 1930s and 40s in the United States after the Great Depression, there was a perception that the destruction of individualism and community banking practices in favour of cookie-cutter branch banking approaches built on efficiency, sales, and transaction banking was a risk to the stability of the banking system. If there were just a few big banks, and there was a broad loss of confidence, then the whole system could fail. This explains why the US has so many institutions (7,334 FDIC-insured institutions as of 8 March  2012) compared with other developed economies (5,404 banks in the entire EU[1]) , as US regulators historically sought to institutionalise community support and make it harder for monopoly approaches. These so-called “foreign systems” of branch banking were labelled  “monopolistic, undemocratic and with tinges of facism” and as “a destroyer of individualism”.[2]

This lingering psychology of safety in the physical banking place (and density) stem from long memories over epidemic “runs” on the banking system during the Great Depression:

“It is known to be a large bank and, being distant and perhaps consisting of thousands of branches, is less distinctly visualized than the local bank; and so the people are likely to think of it as great and powerful, and able to meet its liabilities. In the second place if the depositors were to initiate a run on a local branch, it would be difficult to spread their psychology and arouse depositors in distant branches.”[3]

There was a whole post-war generation that grew up with a healthy skepticism of ‘big banks’ and the risk of a run on the bank. With almost 70 years having passed since the Great Depression, however, the banked population as a whole finally started to believe that banks were inherently securely, safe and trustworthy. We were in for a rude shock!

Trust evaporates in the Global Financial Crisis

Since the Global Financial Crisis we’ve learned that banks are just like any other business, if run poorly they can and do fail, and unfortunately there are many banks that made poor business decisions last decade. Many exposed themselves to sub-prime mortgages, CDOs (Collateralized Debt Obligations) and ABS (Asset Backed Securities), others were over leveraged, had poor risk mitigation strategies, manipulated rates or had their own lines of capital too heavily tied to capital markets. Some like Northern Rock were struggling financially long before the financial crisis, and thus were quick to face dire problems when the economy turned south.

We also learned that despite a government-backed system of licensing and regulation, that banks aren’t actually part of a social-support mechanism built to help the end consumer – banks are simply corporations with a primary focus on generating profitability for their shareholders. We learned that at a time of great angst in the community over the role and health of the banking system, bank’s support for consumer financing and lending, that there was no overriding moral imperative to bank policy. In fact, they’d be quite happy to take tax payer funds on the premise that it would increase liquidity and allow them to lend back to the end consumer, when none of that happened and they were more likely to invest those funds in generating bank profits and large bonuses for their executives.

As consumers do we trust banks? We might trust that the deposits banks hold are secure, but we’ve seen through the veil and know that banks are not infallible, they’re just corporations hell bent on profits, like all good companies should be. We know they can be mismanaged and fail, and while we might have been ready to support a “bail out” when the financial crisis first hit, we’re now dubious as to whether that was the right strategy.

Regulation and Advertising won’t rebuild trust

The concept that the industry can rebuild trust in banking through a combination of corporate messaging, advertising or reinforcing regulation is somewhat erroneous.

Consumers today have a healthy skepticism and distrust of big banking. As consumers we also have a social dialog structure (social media) that allows us to reinforce our healthy skepticism at mass scale. There’s a group psychology involved, but one that society perceives as a protection, creating transparency. Banks might feel frustrated at this, but the reality is that ‘trust’ in the industry was largely engineered over the last few decades through a combination of advertising and visible regulation, and with the missteps of the crisis quickly evaporated. Now similar attempts to re-engineer trust are likely to backfire.

Even regulators, who might believe they are protecting the market and consumers, are increasingly just creating friction between the consumer and institutions (through increased regulation) and the resulting customer frustration and cynicism works against reinforcing trust.

The only way for us to ‘trust’ banks again like we used to, is changing the way banking works. The greater transparency and the better banking serve customer needs, the more we’ll trust banking to work for us. Transparency, utility and great service are all that ultimately matters now, because the old pillars of trust safety, security, brand messaging, fiscal management and regulation are no longer effective.

[1] Source: European Banking Federation http://www.ebf-fbe.eu/uploads/Facts%20&%20Figures%202011.pdf

[2] Source: American Banker Journal, 23 March 1939, p.2

[3] Branch Banking: Its historical and theoretical position in America and abroad, Arno Press 1980 (Chapman and Vesterfield), page 275