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

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Samuel Chao's picture

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

Social media has only recently emerged as a revolutionary communications platform that enables consumers to disseminate information instantaneously, personalize their communities and ultimately affect businesses by fostering an environment of extreme informational transparency. Usage statistics for 2011 paint a spectacular picture of growth – Twitter averaged 190 million daily tweets, while Facebook averaged 30 billion pieces of content shared by users and organizations per day. At this juncture, most industries, including financial services, have minimally adopted social media platforms as an augmentative marketing tool, customer service vehicle and distribution channel. However, social media has the potential to transcend its auxiliary role to shape the financial services industry in a more fundamental manner.

 

Under the old model of mainstream media, consumers gained access to information which flowed through slow, generic and unidirectional channels, aptly epitomised by newspapers. Dialog between businesses and consumers predominantly flowed from former to latter. Social media, on the other hand, offers an instantaneous, multi-directional and customizable means of sharing and accessing information, turning the old model of social interaction into an autocatalytic model that can rapidly transform a murmur between a few individuals into an international discussion between millions. These characteristics of social media have given rise to a communications paradigm that is marked by spontaneity and boundlessness. In the past, every consumer had a limited number of relationships that he regularly interacted with and turned to for information. Presently, most people, especially those in the Gen Y category, count themselves a member of any number of vast, constantly-active virtual communities that cater to the individual’s interests.

This matters for financial firms as it is an industry where relationships form an integral part of the customer lifecycle. The rise of social media will change the way financial institutions establish and maintain relationships with their customers because information is now far more transparent and universal in nature. The extensive reviewing of products and sharing of experiences on an open platform has become a norm. Consumer behaviour has evolved in that they now choose to make decisions based on the amalgamated wisdom of their virtual communities rather than take direction from traditional marketing channels.

On the downside, service lapses or inferior products will do far more damage than they previously could to a firm. The rise of social media has effectively given consumer groups the ability to concertedly place pressure on organizations via online campaigns. On the upside, financial firms can now utilize a marketing model that revolves around customer advocacy, where every consumer has the potential to become a passionate and cost-free ambassador of the firm’s brand.

Consequently, financial firms will start to compete on their ability to transition from a push-based marketing model to a pull-based one. The firms that can create a compelling value

proposition on social channels that can ”pull” customers to opt-in to be a part of their virtual communities will be able to develop customer intimacy and nurture a network of natural brand advocates. There will be a clear difference between the players who actively try to engage their customers and those who merely use social channels to deliver marketing messages. Transaction-based relationships of the past will have to give way to commitment-based relationships, where customers have a genuine interest in the firm’s social activities and offerings.

Compounding the above point, another disruptive aspect of social media lies in the control that users possess over the design of their communities. They get to establish the boundaries of a virtual world in which an increasingly larger portion of their interaction with society takes place. Within such an environment, firms can only hope to build meaningful relationships with their customers if their pages and feeds are first being subscribed to by their target market, presumably by being engaging and relevant.

Under such a paradigm, power has shifted to the consumer. A small player with a superior social media presence has a viable and inexpensively-obtained marketing edge that will allow it to capture business from a large player that is not as well-connected on these platforms. Social media clearly changes the nature of barriers to entry in the industry and alters how firms obtain a competitive advantage.

Moving forward, the ability to harness user-generated content and openly-disclosed information to deliver a more tailored experience to the customer will be an increasingly important source of competitive advantage for financial firms. An abundance of useful information is made publicly available on social platforms, ranging from basic data such as a user’s age, location and occupation to more textured information such as his investment holdings and risk appetite. The provision of financial services will become a more reactive business and product development will adopt an element of co-creation. The firms that can utilize predictive analytics and active engagement to anticipate and discover what their customers demand will face a lower risk of product rejection and marketing failure.

Ultimately, social media certainly has the potential to cause a significant upheaval in the financial services industry but the extent of this upheaval will be contingent on the willingness of the consumer to opt in to the firm’s offering. An example of a social offering by a financial firm that attempts to entice the participation of customers by leveraging the change-factors mentioned thus far in this essay would be the Link-Like-Love Facebook application by American Express, which delivers personalized deals and promotions to card members based on the social information that they disclose on their Facebook pages such as their page likes and friend connections. A quick appraisal of the access permissions that the application requests for will easily give any consumer pause for thought – “Access my basic information”, “Access my data any time”, “Access my profile information”, and perhaps most unusually invasive of all, “Access my friends’ information”.

The rise of social media will undoubtedly spur firms to engage customers and attempt to pull them into their social communities rather than just push them products, but the impact of this

change in approach rests on the consumer’s willingness to allow firms to be an integral part of their social interactions. After all, business pertaining to an individual’s financial matters has never been social in nature. While consumers might be perfectly happy to utilize social media to keep in touch with friends, talk about entertaining topics like sports and celebrities, or share stories, it is an altogether different matter to see them being receptive to the notion of active engagement on an extremely transparent platform with the businesses that service their finances. The extent to which the rise of social media can affect the business model of financial services will thus hinge not solely on how firms capitalize on the plethora of new opportunities made available, but also on the degree of comfort that consumers can eventually develop with financial firms as ubiquitous and semi-omniscient members of their virtual communities.

References: 
  1.  Henrikson, Jenise U. (Aug 30, 2011) “The Growth of Social Media: An Infographic” Search Engine Journal on the web. Retrieved from http://www.searchenginejournal.com/the-growth-of-social-media-an-infogra....
  2.  Freegard, Phil. “Improving Customer Advocacy: How Banks should use Blogs, Ratings and Reviews” Infosys FINsights – The Rise of Social Media in Financial Services – Balancing Risk and Reward. Retrieved from http://www.infosys.com/FINsights/Documents/pdf/issue9/social-media-finan...