The financial crisis of 2008 spawned not just a deep recession but a structurally different business environment globally. This restructured economic order, requires some new thinking, particularly for retail banks.
Many retail banks responded instinctively to the recession, without giving any thought to the aftermath of their actions, and there is a growing perception they have violated their ‘social’ contract with their customers.
In the heady days of courtship, when banks are acquiring customers, they make promises of service and understanding to clients. They position themselves as suitable partners for the long term, especially when it came to buying the major assets in peoples’ lives, houses and cars. Customers commit themselves to the relationship by signing up for twenty year bonds.
Up until mid 2008 it was rational to assume that a customer who didn’t pay back a loan was unwilling to, or incapable of doing so in the very short term, through incompetence or poor planning. It was also perfectly reasonable for a bank to divorce a client that wasn’t committed to the mutually beneficial aspects of the relationship.
When the crisis loomed, many people were retrenched and entrepreneurs, who had been successfully trading for years, suddenly hit a brick wall, where money just stopped coming in regardless of what they did.
Banks responded in a pre-crisis manner, based on the economic assumptions that non payers were the bad guys. They came down harshly on offenders, foreclosing, handing over to debt collection agencies who are used to dealing with recalcitrant bad guys, harassed and heckled already devastated clients, who’s only fault was not to have foreseen a recession when even the economists didn’t see it coming. Their way of helping customers was to offer quick sells of customer’s homes before handing them over to the courts. They reported gleefully of moving more inventory through the system.
What they effectively did was to kick their customers while they were down, and then grind them into the ground. Banks should have looked at this as a relationship-building opportunity and demonstrated that customer loyalty was not misplaced. Instead they alienated a captive audience, who though they might not have been happy, were unlikely to have migrated in droves away from their respective banks.
Had the banks taken a long term view on their client relationships and their financial position, they could have operationalised a single view of customer strategy and considered the customer as the complex entity he or she really is. This would have enabled them to rationalise their exposure to the customer’s risk and facilitated the renegotiation of the terms of their relationships so that the customer would retain their lifetime value to the bank, instead of squeezing them for the present value in a recession.
Take for example, a regularly paying bondholder who has been with the bank for ten years, he hits a problem in the global recession. Judging by his history and paying behaviour, he is likely to get back on his feet in the next twelve months and resume repaying any loans regularly. His house is still worth more than the bond, mitigating the risk that the bank will not be able to recoup its money in future. Surely it makes sense to arrange for a 12 month payment holiday and raise his interest rates by 2%, for the rest of the bond period, thus retaining his Life Time Value to the bank, rather than selling his house off at auction at 50% of its value, alienating the customer, even when he has been rehabilitated and incurring the cost of acquiring an unknown customer from another bank which has similarly disenfranchised their relationship?
The banks add insult to injury by managing their collection processes so badly, that once they have collected their debts in full (and some blood, just for good measure), their alienated and bruised customer keeps receiving SMS’s from the lawyers threatening judgements if they don’t pay up.
Many banks do not understand their customer’s footprint across their financial institutions. In fact some banks are set up on the Owner-Entrepreneur model, because in good times this facilitates the accountability and entrepreneurial behaviour that agile companies need to succeed.
In the past this was a risky practise because it meant that the bank would miss out of cross and up-sell opportunities. Today the risk is much higher. Many banks who noticed a change in consumer behaviour when the economy turned, panicked. They exacerbated the problem at every client interface, by freezing overdrafts and making them due immediately, or by freezing access bonds, so that the customers who could have made payments on most of the accounts or were at risk of falling marginally short on payments, (for example meeting 90% of their commitments to the bank) were tipped into the emotional and financial abyss of bankruptcy. Where they could have had the car repossessed and saved the house, they lost everything.
The banks did not consider that the inventory that they were “flushing” through their system, was the life and heart of their customer, their home, the place where they loved and celebrated, brought up children and created a lifetime of memories. Customers are not going to be so quick to forgive banks, the cost of acquisition and creating loyalty amongst customers has just escalated through the roof.
The breadth and depth of today’s reputational challenge is a consequence not just of the retail bank’s instinctive responses to the speed, severity and unexpectedness of recent economic events but also of underlying shifts in the importance of Web-based participatory media, or web 2.0.
The Modern Internet and the era of Social Media are promoting wider, faster scrutiny of banks and rendering traditional public-relations tools less effective in addressing reputational challenges.
