(DIS)BELIEF IN BANKING
In FS we (mis)trust?
According to 2023’s Edelman Trust Barometer, the FS sector remains the second least trusted sector – after social media. We investigate why, and what can be done.
Following on from a significant increase at the outset of the COVID-19 pandemic, the FS sector – according to the annual Edelman Trust Barometer – saw a sharp drop in trust towards the end of 2021. This downturn continued into 2022, with three countries – including the US – experiencing double-digit declines. In 2023 the collapse of Credit Suisse and Silicon Valley bank has only underlined the widespread feelings of mistrust in the banking system globally, especially on both sides of the Atlantic.
Here, with the help of three experts, we explore the possible reasons that have contributed to this shift, and what can potentially be done to enhance – or even, restore – the reputation of the sector. Eric Leenders, Managing Director, Personal Finance, UK Finance, says: “Everyone in banking is responsible – to varying degrees – for building trust in the FS sector. But the challenge is the reverse – because if everybody is responsible for developing it, then everyone is responsible for destroying it.
“There’s this great word, Ubuntu [a Nguni Bantu term used in South-East Africa], and it basically translates to ‘I am what I am because of who we are’. If we stop and think about this saying in context of who builds trust, then we’ll come to see that we’re all accountable for both building and eroding it. It’s symbiotic and we can’t separate it out.
“Your view can be tainted by one person. This could be the cashier that inadvertently short-changed you and therefore colours your view of the whole industry. Or it could be the banker who was involved in a Ponzi scheme and got caught with his hand in the till. They’ll ultimately equate to the same feeling. On the flip side, you might have encountered a bank manager who helped you with an overdraft at the point of crisis. It’s a very delicate ecosystem.”
Professor Luigi Zingales, University of Chicago Booth School of Business and co-host of the podcast Capitalisn’t, believes that trust is a complex matter. “When you think about trust, there is a country or institutional average that is very much related to the way people see society as a whole. People are much more trusting in Sweden than they are, for example, in Brazil. If you ask a Brazilian how much he trusts individuals, he’ll say not very much, and when asked how much he trusts banks, he’ll say the same. And in Sweden it’s high for both. Now, I’m not so sure that this is necessarily because Swedish banks are better than Brazilian ones. They might be, but it’s also related to the general health of the society in the country in question.” Switzerland has long been hailed as a banking safe haven; but even Credit Suisse could not maintain confidence in the reality of its failings. This begs the question: is the trust in Sweden and the mistrust in Brazil unfounded?
He goes on to point out that trust is also related to specific current events. “After crypto scandals, trust in crypto goes down. Trust, famously, is easy to destroy and difficult to build. There’s a saying that it is like a bird on a tree – chasing it away is effortless, but it’s very hard to attract it there in the first place.”
Experience and perception
Zingales believes that trust derives from a combination of direct experience and perception, which in turn is driven by media and information. “If I have had a negative experience myself, this will colour my own perception a great deal. And if this happens to someone that I know personally, then that too could have a big impact. And how you perceive what is reported in the press, and reported on social media, will be determined by how you personally feel about the press and social media. In short, no one factor shapes whether you have trust in FS or not.
“In the short term, banks can create and launch campaigns, and these might gain traction and have an impact,” Zingales continues. “But, if there’s no real substance behind them, then the impact is temporary and what you might actually end up with is a backlash. Instead, changing the attitude vis-à-vis the customer is what makes a huge difference. All institutions would like to portray an image of trustworthiness. But the real question is around their actions, or if in fact what they’re doing is just for show.”
Fast feedback loops
Zingales is of the opinion that the difference is between institutions where there is a fast feedback loop, and those where there isn’t. “Where there is instant feedback, reality and perception are aligned. But this is lacking in the finance industry. There is a huge delay and gap right now. Imagine, for example, the time between when you first take out life insurance and when you collect it.
“The financial crisis was when people realised that there is a big disconnect between reality and perception. That disconnect is generally built through deception or ignorance, but when there’s a crash everyone suffers tremendously. So, it’s about – from a regulatory point of view – ensuring that trust and substance aren’t too far removed.
