Social media and its impact on the financial industry

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Winnie Soh's picture

Social media and its impact on the financial industry

Need for change

The bursting of the U.S. housing bubble in 2007 triggered what is widely considered to be the largest global financial meltdown since the time of the Great Depression. Amidst the acquisitions, bailouts and collapse of major institutions, investors have been steadily losing faith in financial establishments and years after the peak of the crisis, confidence in banks remain at an all time low1. The banking industry now suffers from what many on Wall Street calls a “Crisis of Confidence”2 and this is intensified by the Eurozone debt crisis and fears of bank runs. With mounting calls for changes that include increased transparency in investments and better risk management, those in the financial services are seeking to transform their business models in order to regain consumers’ trust and fulfill their need for information.

Social media as a communication tool

The onslaught of social media in the last decade has provided revolutionary opportunities for many industries in the consumption and dissemination of information. While the financial sector has not been excluded, the use of social media in a traditionally closed industry presents many challenges that have to be overcome for the successful implementation of web and mobile-based initiatives. Social media is defined as a group of internet-based applications that allow the creation and exchange of consumer-generated content3 and varies from weblogs and forums to podcasts and picture sharing. It distinguishes itself from traditional media as communication becomes bi-directional and this not only enables organizations to distribute information but also allows them to listen to real-time responses of their consumers. Being relatively inexpensive and easily accessible, social media presents a ready solution for banks to rejuvenate the relationship aspect in banking as well as make well-timed changes to meet the evolving needs of consumers.

Undoubtedly, those in the financial industry, like all others, are already beginning to use social media as a marketing and communication tool. A study by Corporate Insight found that at least 70% of the financial institutions surveyed have well-developed online communities on sites like Facebook and Twitter that enable consumers to give feedback and to provide customer assistance4. While it is definitely important for financial institutions to keep up with the social media charge, such initiatives bring about certain caveats that traditional institutions should think about. For one, social media presents an unprecedented amount of power to consumers as it gives them the ability to influence others and compel institutions to respond promptly to their queries. At the Bank of America, 90% of requests for assistance now come through Twitter5 and employees know they have to work swiftly and answer calls for help within a couple of hours. Banks are forced to constantly monitor sites and listen attentively to consumers as previously private complaints are now often made public on social networking sites. This gives consumers opportunities to influence others and blemish the reputation of institutions, be it unwittingly or otherwise.

Social media sites are aplenty and it is imperative that financial services firms spot successful networks instead of trying their hand on a myriad of sites. Being an interactive platform, social media sites require regular updating and maintenance in order to stay relevant and attract visitation. A survey of 50 banks with social media accounts found that few are actively using them and that is deterring their audience. Out of the 42 banks that used Twitter, only 26 actively tweet while the rest allow their accounts to lapse in silence6. To successfully harvest the fruits of social media, financial institutions have to ensure sufficient time and resources are put into maintaining the channels. Banks must lay a concrete foundation for social media to work and this includes acquiring new technology, implementing executive support and changing rules that may impede responsiveness7. This is often a difficult task to balance in an industry where the privacy of information is of utmost importance and security cannot be compromised.

Insight to consumer’s thoughts

While the use of social media for communication is rife, what many financial institutions fail to realize is that consumers’ thoughts and data found on social media sites is in itself a hoard of valuable information for the industry. Aggregate musings on such sites present an insight to consumer sentiments and enable institutions to make better decisions based on the expressed excitement or distaste of the people. Not only can financial services firms determine the likelihood of success for their products or services, firms can also make investment decisions based on the collective mood of individual investors. The field of behavioral finance has often found that moods and emotions affect investors’ perceptions of risk and choice (optimistic investors often correlate with rising stock prices) and understanding the collective mood of consumers can aid financial institutions in making winning investment decisions. Software vendor Streambase Systems recently released an Application Programming Interface (API) that aids investment firms in gauging the collective mood on Twitter and this is an important source of information that financial institutions can and should tap on.

