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

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

“Provide the pictures, I´ll provide the war”. This quote by media mogul William Hearst shows how as early as 1900, communications had already built an unprecedented power to cause wars and make or break firms and governments. Yet, over half a century later, in 1956, Schweizerische Kreditanstalt (SKA) was celebrating its centenary and like many other firms in the banking industry it did not see the need to woe clients through propaganda. The executive board of SKA did not even consider it necessary to have a company logo. By the mid 1960s, however, the need for advertisement could no longer be denied and soon SKA had an internationally recognizable logo (the blue Wermelinger Cross) and a media-relations department1. Today, SKA has been rebranded as Credit Suisse, and it is one of the world´s most renown Swiss banks, and amongst the only firms in the private banking sector (the area of financial services on which we shall focus) to be spearheading access into a new revolutionary communications tool: social media. With even greater power than earlier media forms, social media has already proven its strength through its key role in current events such as the Arab Spring, the wiki-leaks scandal and in deciding politics internationally. Nevertheless, this new, dramatic change in the external business environment has been almost entirely shunned by the internal banking hierarchy. With an erroneous tendency to view social media sites, such as Facebook and Twitter, as playgrounds for the young, an incredible area of opportunity is being ignored. Nevertheless, as attitudes amongst clients change, so too will attitudes in banks; business models must either adapt to social media or lose out in the market share. 

We will begin by defining social media as “forms of electronic communication through which users create online communities to share information, ideas, personal messages and other content”2. Some famous examples are YouTube, Wikipedia, Facebook, or LinkedIn. It´s main intent is to enable clients to establish a social presence. The most successful social media are those which allow for limited ambiguity and uncertainty in communication, while increasing interpersonal communication, intimacy and immediacy.3 So how does this affect the business model of financial services, and more specifically private banks? A business model is “the organizational structure to enact a commercial opportunity”4. In the case of private banks, this commercial opportunity is provision of accessible, personalized and reliable financial services to high net-worth income individuals (HNWIs)5 and other individual clients6. Amongst these services we can count deposits and payments, discretionary wealth management and limited tax advice.

At first sight, this goal can´t be aided by use of social media. To begin with, most HNWI´s are (seemingly) not in the same age group as users of social-networking sites and other social media. Even if HNWI´s did use them, would they be comfortable speaking about the management of their wealth through these channels? If we consider than there are currently 190 million people worldwide actively using Facebook, and that people in Generation X (35-44 year olds) amounts to 16.6% of users, while 55-64 year olds make up 13%7 we seen that the stereotype of these social networks being a juvenile playground is simply untrue. A lot of potential clients Private Banks could cater to use Facebook or other forms of social-networking such as Twitter, MySpace or LinkedIn. Furthermore, many of these offer the possibilities of sending informal, immediate messages to which third parties don´t have access. Through these same channels people across the world speak of their innermost personal feelings daily.

However, many old stereotypes still surround social media. As a cause of this private banks have been lukewarm in entering the social networking scene. Of top private banks analyzed only Deutsche Bank, Crédit Agricole, Credit Suisse and BNP Paribas have “a consistent and comprehensive strategic” presence in the social media, while another six private banks have “bits and pieces of social media framework”. Of the main U.S private banks none has any access in social media. Furthermore, none of these banks has a specific social networking page through which clients can easily access wealth managers.8 The democratization of private banking – although it´s main constituency is HNWI´s – has to be ushered in. Many myths surround private banks, often seen as venerable, elitist institutions only targeted at the super-wealthy. These views are oftentimes false and banks would do well to better inform the general public about their services and requirements to qualify for private banking and wealth management services within their institution. Social media could be the hub to do this, while providing the opportunity for banks to present the image they desire. Furthermore, clients have to have easy, immediate and reliable access to their wealth managers: social media could provide this. Just as citizens want politicians to be accessible through social networks in order to question them and exchange views, clients also want to have on the moment, secure internet access to the person administrating their money.

