In recent years, the most reputable banks have come under fire for compliance violations, civil money penalties, fraud, information security breaches, denial-of-service attacks and inadequate reinvestment activities. The recent financial crisis has magnified their weaknesses and exposed significant flaws in their safety nets. Not surprisingly, customers' trust in large financial institutions is on the decline, as reported in the American Banker article on “The Fragile State of Bank Reputations 2012.
Today, strong corporate reputations are also on the decline. A corporate reputation is largely informed by an organization's people, processes and systems, and in our increasingly mobile, social and global world, reputational risks – those events that positively or negatively impact a firm's reputation – are on the rise, and exacerbated by savvy and hyper-connected stakeholders.
Years ago, a bank's investment in the community and partnerships with local businesses were enough to build and sustain their brand. Banks interacted with their customers face-to-face and cultivated strong relationships with them. This culture of customer service positively influenced a bank's reputation.
Today, most banks engage third-party service providers to process transactions, run their ATMs and provide call center customer support, making banks at least one step removed. With the shift from physical branches to online sites and mobile devices, customers interact more with technology than with bank staff. The problem with this approach is that when a service outage occurs, customers are less inclined to forgive technology, compared to people, because technology cannot apologize. Moreover, if online service providers such as Facebook or Amazon can provide 99.99% uptime, why not banks? Today's customers expect and demand no less.
Today, a bank's reputation is increasingly shaped by regulatory agencies, state attorneys general, the media and online conversations. Initiatives such as the Consumer Financial Protection Bureau's new supervision and examination program and the merger of the Office of Thrift Supervision with the Office of the Comptroller of the Currency have significantly increased regulatory oversight. Meanwhile, the ubiquity of social media gives everyone who has an opinion a platform to share it – and once an opinion is out there, there is no containing it.
In my discussions with senior risk management professionals and chief compliance officers on the topic of "complaints management," a critical component of reputation risk management, furtive glances are exchanged and heads nod.
According to Frank Santora, first vice president of Hudson City Savings Bank, "banks are struggling with the definition of a complaint. If a consumer doesn't like the CD rates and sends a letter, it must be addressed. In addition, some of the requirements around logging call center complaint statistics are creating new challenges for community banks that don't have sophisticated technology. Most banks in the midmarket space are challenged in meeting these requirements."
Banks today are struggling to implement processes that can pull together complaints data from multiple sources for analysis, resolution and reporting. There is also the challenge of interacting with customers, especially when something goes wrong. Customers don't want rehearsed corporate messages. They want engaged conversations, and they want their complaints to be resolved quickly. Oftentimes, customer complaints are warning signals of a deeper systemic problem or "operational risk" in a bank's people, processes or systems, and, if ineffectively addressed, can morph into lawsuits, civil money penalties and regulatory actions that can further hurt a bank's reputation, credibility and profitability.
Banks can successfully manage their reputation risks by renewing their focus on people, processes and systems:
People: Building a corporate culture that embodies the mission and values of the organization will inspire employees to become brand ambassadors inside and outside of the organization. Electing board members and promoting leaders who encourage honesty and transparency will make the entire firm more accountable.
Processes: Embedding education and training deep within an organization will help to enhance the firm's processes and outcomes. By consistently performing self-assessments, identifying issues and correcting issues before they become problems, organizations will be better able to avoid reactive resource-heavy issues management.
Systems: Becoming a "learning organization" requires the development of real-time feedback loops to document gaps in services and products. Organizations can collect data to better track the operational risks that lie at the heart of reputation risk, such as customer complaints.
Operational risks, and therefore reputation risks, need to be continuously assessed and managed with the same enthusiasm as credit risk. Banks that effectively manage their reputation risks will be able to enhance their credibility and profitability, and thrive.
Susan Palm is vice president of Industry Solutions for MetricStream, a provider of enterprisewide governance, risk, compliance and quality management solutions.