The Risky Business of Trust

Trust is so ingrained as part of financial services that we often stop seeing it.  But every time our pay cheque goes into the bank we are trusting that they will not run off with our money.  But conversely, when the bank supplies us with a loan or makes an overdraft then they are trusting that we will repay it on the agreed terms.

Of course, none of this is a given – there is a risk that the bank will not pay out the money in our account.  We are reminded of this possibility at times when there is a banking crisis such as in 2008 when banks worldwide required bailing-out by governments.  Or when there is a technological problem such as that which impacted the TSB bank in the UK when customers could not access their account for days.  However, such is the confidence in the banking system, that we do not experience a ‘run’ on the banks.  This is of course when customers are concerned that the bank will effectively go out of business they rush to withdraw their money, creating a self-fulfilling prophecy as illustrated in the film, It’s a Wonderful Life.

The situation is somewhat different for banks trusting in their customers of course.  Their customers may not honour their commitments to the loan repayment or the overdraft terms.  Although this means that the banks generate revenues through penalties, the preferred option for all parties would be to avoid this.  So, what can a bank do to reduce their risk?

One approach to this that banks have used is ever more rigorous use of credit scoring, essentially calculating the risk of the customer being unable to repay.  These are used very directly to determine outcomes with much less judgement applied by customer service teams than has been in the past.  This is partly the action of the bank and partly the influence of the regulators that are keen to avoid too much consumer credit, as this can have a serious impact on the banking system if there is an economic downturn.

Of course, banks are also in the business of trust, even if they see it in fiduciary terms of risk assessment.  The language and meaning from either side are different but the transaction is the same thing.

There is, however, an opportunity for banks to reduce their risk but it requires them to change their perspective and start to think about the transaction in human, rather than fiduciary, terms.  This is because of a very important but subtle aspect of trust that underpins many behaviours.  When someone places trust in us, then we are more likely to be trustworthy.  So, in a sense, the act of placing trust in another means that the risk, which required the trust in the first place, is reduced.   If my friend loans me his credit card to choose something to eat for lunch then I am more likely to be more careful in my choice of lunch items than if I was spending my own money.  I don’t want my friend to think that he had misplaced his trust, losing his good opinion in the process.    This ‘cunning of trust’ as philosopher Philip Petit put it, means that the risk my friend is incurring from me deciding to buy lobster and caviar instead of cheese sandwiches is much reduced – because of his trust in me.

So, what is the opportunity for retail banks?  In short, it is to stop thinking about trust as something that they are hoping customers will have in them.  In fact, even though consumers may not consider banks to be ‘trustworthy’ (of good character) the levels of churn are very low.  Consumers do think of banks as reliable (a more basic form of trust) and this seems to be what is important for their continued custom – if the low levels of churn in the UK banking market are a reliable guide.

The opportunity is instead for banks to think about the act of lending money, less in fiduciary terms, and more in terms of human trust.  Banks would need to consider how they talk about the fact that they are trusting customers to repay and not simply making bets that they calculate they will come out the right side of.  The cunning of trust means if they are able to communicate effectively that they are trusting the customer to repay the loan then the benefit they may well see is that the customer will be more likely to work harder to do just that.

In a sense, this feels like old style banking with the bank manager looking you in the eye and making clear that they are trusting you to do the right thing.  Except of course banks cannot do that at scale, the numbers have long not added up for that mode of customer service.  What needs to happen is to understand how to embed that mechanism so that it works at scale.  Part of this may be pointing out to the customer the risk that the bank is taking.  Another part of it is phrasing the communications carefully to let the customer that they are being trusted (rather than merely accepted for the loan).

Of course, defaulting on loans or other financial products is not purely a matter of generating good customer intentions.  There is a wide range of ways in which customers can struggle to repay loans, often as a result of events beyond their immediate control.  But nevertheless, this may be one part of the jigsaw that is worth exploring.  Clearly, this is a big shift from what happens now, on a number of fronts:

  • First, banks are keen to build trust with their customers, rather than seeing the dynamic operate the other way around (in that banks place trust in customers).   We suggest that banks start to flip the way they think about this and indeed, as we know from everyday life, the best way to build trust is to offer it in the first place.
  • Second, banks need to move from a purely fiduciary view of the world to one where they understand the delicate and very human nature of trust. There may well, however, be an opportunity for banks to use survey tools and modelling to measure the level of trust they offer and the degree to which the resulting human response reduces the risk for each of their products.
  • Finally, this mechanism requires a degree of transparency by the bank. Perhaps this is less than ‘radical transparency’ favoured by some, which arguably could result in less trust but nevertheless, the notion of sharing even basic information such as credit scoring for loans may require a change in mindset.

This is a call to arms for banks to move to take a more radical view of trust than has been the case to date, which seems to consist of spending large sums on advertising.  Arguably money is better spent on experimenting with ways to manage risk through trust.  It’s a risky business but that’s the only way to build trust.

 

By Colin Strong