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The 3 determinants of reputational risk for banks

The financial services sector is experiencing a period of intense disruption and evolution. As it grapples with challenges ranging from automation across its value chain to the development of fintech and a pronounced shift in the ways in which consumers expect to access services. While dealing with these medium- and longer-term issues is clearly key to a bank’s sustained, future success, the retail banking sector, in particular, must not allow the focus to slip from more day-to-day reputational challenges.

Reputational risks for retail banks are:

In this piece, we take a look at three of these determinants of reputational risk for retail banks.

1) Executive conduct

For individual financial institutions, one of the most powerful reputational risk issues is a disgraced senior executive. The image of the friendly bank manager, who knows your face, your middle name, your dog’s birthday, and who helped you to get your first mortgage, jars with that of the CEO caught fiddling the books or demonstrating a lack of moral fibre.

The 2013 scandal surrounding Co-op Bank chairman Paul Flowers, following his use of illegal drugs and male escort agencies, had a severe impact on the bank’s reputation at the time – overshadowing even its weak financial results – as well as causing repeat damage years later, when the story was dredged up in 2017 as the Co-op was looking for a buyer. Analysis of Co-op monthly sentiment scores at these key times by alva shows just how central executive behavior is in reputation management.

2) Cybersecurity

You wouldn’t expect anyone to trust a bank with their hard-earned money if it can’t handle its own finances, so a financial institution’s bottom line is also the foundation of its reputation. Likewise, people expect a bank to keep their money safe, so data breaches and phishing attacks are particularly harmful. While cybersecurity is key for any organization, the communication channels between banks and their customers are particularly tempting targets for scammers. And no wonder, as according to trade body UK Finance, British banking customers were defrauded of £1.2bn in 2018.

Firewalls and increased cybersecurity might protect their data, but customers can’t see them at work. The most effective approach from a reputational point of view is being open about the risks and educating customers on how to protect themselves. Barclays has had success with its, frankly chilling, TV campaign highlighting how easy it is to be fooled and into giving up account access details.

3) Banking sector reputation

As well as individual threats, the sector as a whole is vulnerable to reputation contagion. Peter Mitic, head of operational risk methodology UK at Santander, and an honorary professor at University College London coined the phrase ‘network drag’ for the knock-on effect of a drop in one organization’s public rating due to negative events on the rest of the sector.

In a study of 10 top UK banks, using alva’s daily company reputation ratings, he found that some banks saw a decline of almost 24% in their corporate reputation score, entirely due to something that happened to one of their rivals.

Mitic did find, however, that banks with a very good reputation could mitigate the effects of those with a poor public persona – with a reputational boost of over 40% in some cases thanks to positive work by their peers. So as long as there are some good apples, the whole barrel needn’t go bad.

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