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

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Deirdre Nah's picture

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

“Money makes the world go round”: a cliche phrase though holding so much truth. Money is the fuel that feeds the engine of civilization as we know it. Without money, there can be no economy on which a social community thrives. All humans, to a certain extent, guard their finances and as such, the financial service industry is integral to any society. At the same time, it is indisputable that social media is increasingly exerting a greater influence on both consumers and businesses today. As the financial industry “has historically been guarded about the information it shares and that is heavily regulated” (Omidi, 2012), banks are understandably less accepting of a novel idea such as social media. However, if banks do not adopt this new form of communication, they will find themselves falling behind their competitors. This essay aims to address how an age-old need (money) and a new and fresh idea (social media) can work in tandem and achieve maximum results and efficiency in financial services.

Social Media comprises social networking websites such as “YouTube”, Twitter”, “Linkedin” and “Facebook” and have proved to be a key component of businesses today. Firstly, businesses use these sites to spread the word about their promotions, events and the like. Such social networking websites capture a large scope of people at a low cost, businesses are now more inclined to use such social media websites for advertising purposes. As employees wind down after work, social networking sites then become a useful method to keep in touch with friends and families from all over the world. In essence, social media is a platform we use to connect with others and spread the word across borders by leveraging on its large network, at almost zero cost.

The business models of financial services would vary according to the services that they offer. This essay focuses on two prominent areas of financial services – investment banking and retail banking. A fundamental business model of a company is essentially “how the company makes money”, as well as finding out “the sources of the company's revenues”. Going deeper, we then “learn about the structure through which the dollars are earned”. (McClure, 2011)

Unlike consumer businesses, the use of financial services results in one investing large amounts of money with delayed returns. For example, one might purchase a dress for a hundred dollars, and the dress is received instantaneously. However, for financial services, one invests a certain amount of money, yet is unsure about its returns thereafter. This results in consumers being more wary about investment in financial services, and thus requiring a greater sense of trust and assurance upon decision. As such, for every marketing or branding strategy that a bank takes on, unlike regular retail shopping, the focus should not be on promoting "special" perks or promotions. Instead, they should focus on fostering customer perceptions of trustworthiness and reliability, allowing customers to feel at ease when engaging their services.

As humans, we tend to be skeptical and often question whether these advertisements are “too good to be true”. As mentioned, investors and consumers exercise more caution with regards to their engagement of financial services because of the inherent delayed returns, and are less likely to be swayed by slick advertisements and flashy tag-lines. However, this skepticism can be reduced through peer recommendation and review. Specifically, current consumers can post feedback or tweet about the pros of using a particular service and the positive remarks they have to offer about it. Also, the increase in the number of “likes” on their Facebook page could possibly build up its reputation and credibility as well.

Building on the point of fostering perceptions of reliance and trust, social media is a good avenue to build up the customers’ perceptions of the bank’s identity and values. Simply put, social media is a low cost method used to brand the company in the minds of potential customers. A bank should provide an overall atmosphere of reliability, security and credibility, allowing customers to be assured that their investments will reap profits. This is something that cannot be done through direct marketing, which “only [provides] one-way response mechanisms as a token form of interaction”. (Wilson, 2012) Some might argue that social media gives off an energy of flippancy and triviality, which are not unfavourable in financial services. However, as consumers start to become “tech-savvy” and accepting of social networking sites, such a misconception will no longer stand: social media is now the gold standard for marketing; it is not viewed as flippant nor trivial, but rather as insightful and informative. As such, financial services have no reason not to leverage on such low-cost techniques to spread their business through a larger network.

Social media also enhances customer engagement. By using social networking sites such as “Facebook”, consumers are able to form communities that allow two-way relations to exist between both the bank and their customers. Previous marketing strategies of banks include billboard advertisements, or more commonly, “cold-calling” techniques where consumers receive calls from banks trying to sell credit cards or insurance. Such methods are high in cost and often deemed as irritating to consumers. Audrey Hendley, the general manager of new customer acquisition in Citibank “stressed that it's important to know who you are talking to and correlate your messaging and content to that audience. The more connected customers are to the brand, the more they will use it”. (Taylor, 2012) By establishing such a platform, it deepens customer relations by making dialogue between the company's employees and the customer more easily accessible. Again, the point of having to build a sense of reliability and trust within the realm of financial services to garner the support and interest of customers must be emphasised, and there is much to be said for social media being an excellent avenue to achieve this.

The above-mentioned points are more applicable towards retail banking, commonly known as Business-to-Consumer (B-to-C) banking. Yet, the rise of social media also affects Business-to-Business (B-to-B) banking, such as investment and hedge funds, which involve considerably larger amounts of money. Here, the need for customers to know the reputation and trustworthiness of the bank is of extreme importance. As such, there is also a greater need to network with high net worth individuals. “LinkedIn”, a social networking site that allows one to know such high net-worth individuals not just within one’s social circle, but all over the world, is a prime example. Statistics have shown that “71% of people use LinkedIn to connect with other professionals” (Taylor, 2012). By doing so, social networking sites bring the world a step closer, and make linkages between businesses more readily available.

Social media has made the world much more accessible. “The low level of engagement required for a user to spread an idea combined with the high speed of new content updates means that those memes which ask most directly and strongly for users to spread them tend to do very well without much motivation required” (Zarrella, 2008). Social media has succeeded in creating a sense of openness amongst everyone, which is a major component in building trust – itself an important factor in financial services. Industries, consumers and companies are no longer limited to business within their country, but are now able to speak to the world. Everyone has an avenue to make their opinions known: ones’ employees, customers and even competitors.

Yet, it is this openness that financial services companies are adverse to, because it means a shift in control to the customer. With the increase in two-way relations between the company and customer, the fact that everyone has a voice and opinion, and now a mechanism with the potential to spread these opinions quickly and without boundaries, companies basically do not have control over what others say about them, be it positive or not. Financial services companies are also, thus, compelled to be much more open and transparent than most would like. As we enter the future with the World Wide Web continuing its reign, financial services companies should consider the effects of such a shift in control.

“Social media isn’t a sprint to see who can go live on the most platforms quickest.  It’s a marathon to see who will succeed at putting clients where they belong – at the heart of business”. (McHugh, 2012) Thus, business owners should realise that while the rise of social media signifies an era of greater openness and transparency within the financial services industry (an idea which many companies are resistant to), it also means that financial services which truly seek to serve the customer's needs will shine far brighter than the rest. As one writer put it, "the best business model in the world is also the simplest: make stuff that's insanely great" (Zarrella, 2008). For financial services that means only one thing, to put the interests of the customer at top priority. Only then, would the openness and transparency brought about by the rise in social media help rather than hinder.

References: 
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  3. McHugh, H. (2012, May 14). Kurtosys Blog. Retrieved June 1, 2012, from Social media for financial services – why culture, not just channels, must change: http://www.kurtosys.com/blog/social-media-for-financial-services-why-cul...
  4. Omidi, M. (2012, June 3). Banks scared off my social media. Retrieved June 3, 2012, from Financial News: http://www.efinancialnews.com/story/2011-05-04/few-banks-tap-into-social...
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  6. Wilson, M. H. (2012, Feb 12). Social Media and Financial Services Brands. Retrieved June 1, 2012, from Social Media Today: http://socialmediatoday.com/martin-hill-wilson/440725/social-media-finan...
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