New modes of banking

The prevalence of smart phone usage and mobile internet also makes it necessary for banks to launch new platforms for banking on-the-go. Mobile and online banking are gaining popularity as they allow consumers to make regular checks on their savings and investments from wherever they are, giving them more control over their finances. Firms like Zecco, an online stock brokerage, have enabled investors to trade through popular social networking site Facebook9; a move that significantly increased the amount of trades carried out. A Rosetta Retail Banking Survey recently found that more than half of the consumers polled prefer online banking to traditional banking and nearly half would do all their banking online if possible10.

Peer to peer lending

With the rise of social media, new threats in the forms of crowdfunding and peer-to-peer lending that directly links supply to demand had arisen as well. Dubbed “social lending”, sites like the Lending Club and Prosper allow borrowers to bypass banks and gain funds at lower interest rates and though they currently pull in only a small proportion of funds, many are increasingly viewing it as a viable alternative that has the potential to disintermediate and eventually replace traditional banks11. The emergence of social lending makes it imperative for banks to reignite relationships with clients by increasing points and frequency of contact and social media is an effective tool in doing so. Brick-and-mortar institutions also have to exploit the weaknesses that social lending institutions have in order to draw borrowers back. What peer-to-peer lending sites currently lack is critical mass12; matching credible borrowers to lenders may take an exceedingly long time and banks have to exploit this by speeding up loan approval processes and ensuring that higher interest rates are justified by prompt processing.

Conclusion

It is undeniable that social media has impacted the world of financial services. The growth of social networks has brought about new threats and opportunities that forces banks and other financial institutions to make changes or be made obsolete. To keep up with the rapidly changing technology, financial institutions have to ensure that their corporate policy includes a good social media strategy with well-defined metrics and clear governance that enables the business to harness the technology while at the same time ensuring security lapses are minimized. The burgeoning influence of social media, especially in its persuasion of the younger generation, cannot be ignored and as social networks thrive it becomes ever more important for firms to meet consumers in the way they desire to be served.

References: 
  1. Wood, J. & Berg, P. (2011). Americans' Confidence In Banks Has Reached An All-Time Low. Business Insider. Retrieved from: http://articles.businessinsider.com/2011-08-09/strategy/30043913_1_small-business-confidence-bank-revenue-bank-leaders
  2. Kavoussi, B. & New, C. (2011). Banks Face Crisis of Confidence as Europe Falls Further. Huffington Post. Retrieved from: http://www.huffingtonpost.com/2011/12/14/europe-crisis_n_1149302.html
  3. Kaplan, A.M. & Haenlein, M. (2010). Users of the World Unite! The Challenges and Opportunities of Social Media. Business Horizon, 53(1), 59-68.
  4. “Social Media Redefining Retail Financial Services Web Experience”.  (2008). Bloomberg. Retrieved from http://www.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr=WFC:US&sid=a44wW5D_2WNQ
  5.  Green, L. (2011). Banks Use Social Media to Solve Customers’ Problems, Build Goodwill. The Palm Beach Post. Retrieved from http://www.palmbeachpost.com/money/banks-use-social-media-to-solve-customers-problems-1503435.html
  6.  Russell, J. (n.d.). How Banks are Embracing Social Media. Retrieved from  http://thenextweb.com/socialmedia/2012/03/29/how-banks-are-embracing-social-media/
  7. “Social Banking: The Social Networking Imperative for Retail Banks”. (2011). Accenture. Retrieved from http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Social-Banking-Retail.pdf
  8. Daly, R. (2011). The Curious Case of Social Media.
  9. Taylor, P. (2012). Financial Services Firms Embrace Social Media. Financial Times. Retrieved from http://www.ft.com/cms/s/0/5218321c-85a7-11e1-90cd-00144feab49a.html#axzz1wGWYzYgk
  10.  “Consumers Prefer Online Banking to Traditional Banking”. (2012). Market Watch. Retrieved from http://www.marketwatch.com/story/consumers-prefer-online-banking-to-traditional-branch-banking-2012-05-21
  11.  Goff, S. (2012). Peer to Peer Lending Grows Despite Risk. Financial Times. Retrieved from http://blogs.sap.com/banking/2012/04/04/peer-to-peer-lending-grows-despite-risks-source-financial-times/
  12.  “Peer to Peer Finance Takes on the Banks”. (2011). Mindful Money. Retrieved from http://www.mindfulmoney.co.uk/7618/investing-strategy/-peer-to-peer-finance-takes-on-the-banks.html