“Changing the attitude vis-à-vis the customer is what makes a huge difference.” Professor Luigi Zingales, University of Chicago Booth School of Business Society
“It’s tricky,” Zingales continues, “because from banks’ points of view [POV], you want to have a situation where [the] FS [sector] is as trustworthy as possible. But from a social POV, that’s not actually what is required. What you want is for perception and reality to be close. Because if a bank has a poor reputation and no one trusts it, then you’re less likely to have a crisis because no one is going to use and invest in that bank. The real risk is the difference between the regulatory point of view and the social perspective. This is what you need to target, and sometimes this means making sure people realise that some institutions are less trustworthy. This isn’t a pleasant job. No one wants to do it, but someone has to.” This is even more important in light of the circumstances surrounding the fall of Silicon Valley bank and Credit Suisse, whose perceived trust externally has been destroyed by real failures within.
A top-down approach
Neil Williams, Chief Economist, Official Monetary and Financial Institutions Forum (OMFIF), looks at this subject matter in a slightly different way, taking a top-down as opposed to bottom-up approach. “We’ve had four major global crises over the past 14 years,” he says. “They’re becoming much more frequent, and this is excluding the background concern of climate change. So, given that we’re experiencing far more turbulence and volatility in the world, what are the chances that we can return to some sort of normality?”
He explains what this means in the context of banks. “If we think back to a time when interest rates were significantly above inflation – when we used to receive what was known as a positive real return on our cash – this for me is some way, at least two years, off. The same goes for a time when growth was guaranteed, when central banking and commercial banking were ‘boring’ – as Lord King, the former Bank of England Governor, said they should be. Finally, what also remains on the distant horizon is a time when it was governments that looked after tax and spending policy, leaving central banks to look after monetary policy.”
Inflation, Williams says, is the main macro concern that affects central banks. “And for me, the bulk of the inflation that we’re seeing is the wrong sort. It’s driven by cost factors, such as energy prices. And this hits us in the pocket rather more than good old-fashioned demand-led inflation.
“If you have to say why you are who you are, you’re not really carrying yourself in the right way. People should already know.” Eric Leenders, Managing Director, Personal Finance, UK Finance
“What does that mean? It means that central banks, showing some machismo, have been going hard on rate rises, especially in Europe in the Northern Hemisphere winter, and this has obviously had a bearing on all lenders and borrowers. And for me, that will become increasingly destructive this year. That trade-off between raising rates and getting inflation down will become increasingly destructive to activity, GDP and employment as well as the risk tolerance of banks and the ability to loosen their lending criteria. All of these things will come back to bite us.”
Why does that matter to economists like Williams? “It matters because a strong banking sector is a necessary but not a sufficient condition for thriving growth and strong economies. Policymakers, if they are worth their salt, are highly sensitised to making sure that banking sectors in aggregate remain healthy because they know that economies will topple if they’re not. Politicians, in turn, know that their tenure will be shortened if banks fail.
“If central banks continue to be part responsible for managing government debt, which they have been by buying the assets through quantitative easing, then the distinction between independent central banks and governments themselves starts to get blurred. But this shouldn’t be the case – in the old days of ‘normal’, the two were very much distinct.” If, therefore, trust was higher when these roles were separate, could it be argued that, when the roles are muddied, trust is further eroded?
Aligning purpose and values
We’ve established the myriad places where the problems lie when it comes to trust, but what can be done to enhance the reputation of the sector? Leenders believes that purpose is key here. “There has to be an alignment of purpose and values,” he says. “What are retail banks there to do? To help with day-to-day expenditure – and this means looking after finances, enabling people to make payments and receive money, and offer support when it comes to the likes of loans.
“Here’s where it gets interesting though – the world doesn’t stand still, and today this means being equipped and equipping others for a digital environment. What’s great – and what will have strengthened trust – is the fact that many mobile applications and online banking applications have in fact added channels that increasing numbers of consumers find incredibly useful. Customers, as I’ve said, want help looking after their money and support when it comes to buying the things that they need to get through life – and good mobile apps are taking them closer to that.”
How do banks convey their purpose? Leenders says that it should be intuitive. “You shouldn’t have to write it down,” he says. “I remember when I did my marketing exams. I came up with a strapline that I was really proud of, but the director that I was presenting it to just scowled and said, ‘as soon as you’re explaining, you’re losing’. And I think that this applies here. If you have to say why you are who you are, you’re not really carrying yourself in the right way. People should already know. They should see a bank’s logo or see their name and know straightaway that their money is safe, that they’re going to be offered different ways to make payments, buy a car or a house and ways to save.”