Are Bankers Clueless Or Realistic?

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Unless you’ve been living under a rock — which I’m not knocking — you’ve probably heard that consumer sentiment regarding banks isn’t particularly favorable these days. Pick your study, it doesn’t matter, the message is the same: People hate banks.

The credit union people jump all over these findings, and consider them self-validation of their customer service superiority. Industry pundits eat up these findings as evidence for why the industry must immediately undergo some transformational change fueled by _______ [fill in the blank with the technology, consulting approach, or book they’re selling].

But what do the bankers think of these findings?

American Banker asked its readers, in an online poll: “What is the long-term effect of big banks’ poor reputation among consumers?”

The problem in evaluating the answers, however, is that American Banker doesn’t show the number of respondents to the question, nor do we have any information about who responded. So, yes, I’m very aware that we might not be talking about a representative or meaningful sample here. But if it is a good sample, then the answers are very interesting:

6%     The banks will have a harder time attracting customers and building revenue

9%     They’ll lose market share to small banks

1%     They must spend more on advertising to rehabilitate their brands

39%  All of the above

44%  None of the above. Consumers always complain about big companies but keep using them

In effect, almost half of the respondents don’t think that poor reputation hurts big banks. The numbers are on their side. In a number of markets, the large banks’ share of deposits has increased from a few years ago. And the Q1 profitability numbers show a return to pre-crisis profitability levels.

But these are just short-term gains, no? In the long-run, a poor reputation can’t possibly be sustainable, right?

It is and isn’t.

The first thing to understand when looking at the poor reputation stats (often reported as low trust) is that people have little trust in “banks, in general” but report much higher levels of trust in their bank.

While there are a number of people who get really poor service from their bank, or feel that they’ve been cheated or shafted, that number is a minority. A much larger percentage of people are forming their opinion of poor reputation or low trust based on what they see in the news: Media reports on how large banks caused the crisis, or the example of how some large bank mistakenly foreclosed on someone’s house.

The second factor to consider is that as long as core banking products are seen as commodities, a poor reputation won’t be harmful to large banks. I don’t know about you, but when I go into a restaurant and pick up the salt shaker, I don’t ask the waiter if it’s Morton’s salt before shaking it on my fries. As a result, people just don’t care enough about their checking account to make a more considered decision. An apathetic customer couldn’t care less about a firm’s reputation.

A third factor at play here is control. When people perceive that they have little control over a situation, they will not think favorably of the party or person who does have control and wields that control. To a certain extent, people feel powerless in dealing with the “big evil” banks, and therefore say they have little trust in them when the researchers ask.

So, let’s ask again: Is having a poor reputation sustainable?

As long as consumers are apathetic about their financial lives and providers, then the answer is YES. This is why credit unions have been — for the most part — unable to move the needle on deposit share. They’re barketing up the wrong tree (I just made that up). Claims and demonstrations of superior customer service and advocacy don’t mean anything to someone who just doesn’t care.

But the numbers in the market mask changes that make a poor reputation unsustainable. More and more people care. The problem for the challengers (credit unions, community banks, upstarts) is that the people who care are predominantly Gen Yers who don’t have a lot of money (at the moment) for deposits and investments, and Gen Xers who aren’t a particularly large segment of the overall consumer base.

Bottom line: The sustainability of poor reputation is declining. Maybe the 44% of respondents who said “none of the above” in the American Banker survey don’t see this.

The important questions to ask about the future is: What can big banks do to improve their reputations? and What can the challengers do to get people to care?

Technology holds the key to the answer to those questions. Technology (I’m thinking of PFM-type tools here) can be at the center of the bank/customer relationship.

I saw a demo yesterday of what I would consider to be one of the best PFM tools I’ve seen. It doesn’t just give the customer a view into accounts and ability to budget. It integrates financial education, it provides peer comparison and analysis, it aggregates rewards program activity, and it enables customer/advisor collaboration.

What does this do for customers? It engages them in their financial lives, and — this is important — it makes them feel like they have more control over their financial lives. To a large extent, I think this is what underlies the hype — oops, I mean interest — in BankSimple.  It’s about giving control — oops, I mean the illusion of control — back to the customer. 

What does this do for banks? A million things. Not the least of which is improving their poor reputation or low trust levels.

If the big banks’ — or any bank’s or credit union’s — response to the Poor Reputation situation is increasing their advertising, or G*d forbid, investing to revamp branches, then they’ll fail to either improve trust or increase share. 

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