No bank or credit union — in fact no human endeavor created so far — has completely avoided mistakes, screw-ups or calamities, self-inflicted or otherwise. But for financial institutions, with their imperative for maintaining consumers’ trust, the fallout can lead to significant challenges and result in a major setback in terms of retaining existing customers and even acquiring new ones.
More than four out of five Americans (84%) say that they would leave a bank if it experienced certain problems, according to a fall 2020 survey my firm commissioned with Harris Poll.
As financial institutions head into a new year, it’s critical to understand which types of gaffes or troubles would lead Americans to leave their institution, as well understand how this would vary across different demographics. Knowing how much reputational damage can be done by certain types of issues and understanding how different demographics perceive these types of emergencies, financial institutions can develop plans to ensure their brand is protected.
What are the reputational issues that would cause customers to break up with their bank?
Cause No.1: Compliance Violation Cited by the FDIC or Other Government Authority
The number one deterrent for bank customers we found are FDIC/government violations. Fifty-six percent of respondents would end their relationship with a bank following a compliance issue.
However, the survey found that younger consumers are less likely to be concerned about that type of violation than older generations. 47% of U.S. consumers between ages 18-34 and 46% between the ages of 35-44 would leave their institution after a government/ FDIC violation, compared to a whopping 70% of those over 65.
Even those in the age segments 45 to 55 and 55 to 64 are more likely to be concerned than younger adults, with 60% and 62% respectively indicating they would end a banking relationship.
This could be a big problem, as compliance citations are rising. Since 2008, regulators have fined banks more than $253 billion. Much of that was related to the financial crisis. But more recently, in the 15-month period through 2019, regulators fined banks a record $10 billion from anti-money laundering violations, according to a report from Fenergo. For the entire decade prior, AML fines hit a total of $26 billion. Fenergo expects these numbers to be higher for 2020 compared to 2019.
Cause No. 2: Data Breach or Cyberattack
Ranking as the second greatest cause of customer attrition, almost half (42%) of Americans would cut ties with their financial institution after experiencing a data breach or cybersecurity attack.
Millennials (age 24-39 in 2020) showed a slightly greater concern at 48% compared to other generations. Gen Z (age 18 to 23) was the least concerned at 38%, followed by Gen X (age 40 to 55) and Baby Boomers (age 56 to 74), both at 40%.
Household income also revealed different perspectives. According to the survey, those with household incomes between $75,000 and $100,000 were more likely to end a relationship with a bank following a data breach or cybersecurity attack at nearly 50% compared to those with household incomes of less than $50,000, at 40%.
This is also bad news for banks and credit unions, as the likelihood of a data breach has increased. The banking industry saw a strong surge this year in digital adoption due to lockdowns. As a result, cyber risks also become a greater issue because of lagging technology as some banks. In July, 2020, FinCEN issued an advisory, warning financial institutions of COVID-19 related cyberattacks.
Even before the start of the pandemic, cybercrime was ramping up sharply. 2019 alone saw the highest number of data breaches ever, increasing by 33% from the previous year, according to Risk Based Security. More than 15 billion consumer records were exposed.
2020 has already seen an uptick in attacks. In just the first quarter of the year, there were over 445 million cyberattacks, according to Arkose Labs. Additionally, the COVID pandemic led to additional breaches and cyberattacks with more individuals working from home.
Cause No. 3: Discrimination Lawsuits
Over one-quarter (27%) of U.S. consumers surveyed would end a relationship with a financial institution if it was involved in a discrimination lawsuit regarding gender, race or sexual orientation.
There was hardly any difference between men and women, with 26% of men and 27% of women finding such a lawsuit offensive, but there were differences among age groups.
While only 21% of Boomers would leave their financial institution because of this issue, younger adults were more likely to do so, overall. Gen Z in fact was nearly twice as likely to be offended, with nearly 40% citing they would break up with their bank.
How likely are banks to be sued for discrimination? More likely than you may think. Data from the Equal Employment Opportunity Commission (EEOC) indicates that employment discrimination lawsuits have been on the rise for several years, increasing to 40% of all claims filed in 2018 from 36% in 2016. Retaliation accounts for nearly 46% of these cases.
Cause No. 4: Organizational Misdeeds Including Sexual Harassment
Nearly one-quarter of U.S. consumers (22%) would part ways with a financial institution if a bank employee was involved in an organizational misdeed such as a sexual harassment scandal or fraud. Younger consumers tend to be more turned off by organizational misdeeds with 26% each of Gen Z and Millennials saying so compared to Boomers at 16%.
Similar to the increase in discrimination claims, workplace harassment claims continue to climb, even among financial institutions. Sexual harassment complaints, specifically, have increased significantly since the #MeToo movement began in October 2017. The EEOC received 7,609 sexual-harassment complaints in 2018, up 13.6% from the previous year.
Beyond the official tallies, social media and citizen journalists bring greater attention to such scandals — whether they have merit or not. Consumers can quickly lose trust and interest in brands that are accused of misdeeds. Even if claims are determined to be false later, reversing such perceptions can be difficult, making it critical to invest in a crisis plan before the mud starts flying.
Cause No. 5: Layoffs and Branch Closures
Coming in as the fifth most concerning issue, 21% of U.S. consumers would cut ties with a bank or credit union following layoffs or branch closures.
The survey found that men were slightly more likely to end a banking relationship for this reason (25%) compared to women (17%). There were only small variations among generational groups (18% Gen Z, 19% Millennials, 23% Gen X and 20% Boomers); education levels (20% each for high school or less and some college, and 22% for college grads or more); or area of residence (21% in urban, 20% in suburban and 22% in rural areas).
With a little more than one out of five Americans indicating they would end a relationship with their bank or credit union after layoffs or branch closures, this could mean bad news for many financial institutions in the current difficult economic environment, especially the largest institutions.
Overall the industry was expected to shed 60,000 jobs globally in 2020, according to one estimate. HSBC Holdings alone is expected to reduce its workforce by 35,000 in the U.S. and Europe. Wells Fargo and Citigroup have also announced significant job cuts. Wells Fargo in October also disclosed plans to shut at least 150 of its 5,000 branches. Earlier, PNC, KeyCorp and Regions announced speeded up branch closing plans. As many of these megabanks aim to cut expenses through layoffs and branch closures, these moves could cost them customers and deposits.
Conversely, this could mean good news for community financial institutions that appear to be hiring more than their megabank competitors.
Understandably, people want to make sure that the financial institution they’re using will be in business long-term. When banks begin laying off or closing branches, customers begin questioning their performance and asking how financially stable they are. While reductions are sometimes a necessary part of business, the reputational impact must be considered, especially knowing that nearly one-quarter of consumers would break up with their bank or credit union following such a decision.
Failure to prepare for any of the potentially damaging issues outlined above could be costly — causing financial institution to not just lose their reputation but also many customers.