The financial crisis of 2008 spawned not just a deep recession but also a structurally different business environment globally. This restructured economic order, requires some new thinking, particularly for retail banks.
Many retail banks responded instinctively to the recession, without giving any thought to the aftermath of their actions, and there is a growing perception they have violated their 'social' contract with their customers.
When banks are acquiring customers, they make promises of service and understanding, position themselves as suitable partners for the long term, especially when it comes to buying major assets, such as houses and cars. Customers commit themselves to the relationship by signing up for twenty-year bonds.
Up until mid 2008, it was rational to assume that a customer who didn't pay back a loan was unwilling to, or incapable of doing so in the very short term, through incompetence or poor planning. It was also perfectly reasonable for a bank to divorce a client that wasn't committed to the mutually beneficial aspects of the relationship.
When the crisis loomed, many people were retrenched and entrepreneurs, who had been successfully trading for years, suddenly hit a brick wall, where money just stopped coming in regardless of what they did.
Banks responded in a pre-crisis manner, based on the economic assumptions that non-payers were the bad guys. They came down harshly on offenders, foreclosing, handing over to debt collection agencies, used only to dealing with recalcitrants, harassed and heckled already devastated clients, whose only fault was not to have foreseen a recession when even the economists didn't see it coming. Their way of helping customers was to offer quick sells of customer's homes before handing them over to the courts. They reported gleefully of moving more inventory through the system.
What they effectively did was to kick their customers while they were down and then grind them into the ground. Banks should have looked at this as a relationship-building opportunity and demonstrated that customer loyalty was not misplaced. Instead, they alienated a captive audience, who though they might not have been happy, was unlikely to have migrated in droves away from their respective banks.
Had the banks taken a long-term view on their client relationships and their financial position, they could have operationalised a single view of customer strategy and considered the customer as the complex entity he or she really is. This would have enabled them to rationalise their exposure to the customer's risk and facilitated the renegotiation of the terms of their relationships so that the customer would retain their lifetime value to the bank, instead of squeezing them for the present value in a recession.
Take for example, a regularly paying bondholder who has been with the bank for ten years, he hits a problem in the global recession. Judging by his history and paying behaviour, he is likely to get back on his feet in the next twelve months and resume repaying any loans regularly. His house is still worth more than the bond, mitigating the risk that the bank will not be able to recoup its money in future.
It makes more sense to arrange for a 12-month payment holiday and raise his or her interest rates by 2%, for the rest of the bond period, thus retaining the lifetime value to the bank, rather than auctioning off the house at 50% of its value and alienating the customer, even when he or she has been rehabilitated. Moreover, incurring the cost of acquiring an unknown customer from another bank, which has similarly disenfranchised its relationship?
The banks add insult to injury by managing their collection processes so badly, that once they have collected their debts in full (and some blood, just for good measure), their alienated and bruised customer keeps receiving SMS from the lawyers threatening judgements if they don't pay up.
Many banks do not understand their customer's footprint across their financial institutions. In fact, some banks are set up on the Owner-Entrepreneur model, because in good times this facilitates the accountability and entrepreneurial behaviour that agile companies need to succeed. In the past this was a risky practise because it meant that the bank would miss out of cross and up-sell opportunities. Today the risk is much higher.
Many banks, who noticed a change in consumer behaviour when the economy turned, panicked. They exacerbated the problem at every client interface, by freezing overdrafts and making them due immediately, or by freezing access bonds, so that the customers who could have made payments on most of the accounts or were at risk of falling marginally short on payments, (for example meeting 90% of their commitments to the bank) were tipped into the emotional and financial abyss of bankruptcy. Where they could have had the car repossessed and saved the house, they lost everything.
The banks did not consider that the inventory that they were “flushing” through their system was the life and heart of their customer, their home, the place where they loved and celebrated, brought up children and created a lifetime of memories. Customers are not going to be so quick to forgive banks, so the cost of acquisition and creating loyalty amongst customers has just escalated.
The breadth and depth of today's reputational challenge is a consequence not just of the retail bank's instinctive responses to the speed, severity and unexpectedness of recent economic events but also of underlying shifts in the importance of Web-based participatory media, or web 2.0.
In Part 2 of this article we look at how social media can mitigate some of the damage that banks have perpetrated on their own brands.
