Trust and Transparency in Banking – Part 1

“I explained I’m a gambler...they can clearly see that I’ve got a gambling problem because of the transactions I’ve been making, and I don’t understand why they keep offering me more money.”

- a witness in the Royal Commission into Misconduct in Banking, Superannuation and Financial Services Industry (in Australia)

For last few years, Australian Banking has been rocked by the Royal Commission’s investigation into misconduct in the financial services industry. During the hearings, various institutions have acknowledged varying amounts of negligence or misconduct in their customer dealings. In the last year’s report, all the banks and financial services institutions were reprimanded and fined to varying tunes by the Royal Commission. The remediation processes and risk management processes arising from these findings are still keeping these organisations busy, with each year multi-millions kept aside to remediate affected customers and arrest the brand erosion somewhat.

Similar enquiries into misconduct have happened in the UK as well in recent years. And the UK FCA has institutionalised a conduct risk framework. All major banks in the UK were fined in recent years for either not proper giving commensurate advice, lack of fee / charge transparency, or mis-selling. Each of these financial institutions had to go through multi-million pound of redressal changes and some had to face the dreaded public censure.

Similar problems of conduct risk have been seen in other parts of the globe. With the rise in digital transactions, multiple party involvement in a transaction like payment; financial crime, conduct risk has grown multi fold across the banks. Other examples of conduct risk in a bank could be as simple as misinforming about products/fees, charging fees for no service, serving wrong product/service, administration errors pertaining to customer data, improper advice not commensurate with the customer’s situation, charging incorrect fee or interest, improper complaints handling, and many more. All of these have been found to be areas of misconduct in the Australian Royal Commission assessment (referred above), and the FCA assessment paper in the UK. In fact, the last Banking Standards Board (BSB) report on the culture in the UK Financial Institutions, highlights small but significant declines in the areas of conduct risk, which arise mainly due to lack of transparency and controls in the systems and processes. In the long run, slowly this leads to erosion of trust with the banking industry at large.

Trust is essential to relationships in all facets of life – personal, professional, financial. We have long expected financial institutions to do the right thing for their customers. Banks consider trust a strategic imperative for them, as it is a key indicator of advocacy and future business. And if it is eroded, the impact can be devastating. But trust is often found wanting in today’s world, as can be seen from the conduct risk lens described above. As the consumer trust in the fintech and big tech grows, and as these tech companies spread their wings far and wide into world of financial services, it will be a even more important for the financial institutions to be more trust worthy, to not only shore up future business, but to protect the existing business as well.

Studies have found that the lack of transparency and controls in the systems and processes can be found in anywhere in the bank – right from product design to approval to sales process, post sales servicing, to all-encompassing culture and governance at the bank. The lack of controls or the lacuna thereof, at any stage during the customer lifecycle, can contribute to conduct risk and eventual loss of trust in the institution.

Lets us look at trust from the financial institution customer’s lens. For this customer, trust starts at the very fundamental ask from these institutions – protecting money and identity (or customer data). Fulfilling this trust imperative, may not ease competition, however, not meeting these expectations can surely lead to damaging returns. Another trust imperative is the “promises” made by the financial institution to the customer. These could simply be – “mortgage application will be settled in 3 days” or “there is no annual fees applicable for a credit card”. Such promises are made all throughout the customer lifecycle with the financial institution and not meeting such promises frustrates the customers and regularly not meeting these promises leads to loss of trust and eventually leads to them switching over to more competent options in the marketplace. Another imperative for trust is the “long term relationship building” – wherein, banks are considered for the financial advice and well-being of their customers. This is where banks will consistently deliver products and services which are fair and transparent and meet the long-term financial well-being of the customer.

All these trust imperatives are needed by the financial institution to compete successfully in the market place. All of these together would make one’s brand and the brand promise are what the financial institution must live for. It also offers the most compelling differentiation from the competition.