Main menu


Flaws in our thinking mean banks can do without our trust


The reputation of the finance industry, and those working in it, remains toxic to this day: many finance professionals at all levels say they are deemed “guilty by association” and the popularly expressed sentiment is that not one of them can be trusted.

Well, maybe it’s not quite that bad. Last year’s Edelman Trust Barometer, an international survey on trust, found that “banking” is not the least-trusted industry. It came second from bottom, trusted by less than half of respondents (49%). The only problem with this optimistic reading is that only “financial services” came out worse (with a paltry 46%).

Several banks are apparently busy, or trying to appear busy, working to recover their lost or damaged reputations. Goldman Sachs pledged reforms in the wake of the SEC’s US$550m fine in 2010 over the dubious “Abacus” deal, while the mandate for the 244-page Salz review into LIBOR rigging, PPI mis-selling and other allegations at Barclays was to help the bank “rebuild trust”.

Several banking adverts can be interpreted as carrying explicit or implicit messaging around trust. A personal favourite of mine is NatWest’s noble declaration: “If we spilt coffee on your carpet, we wouldn’t cover it with the rug”. They might deny it was them, or blame you for not having laminate flooring, but still… it’s arguably an improvement.

Understanding trust

Governments and regulators, chastened by their complicity or failure of oversight, have sought to introduce revised rules and procedures, and edicts, to encourage, cajole or – failing that – coerce the banking profession to be more obviously trustworthy. Yet, while some legislation appears to have had a modest impact, notably the Dodd Frank Act in the US, other institutional responses have been sidestepped with predictable contempt. That includes, most recently, the EU’s ill-judged bonus cap. The widespread impression is that very little has changed to give customers and investors and regulators confidence in bankers again.

No wonder trust in the industry is so low.

My view is somewhat different: An alternative reading of what is happening in our relationship with banking, based on what research tells us about how trust is built and repaired, suggests that trust in banks – in one sense of the word – is astonishingly high.

To see why, we need to consider the nuances of this superficially straightforward but essentially complex thing we call trust. After decades of research from sociologists, psychologists and economists most scholars would argue that trust, properly understood, can be defined as confident reliance on another party, on the basis of positive expectations of their likely future conduct.

Trust is a three-stage process, beginning with an evaluation and a judgement call about the other party’s conduct and character: the evidence for their trustworthiness. This is typically broken down into three, sometimes four, characteristics: their ability (technical competence), their benevolence (motives and interests), their integrity (honesty and fairness), and their predictability (consistency of behaviour). All need to be high enough to generate the confidence to trust, but some dimensions will be more important than others.

If we have enough evidence to trust, we tend to move on to the decision to trust: the willingness to render ourselves vulnerable to the actions of the other party. We then demonstrate this – we make the decision real – by actually taking a risk. We do this by authorising them to act on our behalf, sharing or even surrendering something important to them, collaborating on a joint venture, or associating our reputation with theirs, for example. The outcome of that behaviour feeds back fresh evidence of their trustworthiness – and so the cycle continues, whether of reinforced trust or distrust if our vulnerability is abused.

The three stages are important, because what I see happening is this: people say they don’t trust the banks, but their behaviour suggests otherwise. If there really has been a collapse in trust in banks, it should be utterly reckless for people to leave their money in the hands of the institutions implicated in the global financial crisis. We should see mass withdrawals and transfers to alternative operators: more reliable or less tainted. In the UK, this would be the building societies (mutually owned financial companies, often owned by their customers). It only takes a week to transfer all your accounts in the UK, but this critical mass of revulsion has not fully materialised. There is no sign of panic among the major retail banks.

The sequence breaks down

In trust terms, there is therefore a curious disconnect between the “beliefs” stage of trust, and the “decision” and “action” stages. The expected sequence isn’t being followed. People’s risk-taking behaviours – allowing people they label as “thieves” and “liars” access to all their money – belie their espoused beliefs. So, what explains this gap between what people say they think, and how the same people act?

Models of trust suggest two explanations: people’s distrust of banks is an opinion based on an evaluation of the banks’ trustworthiness, but the risk-taking act is still viable because protections are now in place, from national and trans-national government bodies, that enable people to feel that their money is apparently safe. The banks can be deemed untrustworthy, as long as the financial system has been rendered more trustworthy by external agencies.

Another reason is that the apparently irrational risk-taking act of keeping one’s money in a distrusted bank is because that bank is still providing an economically beneficial service, and/or because there are few other options. Again, in the UK, we are fortunate to have a genuine alternative. Several colleagues of mine in European countries envy us.

These are under-explored dynamics. The banks may not be trusted, but despite public efforts, few in the retail arms seem to be losing much sleep. The challenge for researchers and policy-makers is to understand what might prompt real change. What we need is a “market for trustworthiness”, rewarding the capable and decent banks (and allowing them to be profitable), while showing intolerance for deliberate and systematic abuses of trust. Internal reforms and external governance are struggling to create a creatively destructive impetus for change; now, surely, it is the customers’ turn.