Weekend Reading: Banking on Trust

By: Stephen J. Scott , Founder & CEO of Starling

This piece first appeared in Starling Insights' newsletter on April 26, 2024. If you are interested in receiving our thrice-weekly newsletter, among many other benefits, please consider signing up as a Member of Starling Insights

To start this one, let’s raise three cheers for "cranky" old fintech journalists…!

Last week, Deputy Editor of The Banker , Elizabeth Lumley , penned a superbly grouchy article in which she griped about the trite "tech-bro speak" that prevailed at a recent London fintech roundtable. Too often, she complained, the fintech crowd offers cranky journalists "superficial, cliché-ridden, corporate-communication-approved answers to real questions about the impact of regulations, and the role these new services play in wider society."

Banks, and banking, play a critical role in society, and discussions regarding industry innovation should reflect some awareness of this. "Banks have trust, trust with our money, because they are secure, regulated entities," Lumley rightly observed.?

Industry innovators — in fintech, regtech and suptech alike — would do well to take note of just how challenging it is for traditional players to retain that trust.

In a recent survey of more than 75,000 people based across 32 nations, data and business intelligence firm Statista found that trust is regarded as the most valued aspect of banking, across every country surveyed.?

That should hardly surprise. The 'banking turmoil' of 2023 — which saw the failure of a few large US regional banks and a near-death experience at Credit Suisse, a Global Systemically Important Bank — serves as a sharp reminder of what follows when customers, investors, and the public lose faith in financial institutions.

Precisely just how trusted, and trustworthy, banks in fact are, however, remains unclear.?

Statista found that, on average, customers believe their banks to be trustworthy, giving them a score of roughly four points out of five. But while these findings may spark optimism, they are far from definitive. In its own survey, research firm Forrester found that, among the 10,000 US adults it canvassed, trust in US financial institutions was fairly weak. And in the EU, Forrester recorded a similarly low trust score. UK banks benefited from a marginally higher "moderate" level of reported customer trust.?

Somewhat surprisingly, perhaps, the US was the only jurisdiction in which Forrester found a measurable improvement in average trust scores year-on-year. This conflicts with the most recent annual reputation survey conducted by the American Banker , however, which found that — among customers and non-customers alike — US banks saw the highest decline in positive sentiment reported in the last five years.

Given the well-established importance of trust to the sustained full functioning of our financial system, these numbers are sobering. And their lack in consistency is additionally troubling — such discordant results make it difficult to assess what's needed to improve things.

In an attempt to resolve this inconsistency, in June 2023, the US Office of the Comptroller of the Currency (OCC) requested comment on a proposed annual survey that would seek to measure, understand, and track public trust in banking and in banking supervision.

"The OCC recognizes the public's trust in banks is an important aspect of a thriving and stable banking system," the request read. "By surveying the public, the OCC can use the results to identify areas where trust can be further enhanced and gain insight into the many aspects that are important to consider in working to maintain and enhance trust in banking and bank supervision."

In our own response to the OCC's consultation, we emphasized that trust in banking, and in bank regulation, starts with the trust dynamics that characterize organizations.?

For the regulator and regulated alike, the conduct that prevails in an organization flows from the behavioral norms that prevail. And people in any organization most often take their behavioral cues from their most trusted peers. So trust with external stakeholders is in many respects derivative of the trust relationships among internal stakeholders.?

"The social circumstances in which people find themselves — their social networks, and the norms of behavior those networks encourage — are extremely powerful forces in motivating behavior, and frequently far more powerful than monetary incentives or individual desires," we wrote, recommending that the OCC seek to incorporate some assessment of these "Community Factors," as we termed them, into its measurement of organizational trustworthiness.?

Customers have a limited view into the governance and operations of their banks. Faith in those institutions is thus derivative of the personal experience one has in working with a firm and — perhaps more importantly still — the experience that trusted peers report having had.

When trusted peers lose faith in a firm, that distrust spreads among other trusted peers in a contagious network effect. One need only look to the run on Silicon Valley Bank and the social media frenzy that surrounded it to see such behavioral contagion at work. Trustworthiness is not static, so any approach to measuring it that fails to account for these "Community Factors" may well miss out on a key vulnerability. Perhaps the key vulnerability.

Consider the false account scandal at 富国银行 . That misconduct took place among employees who likely modeled their behavior on what they routinely witnessed among an internal community of trusted peers.?

Now consider the external community effect. In the American Bankers' aforementioned reputation survey, Wells Fargo ranked second-lowest among its customers, besting only First Republic Bank, which collapsed during the survey period. And among non-customers, Wells Fargo was ranked last.?

Behavior encouraged by an internal trust network — opening false accounts — has triggered ongoing behavior across external networks of customers and would-be customers who are joined in their ongoing distrust of the bank and their far greater trust in one another's shared opinions of it. "Community Factors" at work, inside and out.

As we have chronicled over the past six editions of our annual Compendium, executives and supervisors in the traditional banking sector struggle to put these ideas into practical effect. Hence an ever-increasing attention, globally, to the culture within firms and the consequences it may have for trust in those institutions.?

These struggles continue, seemingly unabated, as we will discuss in the upcoming 2024 edition of the report. Industry innovators more interested in "pro-speak" than "bro-speak" may want to give it a glance. We certainly hope it will help Ms. Lumley, at least, to feel a bit less cranky.