It´s not only a question of existing clients, but of potential ones; people who may be informed of what private banks have to offer, and may learn more of who qualifies for private banking and who doesn´t. The truth is that Private Banks cannot have a presence in every place in the world. However, as globalization is creating wealth in emerging markets, even citizens of LEDCs can become clients. Access by potential clients resident in remote and impoverished countries to their bank could be key in providing a better service and winning a larger percentage in the market. Even clients who don´t qualify as HNWIs might still be wanted by private banks, and may still feel they warrant aid in managing their assets. While assigning a wealth manager specifically to them and making him journey to wherever they are across the world may be costly and impractical, creating an internet hot-line which facilitates client-manager communication is an efficient and probable solution.

Eventually, the traditional concept of economies of scale may be rivalled by a new economy of access. By this, we mean that it will no longer be just the traditional giants, capable of having the sizeable financial economies, specialization, division of labour, bulk-buying, transport economies, large machines and promotional economies who will dominate the market. Smaller, but more revolutionary and present-minded firms who are quick to jump on the bandwagon of social media will also get a large share of the market. When speaking of private banking this is especially true; in this business model we don´t have to factor large machines or bulk-buying into costs, and in addition we do see that advertising can be provided at relatively low and accessible costs via social media. Also, transport and communication costs with clients may be significantly reduced by using this form of minute-by-minute contact between client and wealth-manager. This will cut costs for both clients and firms creating a win-win situation.

In the 1950s private banks refused to join into the media and to advertise through radio, television, etc. The dogma dictated that clients should seek the private bank and not vice-versa. In the 1960s, inevitably, banks began to join the bandwagon of advertising and to gain access to the public. Now, once again we are in the same situation. Social media is just one more type of media, and just like banks in the 1950s, modern day private banks are weary of joining the trend. However, the rest of the world is changing, and so must banks. Private banks ought to have a presence on YouTube, Facebook and Twitter, and maybe even a specific social-network dedicated to private banking, which can provide discretionary wealth management and tax advice to the client while giving a face to the wealth manager and to the bank itself. This page can meet the stated targets of both private banks and social networking by increasing interpersonal communication, intimacy and immediacy while removing some of the ambiguity and uncertainty which entrusting your money in the hands of a far away wealth manager can cause. It will be the banks who do this who will be at the cutting edge of technology, and who will create further value.

References: 
  1. Joseph Jung, From Schweizerische Kreditanstalt to Credit Suisse Group: The History of a Bank (Zürich, 2000), p. 373-403
  2. Definition of Social Media, Merriam Webster Online Dictionary, http://www.merriam-webster.com/dictionary/social%20media (accessed on the 28th May, 2012)
  3. This is based on the Social Presence Theory (Short, William & Christie, 1976), the Media Richness Theory (Daft, Lengel, 1986) and the Self Presentation Theory (Goffman, 1959) all cited from Andreas L Kaplan and Michael Heinlein, “Users of the World Unite! The Challenges and Opportunities of Social Media, Business Horizons, LIII, (Nov- Dec 2010), p. 59-68
  4. George G and Bock AJ, “The business model in practice and its implications for entrepreneurship research”. Entrepreneurship, Theory and Practice, 35 (1): 83-111
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  7. 25 to 34 year olds make up 23.4%. cited from Check Facebook, http://www.checkfacebook.com/
  8. Cited from Most Banks and Wealth Managers Ignore Facebook, Twitter & Co, My Private Banking Report,  http://www.myprivatebanking.com/article/new-myprivatebanking-report
  9. "Facebook Marketing Statistics, Demographics, Reports, and News – CheckFacebook." Facebook Marketing Statistics, Demographics, Reports, and News – CheckFacebook. Web. 28 May 2012. <http://www.checkfacebook.com/>.
  10. Jung, Joseph. "Chapter 373-403." From Schweizerische Kreditanstalt to Credit Suisse Group: The History of a Bank. Zurich: NZZ Verlag, 2000. 373-403. Print.
  11. Kaplan, Andreas M., and Michael Haenlein. "Users of the World, Unite! The Challenges and Opportunities of Social Media." Business Horizons (2009). Print.
  12. Most Banks and Wealth Managers Ignore Facebook, Twitter & Co." - MyPrivateBanking. 04 Nov. 2010. Web. 28 May 2012. <http://www.myprivatebanking.com/article/new-myprivatebanking-report>. 
  13. "Social Media." Merriam-Webster. Merriam-Webster. Web. 28 May 2012. <http://www.merriam-webster.com/dictionary/social%20media>.