To what extent, if at all, does the rise in social media affect the fundamental business model of financial services?

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Adam Wong's picture

To what extent, if at all, does the rise in social media affect the fundamental business model of financial services?

Social media is definitely changing the landscape of different industries. Due to different uncertainties and risks on compliance, cost effectiveness and corporate reputation, the financial industry has a slow start on social media. However, at the same time, the industry is now putting more effort on developing to find better approaches to participate in this rapidly developing trend. Corporate Insight, which tracks financial services firms, says 67 percent are now using Twitter and 59 percent are on Facebook. The rise of social media is definitely altering the way financial service providers create value and creating new threats and opportunities for the industry. How should the financial services providers react to these changes?

After experiencing the financial crisis, individual consumers from the lower end of the financial industry such as consumer banking and insurance services are looking for higher transparency of their service providers. In response to this situation, institutes have to participate in the interactions of the online community to build trust. Service providers should try to provide an increased level of disclosure and some platforms for peer review through social media.

Nicolet National Bank from the US has set a great example to use social media to enhance transparency. They have helped people with mortgage questions, business loan queries, and general finance questions on their blog and Jeff Gahnz, the President of the bank, even answers questions directly on their blog. The bank also blogged about the bank’s participation of Troubled Asset Relief Program (TARP) so the consumers are able to know where their money has gone, and why their bank participated.

The opening up of discussion channels by utilizing social media undoubtedly leads to a more customer-driven market. While businesses try to involve in social media, it is always suggested that they should have interactions with the consumers instead of pushing the message to them. This is definitely more crucial in the financial industry. Ross Taylor, chief digital officer at TMW, a digital marketing and communications agency, says: “There’s a far greater opportunity to build credibility by guiding and informing conversations.” Social media provides a good platform for individual consumers to gather information and compare different products through seeking feedbacks from the institutes and their peers. There are two implications from this situation: more knowledgeable individual customers and needs of a simple and clear fee and product structures. Individual customers have a better understanding because of social learning through online discussion. As a result, they are seeking products that have structures that are easy to understand so they feel more secure to purchase. The institutions should therefore restructure their future products in an easier and clearer way meanwhile satisfying specified customer needs.

The more customer-driven market also leads to the rise of social lending sites such as Zopa and Prosper. These peer-to-peer lending sites are able to provide better rates and easier, cheaper and more efficient transaction methods than the traditional banks. Traditional banks may try to participate in social lending by providing legitimate social lending platforms with their existing good wills. However, to protect reputations and avoid complication of compliance issues, it would be better for the institutes not to copy exactly how these social lending sites work. Instead, they have to utilize the innovations of these social lending sites to develop their own social lending models.

The main reason of social lending sites becoming popular is that they allow consumers to bargain and look for suitable rates for themselves. By using a similar concept, traditional institutes can also develop systems that allow consumers to directly interact with the staff in the institutes and seek for loans or insurance plans that suit their own needs. Bank can even try to set up a more aggressive social media policy, which guides and encourages individual sales and customer service manager to set up individual work accounts on social networking sites to interact or even selling products directly to online customers.

The rising of online niche community is another outcome of the development of social media. It is definitely a great opportunity for the service providers to be more focus on different segmentations according to age, regions, income level and even lifestyles by building online niche communities. There have already been some successful examples of online niche community built by financial institutions. Royal bank of Scotland developed an online community called ‘Keep Britain Biking’ encouraging motorcyclists to interact with its insurance brand Devitt. Barclays also developed an online niche community called 100 voices targeting young students.

The online community is now becoming more ‘social’. Direct branding of corporate is no longer a solution of marketing for financial institutions.  Tone and style of a community will be decided by the wants of the consumers rather than the bank or institution itself. However, financial institutes should bear in mind that the consumers want solid contents and tangible benefits instead of ‘friendship’ from the social media channels. According to a Deutsche Bank research ‘Users want tangible benefits, not friendship’ published in May 2011, German social media users are interested in information on all kinds of financial products but they are less interested in building personal contact with the institutes.  

Another thing that financial institutes need to do through social media is data monitoring and information sharing. This is not only important to the customer services of the lower end of the financial industry but it is also crucial for the higher end of the financial services such as investment banking and hedge fund.

In late 2010, a research paper published by Johan Bollen, Huina Mao, and Xiao-Jun Zeng in the Journal of Computational Science proposing that social media is quite possibly providing a service that goes far beyond real time news. More surprisingly, it may in fact be predicting the price changes in the stock market. The three researchers evaluated the relationship between the mood of financial related tweets and the market direction of Dow Jones Industrial Average closing price. The research gave a groundbreaking result that the researchers were able to correctly predict the direction of Dow Jones Industrial Average closing price nearly 3 out of 4 times based on the analyze of the mood of the social media community.

Although the result of the research appears that we have only scratched the surface in discovering and analyzing the relationship of social media and the financial market, it absolutely shows that there is a great potential for the financial institutes to dig deeper into this area. In order to establish a more professional network and gather more relevant data, a financial institute should build its own professional social network by carefully selecting ‘friends’, ‘followers’ and ‘contacts’. The use of social network is therefore no longer subject to building relationship with individual consumers. Social network can also now be a hub for sharing professional knowledge and information.  

At Citigroup, analysts, researchers and senior managers publish posts on its blog on a range of finance-related issues. The bank also internally has around 400 communities centered on different subjects or business areas. 80,000 out of  250,000 of the firm’s employee are now members of these communities, which Citi hopes to extend to its clients soon.

JPMorgan Worldwide Securities Services shares its expertise through its pension blog hosted by Benjie Fraser, practice lead for the division’s pension fund business in Europe. The blog participations are by invitation only as it aims to foster meaningful conversation among senior pensions fund trustees in a secure environment. Some of the information from the blog has already been put in use and Fraser says it has started to change the conversation at JPMorgan. It’s positively impacting JPMorgan’s agendas and over time will help frame how JPMorgan do business.

As also stated in the research ‘Users want tangible benefits, not friendship’ by Deutsche Bank, the majority of new financial products is purchased online or preceded by online research in Germany. Younger clients are ahead but even more than 60% of the clients beyond the age of 60 rarely buy a financial product without consulting the Internet first. It is clearly a need for the financial industry to engage in the social media and adjust the business model gradually to create value for the changing consumers. However, the worries of the strict regulations of Financial Services Authority (FSA) while engaging in social media still remain. In order to succeed in the social media trend, financial institutes should test and move forward by establishing well planned and carefully defined social media strategy. They also need to proactively identify compliance and business risks.

The business models of financial institutes are always changing with the advancement of technology and innovation. Social media is certainly making impacts on the financial industry and therefore financial service providers should start adjusting the ways they create value for the consumers. Although the ROI on social media is hard to measure, the institutes cannot neglect every single threat and opportunity aroused from the rising of social media.

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