Cole, Ricki Lee
Assessing Consumer Trust in the UK Financial Service Industry: A research based analysis of existing measures and implications for improvement.
[Dissertation (University of Nottingham only)]
Over the past 5 years numerous worldwide financial service scandals have plagued the financial services industry (FSI) leading many to believe that the international banking system could be on the brink of collapse. As such, industry experts, consultants and academics have been increasingly interested on gauging the affects it has had on consumer trust and the FSI. While trust is an important aspect in any relationship, extensive research has been conducted regarding this topic particularly because of its importance when there are high costs and/or benefits at stake.
Thus far, existing research has provided for the identification of key aspects that can be used to define consumer trust it in general terms. It has found that the most common factors to consider when defining trust are the presence of risk, confidence and expectations among concerned parties. Because all of these elements are subjective, trust cannot be simply viewed as black and white; have or have not. Therefore, it is important to not only assess whether or not trust exists, but to also determine the implications of trust that lies between the extremities.
The various levels of consumer trust can be associated in part with anticipated actions consumers may take that could affect business, as outlined in section 3, although they cannot always be accurately predicted as such. However, measuring these varied levels of trust is complex and oftentimes difficult to measure as there are many underlying factors that can sway one’s own view of trust such as an individual’s past experiences, preferences and their adversity to risk. The most effective and efficient way to measure trust is through conducting surveys however it is not without limitations. The ambiguity of trust in and of itself is one of the primary limiting factors in obtaining accurate measurements while additional factors, such as socio-demographics, survey environment and cognitive abilities have also been found to influence a respondent which can lead to skewed results.
These research findings and measures of consumer trust are of importance to companies and the general economy because of the value it can add to forecasting. For example, should a company find that consumer trust is high; they are more likely to attain forecasted goals of (a) cross-selling additional business to existing clients and (b) generating additional business through client referrals and vice versa when trust is low. Furthermore, understanding consumer trust levels can also lead to improved regulatory and policy principles leading to a long-term benefit to society while on the other hand, low trust can discourage innovation as resources may need to be diverted to marketing and strategy departments in order to work on improving consumer trust.
That being said, calculating the precise value of trust and its affects is quite complex and difficult as one would have to account for the costs associated with losing the customer due to trust, potential losses on prospective customers due to a lack of trust or negative WOM and the added costs of obtaining a new customer. The most efficient way to obtain a broad estimate of the value of consumer trust is to calculate the cost of losing a customer. This can be done by using the Customer Lifetime Value calculation for current consumers which takes the average annual revenue per customer times the average annual gross margin per customer and divide’s it by the average annual churn rate. This calculation can then be compared to the estimated CLV of new customers to determine the underlying cost of losing a consumer. However, this calculation does not take into consideration only those customers that have been lost due specifically to a loss in trust.
From an economic perspective, Zak and Knack (2001) claim that “trust and the social and institutional factors that affect it, significantly influence growth rates”. However, when comparing the above referenced historical events and their affects on GDP to the consumer Trust Index over the same period of time (see figure 12), we find that there are no obvious parallel fluctuations. These findings indicate that consumer trust does not directly affect GDP. Perhaps we can then conclude that GDP growth/decline can then be an additional factor that influences trust.
Other factors that have been found to influence trust are the media, poor regulation, political influence, openness and transparency. The Trust Index also identifies expertise and competence, integrity and consistency, communications, shared values and concern and benevolence as contributors to consumer trust. This particular research found that consumers trust in their own financial service institution (59) more than in the FSI as a whole (45), with brokers/advisors being the most trusted for both categories.
Surprisingly, this Trust Index study does not show a correlation between consumer trust in the industry and the recent economic crisis as the trust data has not fluctuated in conjunction with the media driven exposure of poor banking practices and scandals. This could be attributed to the questionnaire itself as it was initially developed pre economic crisis (2005) and has only been slightly adjusted since. Although there is something to be said for collecting the same data over an extended period of time as it can provide a rich historical account of consumer trust trends, in this technologically driven era where information is readily available, consumers are becoming more aware of the societal impacts of business conduct, therefore their values and preferences as to what factors makes a company trustworthy can change rapidly.
In another research study conducted by YouGov in 2012, the consumer data they collected regarding current levels of trust mirror that of the Trust Index findings as their research shows that only “53% of consumers are willing to trust any bank or building society” (2012). The focus of the remainder of their study was rather different from that of the Trust Index as the focus was more on discovering what defines trust and what measures can be taken to improve it. They find that consumers view the exacerbation of underlying issues, the misalignment of interest between the banking sector and its customers, and the structure/culture of the industry as key contributors to the mistrust of the industry.
In a sister study conducted by YouGov of FSI, executives also attribute the loss of trust to biased media attention that focuses on the negative aspects of what has gone wrong without following up with stories on the positive attempts to create better practices and recreate trust. They also find that executives in the FSI believe trust has been eroded due to poor legal practices that have lead to an increase in ineffective regulation, increased costs and general deterioration in relationships between institutions and consumers.
Further academic and consultancy based research has found that in order to restore consumer trust, the industry and its companies need to focus on: improving ethical standards and code of conducts to provide for better business practices, providing consumers with sustainable products and innovative technology, improving consumer education and communication, revamping policies and regulatory enforcement methods, and developing a more consumer-centric structural change of company culture and values.
All of that considered, this research has lead to the development and proposal of a Trust Balance Framework that utilizes a multi-method approach of conducting both qualitative and quantitative research methods in order to provide institutions within the FSI with an all encompassing method. The aim of this framework is to attain a company specific assessment of consumer trust and a guideline on how to continually improve on maintaining consumer trust.
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