How the Rise of Social Media Affects the Fundamental Business Model of Financial Services

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Umangkumar Parikh's picture

How the Rise of Social Media Affects the Fundamental Business Model of Financial Services

Most definitions about social media centre on the fact that it involves web-based as well as mobile technologies where online communities interact and share information. This could be between individuals or organisations. I would go further and say that social media is something that potentially brings about greater convenience to people and also creates new markets which didn’t exist before.

The arrival of social media has created some unrealistic expectations. The mistaken belief that the epic rise of social media will create vast amounts of new wealth for everyone has been quelled. This is seen most prominently in the recent disappointment of Facebook’s initial public offering (IPO). A lot of social media’s potential is still hype and many of the promises of the ways it is going to transform businesses has yet to take place. Nonetheless, social media is here to stay and it is going to affect the fundamental business model of financial services in various ways.

The main role of a financial services firm is to be an intermediary of capital. It needs to effectively link the lenders with the borrowers on a massive scale. From this role, it earns a spread and that is the fundamental business model of the financial services industry. The emergence of social media does bring about threats to this business model. Crowdsourcing is fast catching on where entire communities are formed to help one another find solutions. Crowdcube, the world’s first equity crowd funding platform based in UK, has helped disburse seed money of millions of pounds to start-ups. Other crowdfunding sites like Kickstarter have achieved great success as well where companies raising money give free product samples to investors. This new trend will be alarming at the very least, to venture capital firms as well as private equity companies. When initially, they held the keys to the honeypot of seed capital, these websites are making it easy to bypass them and raise money in a less hassle-free manner. These sites bring angel investing to the masses and prominent investors on these sites show their tacit backing of certain companies which others follow, something which is expected in the community sharing aspect of social media. Banks are not exempted from the encroachment of their lending territory as well. Funding circle, another UK firm bills itself as an online marketplace and provides loans to small and medium enterprises (SMEs), which are typically potential customers of banks. While the amounts are not big at the moment; with only about tens of millions of pounds disbursed each quarter, it is definitely something which banks need to sit up and take notice of.

In this day and age, social media makes things go viral almost instantaneously. DBS, a prominent bank in Singapore had its reputation take a hit during the Lehman Minibonds saga which first started in 2008. It eventually managed to repair its image and recover its brand equity. Lately however, social media has a very activist air to it. If such a fiasco took place with a banking institution today, I am quite sure that that particular institution’s brand image would not just be sullied but be dragged through the mud in the virtual arena. Bloggers and tweeters will have a field day as they proclaim how that institution has lost its trust and integrity with its customers. Financial service firms need to pay close attention to this trend. Anytime a blunder has been made, a firm should quickly come out to apologize and make amends. If a PR campaign is not done in time, the institution’s brand may face a blow which it can never recover from, thanks to the power of social media. Trust once lost among customers is hard to gain back.

However, not everything is dark and gloomy for the financial services industry. I feel that social media is complementary to a lot of the activities carried out by banks, for example. Investment advisors are increasingly using social media to educate existing and potential clients on investments as well as to promote new services. Think of the potential of this during road shows for IPOs where investment banks are able to reach out to larger groups of people and give regular updates to the process. Investment banks shouldn’t have any fear of being supplanted by social media, in my opinion. I would like to look at history to prove that point. During the dot-com craze in 2000, a lot of shipping websites such as oceanconnect.com and setfair.com were set-up. Their goal was to become an online community to link buyers and sellers together and cut out the traditional brokers, as their commissions can be quite high. Instead, many of these websites went bust and shipbrokers are still very much valued today in the industry due to the specialised advice they give to clients. In the same vein, the imprimatur of an investment bank is still integral to the IPO process and social media can never hope to displace them.

The rise of social media also brings about exciting new opportunities for firms in the financial services industry. Credit card companies are working with merchants to develop mobile phone applications and programs to process online payments. Starbucks launched its Mobile Pay platform in 2011 and by December that year, had processed 42 million transactions in its coffee chains. Consumers like hassle free payments and financial services firms cannot afford to be behind the curve for this one. We also see encryption technology and security being married with social media as well. Jumio, the company which Eduardo Saverin (the facebook co-founder) has invested in, has technologies to convert your webcam into a credit card reader and allows merchants to verify a customer’s identity online, seamlessly. Eduardo himself in a recent interview said that Jumio has already achieved more than US$100 million in sales globally.

Even traditional banks like Wells Fargo could take a leaf out of some social media companies and apply it to their business model. Think of “A Groupon style; special fixed deposit rate for the first few hundred customers at some of the bank’s branches.” Once these customers come to the branches to redeem their coupons the bank has the opportunity to cross-sell them other services as well. Many banks have only been undertaking a half-hearted attempt to embrace social media as they are not aware of its immense potential.

Banks are also using social media to mine customers’ data. Tweets are tracked to glean more information such as long queues which the bank then takes steps to remedy at the branch. Banks are no longer waiting for customers to come to their branches. Instead, they use social media to follow customers’ habits, preferences and patterns and are proactive in offering new financial products such as loans and revolving lines of credit as and when customers need them. As margins get squeezed in retail banking, this is an innovative way to find new sources of revenue ahead of competitors. Industries like private banking and wealth management are benefiting from professional social networking websites like LinkedIn. Not only can they recruit talent from LinkedIn, they can also pursue sales leads and contacts from LinkedIn.

The micro financing industry is also poised to go through a transformation with the advent of social media. In countries like Bangladesh, co-ops which take loans can be educated on the most efficient way to use funds as well as using mobile platforms to keep track of their loans. Loan officers can monitor and track loans as well as approve and reject them using mobile technologies. Co-ops rely on peer pressure to encourage each other to repay loans and banks can consider using tweets to updates members of the co-op when one member makes a timely repayment of his loan.

In conclusion, the rise of social media has affected the fundamental business model of the financial service industry in some ways. However, going forward only time will tell how the financial service industry adapts to the threat of social media and how it actually harnesses the power of social media to make its fundamental business even stronger.

References: 
  1. KPMG (Apr 2012) “The Social Banker-social media lessons from banking insiders” Retrieved May 29 2012 from http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/social-banker/Documents/social-media-lessons-from-banking-insidersv2.pdf
  2. Russel, A. B. (May 2012), “The Roles of Social Media in Banking.” Retrieved May 29 2012 from http://www.information-management.com/news/social-banking-Facebook-Twitter-GRC-Bancorp-Wells-Fargo-10022431-1.html
  3. Sahota, P (May, 2012), “The Future of Mobile Payments.” Social Media Club, Retrieved May 29 2012 from http://socialmediaclub.org/blogs/from-the-clubhouse/future-mobile-payments
  4. Social Media Solutions (Mar, 2011), “Banking on 2011 Social Media Guide.” Retrieved May 30 2012 from http://socialmediasolutionsllc.com/wp-content/uploads/2011/03/Banking-Guide.pdf