By Bob Souster

As service providers, banks deal mainly with money and information. Over many centuries, they have developed great expertise in dealing with money, and in the last century in particular they have proved to be innovative, creating products to meet a whole spectrum of needs to an expanding customer base.

Despite the rapid development and deployment of advanced communications technologies, managing information presents many challenges. This article explores some of these challenges and examines the implications for banks, with special emphasis on their ethical dimensions.

Why is Information Important?

The money held and processed by banks mostly belongs to others, such as customers, accounts payable and businesses. Banks earn the right to deal with financial assets belonging to others through a bond of trust. Account relationships will only be formed and maintained if customers and others are confident that the bank will protect the funds, use them wisely and act in their best interests.

Focusing on customers, it is usually sufficient for a bank to provide information on how a service will meet the customer’s need in order to proceed. This is usually expressed in terms of benefits; as long as the customer has an assurance that a service will meet their needs, they will be unconcerned about the technical features. Even if a service has disadvantages, the customer may still go ahead if the benefits outweigh the drawbacks. Here lies one of the problems when managing information.

In nearly all buyer-seller relationships there will be some degree of information asymmetry. This term relates to the gap in knowledge and understanding between the service provider and the customer. Just as one would expect a motor engineer to know more about the workings of a car than the owner of the car, a banker will inevitably know more about the products and services offered than the person using them. This asymmetry is one justification for regulation of the banking sector, without which less scrupulous banks would be able to sell products and services for profit, regardless of any harm done to the customer. In 2014, the Financial Conduct Authority, a UK regulator, identified information asymmetry as a significant driver of conduct risk.

Fortunately, the vast majority of banks are not unscrupulous, and since the global financial crisis there has been a renewed focus on putting customer interests at the heart of business activity. The crisis had exposed several deficiencies in the banking industry, such as sales of inappropriate products (notably sub-prime mortgages), indiscriminate risk-taking and, in a minority of cases, appallingly unethical behaviour. Banks have had to work hard to rebuild trust and confidence of the public, regulators and governments, and that relies to a large degree on information and how it is communicated to others.

One of the essential building blocks of ethical behaviour is technical competence. The banker has to understand what is right for the customer and that judgement can only be exercised properly if the banker knows the bank’s products, its processes and its customers. However, simply being prepared to identify and anticipate customer needs and then match products and services to needs will only partially reduce the level of asymmetry.

Customer Inertia

In most countries, the majority of customers do not shop around for the best banking products available in the market. Switching accounts to alternative providers takes time and busy people are seldom prepared to expend their time and energy in seeking out what is best for them. Despite the best efforts to develop open banking and reduce barriers to switching, many customers are content to stay right where they are. There are several reasons for this:

Many customers are influenced by current bias, which is the perception of what is best for them now, placing less importance on what could be better in the longer term.

Some customers are driven by mental shortcuts and rules of thumb, influenced by what their parents did or what their friends suggest. This is quicker and cheaper than carrying our product searches, albeit less efficient.

In many cases, customers may take decisions they perceive to be safer. This is one reason why many thousands of customers leave funds in non-interest-bearing accounts for fear of the proverbial ‘rainy day’ when the funds may suddenly and unexpectedly be needed. An ethical banker will respect this, even if they advise that alternative choices could be advantageous.

Despite increases in financial inclusion, many customers do not understand the products and services, and in many cases do not want to understand them, as long as they serve their purpose.

The Role of the Ethical Banker

The factors described above might suggest that bankers need do nothing except perform a passive role in providing information, as and when it is demanded by customers. In fact, it is now more important than ever for professional bankers to reach out to customers and establish ongoing dialogue. Unfortunately, this is now more difficult than it was in the past. When banks relied heavily on physical branches, nobody was better informed that the counter staff, who would have a deep knowledge and understanding of the many hundreds of customers they met every week. With the transition towards digital banking and the rationalisation of branch networks, this personal bond has been broken and the relationship has to be built and maintained by alternative approaches.

This void can be filled in numerous ways. Most banks have customer relationship systems (even if they call them by a different name) and these can be used to build and amend profiles over time. Knowledge workers, including those involved in building management information systems, have a crucial role to play if customers are to take on a persona and not represent a virtual concept. Some banks are now building artificial intelligence systems to model customer scenarios and simulate the decision-taking process in customer advisory scenarios, but the better banks will surely understand that these systems have to be driven by human judgement and not used as a shield to evade individual responsibility.

The Age of Misinformation

Ethical bankers must concern themselves with the quality of information they process and to which they have access. Advanced technologies bestow the gifts of big data and the power to sort it, categorise it and use it as a platform for effective customer fulfilment. The quantity of information is not a problem, but the harder task is to allocate resources in a manner that will increase efficiency in achieving positive customer outcomes.

At the same time, bankers must understand that providing appropriate, correct information might not always be enough. Customers can gather information from a bank that is 100% correct and appropriate to their needs, but they will also gather information from other sources too.

Consider the following information, all posted on social media in the last year:

  • Sir Richard Branson (founder of Virgin Group) is recommending bitcoin as a means of building a fortune (false).
  • Beatles drummer Ringo Starr is dead (false, he is very much alive).
  • Actor Bob Hoskins is dead (true, but he actually died in 2014).
  • UK exports to the European Union (EU) only comprise 8% of total exports, so the UK should leave the EU (the actual figure is 44%).
  • The Swedish government has officially sanctioned cryptocurrencies (false).
  • The Covid-19 emergency in the USA will be over by the middle of March (tragically false).
  • Kim Jong-un is dead (false).

These posts would have been read by thousands and shared with others by some who believed them to be true. Obviously, the majority of these would have been used as ‘clickbait’, while some may have been politically motivated. One question we have to ask is if the global financial crisis had occurred in 2020 and not 2007, what would these media have said about banks, and how would the banks have responded? The only appropriate response is to tell the truth.

Quality of information is key. Banks can publish facts about successful products and services. They can produce codes of ethics extolling their values, beliefs and promises to their stakeholders and publicise their successes. They can also post positive reviews of their services by satisfied customers, but anybody who has stayed in a terrible hotel on the strength of positive reviews will confirm the drawbacks of doing so. Perhaps the safety net can be provided by validating information offered to the public. Some banks do so by commissioning independent feedback on service provision and then committing themselves to publishing it, whatever conclusions are drawn. This is a brave approach, but sometimes bravery yields rewards.

Robert (Bob) Souster is a Partner in Spruce Lodge Training, a consultancy firm based in Northampton, England. He lectures on economics, corporate and business law, management, corporate governance and ethics. He is the Module Director for ‘Professionalism, Regulation and Ethics’, a core module of the Chartered Banker MBA programme at Bangor University, Wales.