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Digitial Trust: The New Normal

How fintech's position themselves to capitalize on banks' biggest weakness

What does every bank want, few banks have, and some even include in their name? Trust. In its 2Q16 report on the financial technology (fintech) industry, PWC identifies trust as the largest barrier preventing financial institutions from reaching the 42% of global adult population that is absent from the formal financial services system: the un(der)banked and un(der)insured. While lack of trust in established FI's serves as a barrier to traditional financial institutions, it serves as perhaps the biggest opportunity for fintech's. Why do banks have such difficulty establishing and cultivating trust, and how are fintech companies positioning themselves as the solution?

A few weeks ago I had the pleasure to hear behavioral economist Dan Ariely of Duke University deliver the keynote speech at the Council for Entrepreneurial Development (CED) Tech Ventures Conference in Raleigh, NC. TED seems to think Dr. Ariely has a lot of ideas worth spreading, and has produced a number of TED Talks featuring him. Most of his talks deal with the application of social psychology and behavioral economics principles to the real world business environment. In one TED Talk entitled “Our Buggy Moral Code”, Dr. Ariely discusses research he conducted in the aftermath of the financial crisis in attempt to explain the irrationality and greed that led to the demise of our financial system. He concludes that humans are predictably irrational, and substantiates studies demonstrating the negative influence groupthink has on human behavior. Last week’s developments with Wells Fargo, which emerged as the world’s largest bank by market cap after the financial crisis, were an unpleasant reminder of 2008. The 5,300 employees that Wells laid off fell into the same trap that thousands of CDO underwriters fell into during the financial crisis. One executive from the bank said essentially that a few bad apples spoiled the bunch; that there was something akin to the Lemming Effect at work.

Ariely also identifies alienation of bank employees from both clients and money itself (e.g. through securitization) as contributing to an inability to process the implications of actions that take advantage of clients for personal gain. CFPB director Richard Cordray said of the Wells Fargo scandal, “Unchecked incentives can lead to serious consumer harm, and that is what happened here.” In other words, when people get paid more for taking advantage of others, and they are far enough removed to not see the damage first hand, they will take advantage.

Civic bodies are turning to fintech as a solution to the trust issue. This summer the House Energy and Commerce Committee introduced a bipartisan resolution urging the U.S. at large to push adoption of financial technology. Rep. Adam Kinzinger (R-IL) said of the resolution, “As the U.S. is a global leader in both technology and financial services, we must be proactive in harnessing the FinTech revolution and leverage this technology as an opportunity to empower consumers, promote financial literacy, foster economic growth, and forge new markets.” In Charlotte, NC, banking executives, fintech entrepreneurs, and civic leaders have joined forces with Mayor Jennifer Roberts in the Charlotte Fintech Initiative. The 'Mayor’s Initiative' (as it is called colloquially) aims to, “cultivate a collaborative financial technology hub in Charlotte focused on digital trust.” Of note in the Mayor’s Initiative's mission statement is the intent to establish digital trust, specifically. Distrust in the financial services industry doesn’t just stem from the type of dishonesty demonstrated by CDO underwriters prior to 2008 and Wells Fargo consumer bankers more recently. Other sources of distrust in the system stem from the convoluted nature of consumer banking and personal finance management. Banks foster consumer dependence by over-complicating the process of managing, investing, transferring, and spending money, and then charging consumers fees to do it for them. There’s nothing illegal about it, they could just do it better and cheaper. Roboadvisors like Betterment and brokerage platforms like Robinhood slash management and brokerage fees, while delivering a more streamlined interface and better UX. Vlad Tenev, Robinhood co-founder and co-CEO said of millennials after the financial crisis, “People lost trust in the financial system — especially people in our age group.” Entrepreneurs like Tenev are establishing digital trust through efficiency, transparency, and UX/UI.

So for fintech entrepreneurs and banks alike, remember that not only is trust non-negotiable in attracting consumers, it is a key component of your value proposition. Efficiency, transparency, and honesty are no longer consumer luxuries; they are the baseline. Banks cannot afford to stagnate by keeping complicated and inefficient processes in place, much less lose ground through blatant dishonest. With fintech companies focused on establishing digital trust, established financial services players, from banks to insurers to wealth managers, need to find ways to reconnect with the consumer: simply having ‘trust’ it in the company name isn’t enough.

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