Social Media and Financial Services

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Robert Montgomery's picture

Social Media and Financial Services

The rise of social media has already had significant impacts on the fundamental business model of financial services, and this trend is set to become more evident as time goes on. Social media affects the financial services industry by providing new opportunities and threats. The opportunities include new ways of engaging and servicing customers, the external, or alternatively firms are able to enhance internal communication and business processes in order to reduce costs and streamline service delivery.

All firms have a social media presence whether they are actively engaged in social media or not. Therefore for financial firms, social media presents both a threat and an opportunity. For firms that are not actively using social media, there is a significant threat of negative publicity across a variety social media channels. However, for those firms that do participate on one or more of the social media platforms, there is an opportunity to manage public image, by emphasising the best aspects of the firm while responding to negative feedback and then improving those parts of the business.

A major way in which social media has changed the financial services business model, is that firms are now branching out to provide services that are not necessarily directly related to the key financial products offered by the firm. American Express has been one of the pioneers of this use of social media via its Open Forum1. The American Express Open Forum provides a place for entrepreneurs and business owners to seek advice, share ideas and network. This success of this website is largely due to the fact that many small business owners rely on social media because of the relatively low costs of obtaining business advice and marketing in comparison to traditional methods. Open Forum creates value for American Express because the website helps to build a trusting relationship with potential customers. Additionally, because the forum is part of American Express website, customers have immediate access to both the strategy (Open Forum’s business advice) and implementation (American Express’ financial products) needed to run a successful business.

Now that social media is becoming part of the financial services sector, it is reducing the marketing advantage of larger firms. This levelling effect occurs because social media is relatively cheap and most social media platforms are homogenous templates, and as such there is less opportunity for big budgets to create an advantage. For this reason, the firms who dominate social media will be the firms that provide consistently valuable content, regardless of the size of the firm or how well established it is.

Similarly HSBC UK has created the HSBC Business Network2, an open-access website where entrepreneurs can discuss their experiences and discuss financial products. The Business Network comprises 148 blogs with the majority of the content being authored by users rather than HSBC employees. In this instance, it is clear that HSBC is not just creating value through financial products and financial/business advice, in fact the real value sort by customers in this context is the networking tool provided by the Business Network website.

Perhaps the most important piece of evidence in favour of the argument that social media is changing financial services, is that the use of social media by finance firms is now regulated in some jurisdictions. The Financial Industry Regulation Authority (FINRA) in the United States recently released a guidelines outlining how financial firms use social media3. Examining the guidelines it is clear that social media is impacting on how consumers of financial products, and particularly investors, are obtaining financial advice and then making decisions. FINRA places great emphasis on developing accountability within firms for investment recommendations that appear on a firm’s social media platforms, whether the content is created by employees of the firm or by a third party. The broadcast of financial advice over social media channels lets financial firms create value by providing real time news and information to multitudes of customers simultaneously. This type of instantaneous group advice was not a feature of the financial services business model that existed prior to social media.

The majority of people recognise that social media is rapidly changing the world, however, what is less talked about is whether social media is impacting on financial services, a sector that lies at the base of all other industries. This essay has shown that for financial firms, social media is essentially unavoidable, and has provided a new toolbox for firms, and as such has augmented the way in which value is created. Firms use social media to engage customers, which has resulted in blurring of the lines between marketing, troubleshooting and advice. Additionally, firms have been forced to compete on a level playing field, where the quality of advice and products is the key to winning customers. Although the impacts mentioned in this essay are the most visible and most active areas of social media in the present, the fact that both the financial sector and social media are constantly evolving means that the future will hold even greater and more significant changes for the financial services business model.

Bibliography

  1.  http://www.openforum.com/ [viewed 2 June 2012]
  2.  http://www.business.hsbc.co.uk/1/2/start-up-business/starting-your-business [viewed 3 June 2012]
  3.  Financial Industry Regulation Authority, Regulatory Notice 10-06, http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p120779.pdf [viewed 3 June 2012]
  4. http://www.openforum.com/ [viewed 2 June 2012]
  5. http://www.business.hsbc.co.uk/1/2/start-up-business/starting-your-business [viewed 3 June 2012]
  6. Financial Industry Regulation Authority, Regulatory Notice 10-06, http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p120779.pdf [viewed 3 June 2012]