Coping with a Banking System in Distress — A Consumer’s Angle

While following the news on the global banking crisis, mainly in the US and Europe, I have growing suspicions that a fundamental role of the banking system is being left aside unwarranted: safekeeping the money of the public. Particularly, retail banks are meant to provide people a safe place to park money they earn, then draw money gradually as they need to cover their expenses, and saving the rest in programmes that allow them to increase their financial assets for the future. In the time that clients are not requiring their money in cash, banks can give loans and serve more customers under certain conditions that guarantee sufficient liquidity. It has been rather implicit that banks may invest and employ the money in different ways that increase value for the bank. While many retail banks encourage the consumers to let the money in their bank accounts work for them, it appears that in recent decades banks have made money work better for the institutions (and their executives) than for their customers. Worse than that, they have put the banks at great risks as can be seen these days.

Truly, there is a lot of talk about re-capitalising the banks, restructuring debts, and lowering risk levels. These are essential measures to stabilize and heal the banking system, but those talks are held at a level quite remote from most consumers. The effects of these measures are not clearly apparent to “average” account holders, and it may also take a considerable time until those effects are evident in the safety and behaviour of the banks. For example: what effect consumers may perceive of the separation between investment banking and private banking?  As policy makers and chief financial experts do their best to fix the ailing banking system, a problem of eroding consumer confidence in the banks shows signs of getting just worse. Therefore, bankers should not wait for the higher-level “macro” problems to be fixed and thus regain public confidence; they should start attending to consumer concerns right now.

In working towards strengthening the confidence and trust of domestic customers in their banks in due time, I would like to draw attention to three areas requiring treatment:

Saving plans — This is the time for retail banks to offer customers relatively simple plans for securing their funds for a medium term (i.e. 2-3 years) even though interest rates are currently only modest. The effort of banks should therefore be directed to offer better terms as possible in plans developed within the bank. Their aim would be to install confidence in customers that their money is protected for the time being, and until conditions in financial markets improve. It is a less appropriate time to push more complex and riskier schemes that are reliant for instance on future values of currencies, share indexes or precious metals. It is not the risk at issue which I would like to address here but the complex, often tricky, rules and conditions such schemes entail, which may alienate more customers (i.e., consumers tend to resent ambiguity and doubts). It is better to demonstrate a more  straightforward and transparent approach in the current situation to regain trust and confidence.

Commissions — This a specially thorny issue that upsets many consumers or bank customers and increases tensions. Commissions are effectively the prices charged for a variety of banking services, whether on a periodic basis or per transaction. In Israel, a government committee several years ago forced the banks to reduce the number of commissions they maintain because customers got completely lost in the many accumulating commissions and could not understand them in their bank statements. This has led to some improvement, easing the burden on the domestic customers, but it was soon after revealed that by grouping the commissioned services into a smaller number of categories, the average commission in new categories has actually been raised. According to data published in an Israeli business paper (TheMarker), the income of the five main banks in the country from commissions reached in 2010 14bn sheqels (~€2.8bn), a little more than 20% related to handling current accounts; the net profits of those banks in 2010 stood at 6.6bn sheqels (~€1.1bn).  In the current atmosphere of protest, consumers have quickly linked those commissions with reports about high profitability of the banks and high salaries and bonuses of top bank executives. The Israeli national student union already declared this topic the next target of their campaign (TheMarker, 17/10/11). A reform in Israel some five years ago that decoupled retail banks from managing mutual/equity funds and pension funds may have actually drove banks to increase commissions in compensation for lost gains from investment activities. This matter should be dealt with wisdom and sensitivity to avoid the next crisis in other countries.

Advisory service — Banks should be ready and available to provide advice and guidance on how to manage budgets and protect funds (particularly in these troubled times) to any clients interested (e.g., customers with less economic background who require some coaching or guidance). Detailed and interactive guides may be made available for self-service in a website. However, staff should not be too quick to refer customers to a website but rather allow more time to talk face-to-face with them and foremost listen to their queries. Overall, banks have these days to work harder to make their customers believe that they work in the best interest of their money in the bank. Many consumers may still prefer not to trust their personal and household financial affairs with their bank but it is still worth the effort for the bank to show goodwill to aid their customers.

It is undoubtedly essential to stabilise and amend the financial platform on which banks operate as a pre-condition for their healthy functioning in the longer term. It is also vital, however, to work towards solidifying the confidence of consumers in the banking system, specifically the retail banks that maintain and handle their personal accounts. This task should not be deferred until after fixing what appear to be the more fundamental financial weaknesses of the banking system.

Ron Ventura, Ph.D. (Marketing)


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