It will be transparent, decisive action that builds strong reputations in the future. Doing so effectively means stepping up both the sophistication and the internal coordination of reputation efforts. Some companies, for example, not only use cutting-edge attitudinal-segmentation techniques to understand the concerns of customers better but also mobilise cross-functional teams to gather intelligence and respond quickly to far-flung reputational threats.
One key is to cut through organisational barriers that impede such efforts through committed senior leadership who have an opportunity to differentiate their companies by demonstrating real statesmanship. An energised, enlightened and empowered public will expect nothing else.
The proliferation of Web-based platforms, has given individuals and organisations new tools they use to subject banks to greater and faster scrutiny. This communication revolution also means that certain issues (such as poor customer service) can be picked up by “citizen journalists” or bloggers and generate outrage on a much larger scale.
As a result, what formerly were operational risks resulting from failed or inadequate processes, people, or systems now often manifest themselves as reputational risks whose costs far exceed those of the original missteps.
In this dispersed and multifaceted environment, banks must collect information about reputational threats across the organisation, analyse that information in sophisticated ways, and address problems by taking action to mitigate them. This requires significant collaboration, coordination, commitment and an ability to act quickly.
Many retail banks are structured around centralised corporate-affairs departments that can’t monitor or examine diverse reputational threats with sufficient sophistication. Moreover, traditional PR can’t deal with many concerns, which must often be addressed by changing business operations and conducting two-way conversations. Managers of business units such as home loans or credit cards, have a better position for spotting potential challenges but often fail to recognise their reputational significance. This is often an unintentioned consequence of remuneration systems designed by financial managers, not being aligned to marketing strategies. Internal communication about reputational risks may be inhibited by the absence of consistent methodologies for tracking and quantifying those risks. Accountability for managing problems is often blurred.
As a result, responses to reputational issues can be short term, ad hoc, and defensive, and therein lies a problem that companies must solve quickly: even as reputational challenges boost the importance of good PR, companies will struggle if they rely on PR alone, with little insight into the thinking and operational root causes of their reputational problems.
A logical starting point for companies seeking to raise their game is to put in place an effective early-warning system to make executives aware of reputational problems quickly. Most companies are quite good at tracking press mentions, and many are beginning to monitor the multitude of Web-based voices whose power is beginning to rival the mainstream media’s. However, doing these things effectively, while an important prerequisite for stepping up engagement with stakeholders, isn’t the toughest task facing organisations.
To prepare for and respond to reputational threats, we suggest that retail banks should emphasise these priorities.
- First, they need to assemble enough facts to gain a rich understanding of their customer base as it manifests itself across the entire organisation, not only their product preferences but also the psychographic profiles of segments of customers including propensity for risk, social media adoption and behaviours etc.
- Secondly, they must conduct a two way dialogue with their customer (segments).
Banks are still the heart of the South African economy. They pump the funds on which productive human enterprise depends. Banks must perform this role well, with all the diligence we would expect of any expert or custodian of an essential task.
They must refocus on those fundamentals that are unchanged by the financial crisis — their core purpose, customer needs, and capabilities — while recognising that profound market changes have occurred and will affect how these capabilities need to be delivered. Those leaders whose banks can respond to the times and enhance their capabilities will be tomorrow’s winners.
About Digital Bridges
Digital Bridges creates high performance organisations by unlocking the business value of the web. We create digital strategies, user requirement and functional specifications for Intranets, websites and web applications. We also develop and implement social media strategies and create powerful digital brands using eMarketing and Communication.
Digital Bridges is technology agnostic and partners with great technology companies in order to ensure that our solutions are fit for purpose and deliver on organisational strategy.
Digital Bridges approaches the web from a management consulting position and relies heavily on rigorous academic thinking as well as business experience. It is headed up by Kate Elphick who has a Law degree and an MBA from GIBS. Kate has spent the last fifteen years of her career on the business side of the IT industry with companies such as Datatec, Didata, Business ConneXion and Primedia. Her skills include innovation and growth through marketing, communication, collaboration, knowledge management, human capital, performance management, process engineering and BI.
Digital Bridges has a broad range of experience working with significant, successful clients in the Financial, Gaming, Tourism, Pharmaceutical, ICT, Legal, Airline, Professional Services, Media and Public Sectors.
To find out more about Digital Bridges, please visit www.digitalbridges.co.za or contact Kate Elphick on firstname.lastname@example.org.