Social Media

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Amro Sarafy's picture

While although the fundamental business model of financial services companies will remain largely intact in the face of the meteoric rise of social media, the impact is non-negligible as financial firms will seek to incorporate it into their strategies. Social media, through the internet and mobile phones, turns communication into instantaneous dialogue between parties, and is entirely ignorant about boundaries. What is more is that social media is increasingly reaching more parts of the world thanks to the facilitated accessibility of the internet: the growth of the number of internet users in Africa between 2000 and 2011 has been almost 3000%, while the Middle East saw a rise of 2244% over the same period1.

The Middle East is a glaring example of how social media can affect financial firms, especially in Wealth Management and Islamic Finance, of which the latter is growing at more than 10% per year2. Social media, in many ways, launched and facilitated the Arab Spring. Empowered by this quick diffusion of information, populations across the Middle East rose, synchronized, and in several cases, removed long entrenched dictators who historically monopolized, among many things, telecommunications. The ability of Arab populations to quickly communicate to one another was vital in coordinating against and circumventing government plans to quash peaceful protests. Social media allowed ordinary Egyptians to hear about Khalid Said, who was brutally and fatally beaten by security forces, which led to the January 25th 2011 protest that eventually came to be known as the start of the Egyptian Revolution. Even before that, it was social media that spread the word among Arabs about Mohamed Bouazizi, the young Tunisian in despair whose act of self-immolation would forever change the Arab world. Suddenly these oppressive governments could no longer monopolize the flow of information, it was now at the fingertips of the average citizen. The Arab Spring however is not without economic consequence, costing the region almost $100 billion since its outbreak3, and financial firms have undoubtedly taken note.

Financial Services firms, who invest heavily in the Middle East and other regions that yearn for democracy know that a domino effect is all the more real and unpredictable, given the empowerment social media accords. Financial services firms traditionally talk about exchange-rate risk, business risk, counterparty risk etc, but there will be much more talk about status quo risk”. Social media has given people never-before understanding of democracy and freedoms, and has also given them a powerful tool to pursue that dream. Few, if any, analysts in 2010 could have foreseen Hosni Mubarak being sent to jail for life in 2012. Thus social media has the ability to make what we confidently understand today completely inaccurate tomorrow.

However, the ability of social media to give people a tool to mass coordinate is not restricted to non-democratic countries. Social media helped spread the word about the Occupy Wall Street movement that, in many ways, also demanded a change in the status quo and spawned copycats worldwide. However, social media was also used to stow anarchy when it allowed many to coordinate riots in London in the summer of 2011. This all the more amplifies social media’s reputation as far-reaching in terms of locations, and motives for use; this reputation is well on the radar of financial firms.

Social media is itself a revolution because it is really a “Consumer-generated Media”. In a sense, it has now allowed the average person to advertise themself, flipping the script on firms and sending them scrambling to find ways to reach these consumers and learn more about them. Now it is true that consumer data and advertising on social media such as Facebook is more useful to a firm like Proctor & Gamble than to Goldman Sachs for example, but financial services firms are definitely not turning a blind eye to the phenomenon that is social media. This is backed by a recent study that covered 90 firms spanning the finance industry entitled “Social Media Leaders”4. The report cites, for example, online stock brokerage firm, Zecco, that allows customers to trade through Facebook, while financial advisory firm, Ameriprise, allows a search tool for financial advisors on Linkedin. Also cited was Vanguard, the Asset Management firm, who was the first of its kind to engage in social media, having created, in 2009, a blog that offers analysis from the firm’s senior managers. The report goes on to highlight a key dramatic change: during a similar survey in 2008, they found that only 20% of firms in Financial Services had a significant social media presence, but by 2010 that percentage skyrocketed to 90%, and is currently at 92% in 2012. So indeed firms in the financial services sector are increasingly using social media, however it is important to note a subtle distinction: these firms are merely incorporating social media into their strategy, rather than revamping their fundamental business model.

Financial Services companies engage in many activities, and often these activities involve complex financial products and trading, but at the end of the day, put simply, they just manage money. The very nature of managing money is not very directly tied to social media. For instance, a company like Walmart would benefit immensely from advertising its products on Facebook, and to also gather consumer data about Facebook users so that it can better position itself. On the other hand, Citigroup would not see much of a value in advertising swaptions on Facebook. Whatever benefit derived from social media with respect to financial services firms is largely from reputation. Yes, it is true these firms can advertise their interest rates, savings plans etc, but such advertising is not at the core of the business model for financial firms like it is for Apple, Walmart etc. Financial services firms rely heavily on institutional clients and private banking; Citigroup is not going to advertise “does anyone need a mergers and acquisition done soon?” on Facebook. Financial firms have their established and prominent clients who are all well aware of the selection of financial firms available. Thus, money management does not need to be advertised, but it’s reputation is in a public relations crises, especially since the onset of the 2007 global financial crises, where the banking industry has struggled to shake its image as the poster child of excess and greed.

Social media provides a medium for these firms to directly and cheaply reach out to average citizens. Such outreaches can go along way in bolstering an image of social responsibility. Firms in financial services can use social media for the purposes of everything from recruitment to community outreach to global competitions such as Credit Suisse has done through Project Firefly. The competition has reached audiences beyond the field of economics and finance, audiences who would otherwise generally not be reached by Credit Suisse. But fostering an image as a sponsor of a program that encourages creative-thinking and exchange of ideas is really an invaluable goodwill for Credit Suisse.

Without a doubt Financial Services firms are keen to incorporate the rise of social media into their strategies so that they are not caught flatfooted during this technological revolution. Additionally, these firms will certainly be assessing the impact of social media on the environments in which they invest and operate, and how this translates into risk and opportunity for them. However social media will not change their fundamental business model, it will only add to one of the endless factors financial services firms must take into account before transacting. This is because social media has allowed the average citizen access to information that spreads like wildfire, and this citizen has in turn used it for everything from scrutinizing firms (e.g BP) to launching revolutions. By incorporating this reality into the way they conduct business, financial firms will be better positioned to anticipate changes, communicate more effectively and directly to the public, and react appropriately.

Social Media has forever changed our world: it has facilitated the flow of information to the average citizen, empowering them. As this “informational advantage” was traditionally enjoyed largely by governments and large corporations, financial firms will now look to adapt to this change in the balance of informational power. However, just as it has empowered average citizens, social media gives financial firms a better gage to more comprehensively understand the environment in which they operate. Thus, while social media has shifted the balance of informational power, it has also empowered financial firms; and while it will feature more and more prominently in the strategies of financial firms, social media is likely to leave their core business model untouched. After all, it was just in April of 2012 that Facebook itself went to these very same financial institutions asking them to do what they fundamentally do best: manage money.