Retail Finance - Banking Loyalty, an oxymoron?

It’s no surprise when I say there’s still something of a trust issue between the financial services industry and its customers. In the Spring of this year, Dame Colette Bowe, Chair of the Banking Standards Review Council (the body tasked with improving standards in the financial sector), stated that banks must "raise their game" to regain the public's trust after a string of scandals. A great example of British understatement.

But trust in what?  The Market Research Society reported in March that whilst banks have lost the trust of the public over the last few years, they trust banks more than government, charities, schools and supermarkets to look after the personal information they hold about us, and not sell it to the highest bidder.

That seems contradictory, but over the past year we’ve talked to people with current accounts, loans and savings products in some depth, and there might be a simple explanation.

We’ve wanted to understand more about people’s relationship with their money and financial services, to see if we could find any fundamental patterns of belief, or need, or preference. We’ve found several, but one that is current (and unlikely to be fundamental) is: most customers are pretty cynical about banks.  When we probed this cynicism we found concerns around the concept of loyalty and the need to turn it back into something meaningful, not moneyed.

What we mean by ‘trusting a bank’ is  we'd  like to believe the bank would behave loyally to us. Loyalty is tricky to tie down, it’s a nuanced concept, wrapped in social and moral codes whose boundaries are hard to define. But most of us ‘get it’, and we feel it strongly when it is broken.

For now, let’s define trust as 'a belief that group members will watch each others backs and not rip each other off', or said another way, 'a belief that someone else will look out for our interest as well as their own'.

Perhaps because of its social importance and its subtlety, Loyalty has been an attractive and easy target for the banking world to hollow-out, turn on its head and bankrupt. Because the banks have monetised loyalty.

 

Loyalty has been monetised

Yes, it's been monetised and loyalty in retail banking is definitely not a two way street. When we talk loyalty in retail banking what do we mean? What are you expected to give your bank and what do you get in return? They would like all your money and all your borrowing and all your savings too please, for life. Recently of course this includes all your personal data on your spending patterns and preferences. In return you get a free account (paid for in ways that aren’t transparent to you) and what else?

Until quite recently, if you were unlucky chances were you would become the unwitting victim of ‘under the radar’ disloyalty from your bank. The interest on your deposits slumped, you were penalised for making mistakes, new customers got better rates than you; you were played like a fish and offered empty tokens of prestige (a black, a pink, a green, a gold card) and were encouraged to get what you want now and to hell with the future. And to trump it all, you were given the opportunity to buy insurance in case you couldn’t actually afford to keep those payments up.  There were occasional painful, sharp wake-up calls evidencing your banks disloyalty when £25 charges hit, because you went overdrawn for an evening by £7.35.

You stayed in the bank because you were tied up with borrowing, and direct debits and standing orders and somehow a belief you were lucky to have a bank account - and of course your very human tendency to look somewhere else rather than at the slow motion car crash that was your current account. Better the devil you know?

Some of this still goes on, but now the FCA is here and things are changing in banking. A change accelerated by the challengers (who tell us they have transparency baked-in). Banks are shaping up.

 

So what is banking loyalty in 2015?

Banking’s ‘reward based current accounts’ are a relatively recent cough ‘innovation’ and a cornerstone product for banks who can afford loss-leaders to drive customer acquisition. These rewards based accounts work with your natural tendencies - they work to shape your habits through gentle cycles of rewarded (and sometimes punished) behaviour. People manage their money in different ways and will therefore respond differently to the way in which banks try to manage them. Many are not better off with rewards based accounts and ‘loyalty’ as is implied in their description is certainly not implicit in the banks who offer them. No matter how you spin it - it still seems a very one way relationship: us, loyal to them.

My background is in psychology, and personally Nudge is something I think the FCA should be watching for in banking. Maybe they are - maybe that’s an entire other post.

Loyalty and ethics aren’t the same. But most of the people we talked to believed that banks that behave unethically are being disloyal. Our research showed that people want to believe their bank is doing right by the world, even if most don’t care precisely what or how that’s happening. Ethical practices can be cut at macro and micro levels – from a bank's investment strategy through to its banking behaviours, through to the treatment of its customers. There is a lot of ethical noise out there, as banks compete to be seen to be more helpful, more grounded, more socially responsible, more customer centred, more caring.

They’ve got ground to make up and we mustn’t fall back into the dream state that has typified our relationship with them – and we should be careful to separate what they say from what they do – because some banks are much, much more committed to ‘ethical’ than others, however you choose to define it. And in the din made by all that expensive advertising, the signal can be hard to make out.

A minority of us do notice the differences. In the insightful 2013 YouGov report “Public Trust in Banking”, the UK public were asked to assess the reputation of each of seven banking groups. With two of these banks, more people said “good” rather than “bad”. These were the Nationwide (by 42-10%) and the Co-operative Bank (by 42-8%). With these two, as with all the others, a huge number of people say “don’t know”; but among those who do have an opinion, the report states that it's clear that a mutual structure and the avoidance of “casino” banking practices have made a difference. If the survey was run again, and if they were in in consideration, I expect Triodos and several new challengers would be entering that list.

There are banks working on the notion that bank-customer loyalty could be a two way street. One in which behaviours, not cash, define the relationship of loyalty between a bank and its customers. This shifts the emphasis from the best rate to a decent rate - and the focus of loyalty towards something akin to fairness.

 

What would it be like if banks were loyal to you?

As a concept, ‘Loyal to you’ could turn banking on it’s head. Loyal to you would define a bank that proactively watches your back in exchange for the trust you have given them to manage your money.

• Being loyal to you is not a bank promising to teach you how to use your ipad, but one that gives you a chance to stop that overdraft charge in its tracks. Something that Natwest’s ‘ActNow’ seems to offer.

• Perhaps a bank which makes explicit the cost to you of running a current account – by charging you for it, rather than pretending its free and clawing the cash back in other hidden ways – something that George Osborne has said he’s very keen on and I predict we will see very soon.

• Perhaps a bank that publishes a simple charter of it’s loyal behaviours, that can be measured, rather than a set of financial product characteristics hidden behind opaque terms like representative rate (the interest rate you are probably NOT going to get).

• Perhaps if making the world a better place floats your boat (unfortunately this seems to describe a silent minority of UK customers), a bank that publishes it’s investment strategy, and provides a measurable manifesto for the way it lends, would be a great way of gauging whether it walks the talk.

• Perhaps a bank that when the going gets tough, doesn’t treat its customers as if they have the plague – straight into isolation, nil by mouth, special measures, protective suits on – and  move them quickly out the front or the back door.

• But instead is one that recognises most of us will experience the downs as well as the ups of life, and not uses the greater good of the group as an excuse for penalising the individual. A bank that helps the individual back towards gaining financial control without enforcing austerity, a bank that recognises some people will take advantage of this but that most won’t.

 

In the YouGov survey I referenced earlier, 32% of respondents said they would be embarrassed to work in banking, with only gambling getting higher ‘embarrassment’ scores. Perhaps a bank that committed to be 'Loyal To You', would be one that its employees and if relevant, its shareholders - could feel proud to work in and own.