Does reputation matter in financial services?

25^th August 2015

To date, reputation has not been a significant factor influencing consumer behaviour in financial services. In other words, despite the real growth of fines and stream of bad press, consumers aren’t voting with their feet, and reputation has not significantly impacted the bottom line of leading financial organisations.

This isn’t much of a surprise. Consumers have traditionally found it hard to engage with the financial services industry. Add to the mix a series of widespread abuses, such as PPI, and too many consumers have come to see the financial services industry as a monolithic grey block trapped in a cycle of misconduct. Three trends will help to change this.

A wave of challengers: blue, orange and pink

An avalanche of new banking entrants are on the way. With up to 15 more challenger banks in various stages of development, some exciting and colourful players will soon enter the market, with Atom and Civilised being leading examples. What these organisations do once they launch could profoundly change the state of play.

When Zayn Malik of One Direction left the five-piece boy band, Lidl a ‘challenger’ supermarket, immediately cut the cost of its One Direction Easter Egg by a fifth. A smart piece of marketing that immediately went viral and reinforced Lidl’s position as a low price supermarket. Would any bank today take Lidl’s lead following the announcement of another banking fine? Unlikely. The chances are that the next scandal will envelop them too.

The new wave of challenger banks will be free from the legacy of misconduct. If they are bold enough to capitalise on this, they stand a chance of capturing the public imagination, and will help to inject more colour into the industry.

Increased financial freedom: Las Vegas or a funeral plan?

 As the government tears-up the remnants of the nanny state, personal freedom and accountability are being placed at the heart of the financial sector. One example are the pension freedoms brought in earlier this year, which aim to empower pensioners to make better decisions. Some consumers may act irresponsibly, but the vast majority will engage more critically with the options available to them, including which products and providers they choose to embrace.

Increased freedom and more options, driven by both regulatory and market developments, will help to stimulate engagement. Today few consumers wonder how stable Lloyds Bank is, but asking the same question of a peer lender (in which deposits are not covered by the Financial Services Compensation Scheme) would be wise. In this context, reputation and trust, as key points of differentiation, will start to matter a lot more.

 Self-regulation: an army of Jane, Sarah and Scott

With memories of bank bailouts fading and an increased emphasis on data analytics, self-regulation is firmly becoming a hot topic.

Financial organisations are being asked to demonstrate that they are treating their customers fairly. While many are developing complex and costly internal processes, there are simpler and more potent options emerging; which will also better engage consumers as active participants in the financial services industry.

For example Uber uses a simple, but powerful mechanism to help self-regulate its marketplace. Its passengers rate their drivers, and likewise, drivers rate their passengers. Drivers with better ratings get more customers. Passengers with poor ratings find it harder to get a ride home after a big night out.

Summary

Having a trustworthy and reputable financial services industry matters. However, the current state of play makes it hard for consumers to engage.

When real colour is injected into the financial services industry, consumers will be better served and ultimately empowered to engage. Combined with other developments, including sophisticated efforts at self-regulation, and reputation looks set to emerge as a source of key strategic value. The reputation of an organisation looks set to significantly impact its bottom line within the next 10 years.