The Trust Issue Effect On Banks

In the September edition of its Road to Recovery report, MasterCard sought to uncover why consumers bank where they bank, but with a focus on one specific aspect: why a single consumer maintains multiple DDAs (direct deposit accounts). The answer comes down to the fact that, although consumers trust their banks, they don’t trust the safety of their money — in any one account — in today’s post-financial-crisis and high-cybercrime era.

As Theodore Iacobuzio, VP of Global Insights at MasterCard, recently discussed with MPD CEO Karen Webster, the fact that this consumer fear is largely an irrational one doesn’t make it any less of a reality for banks to deal with. He dove into the details of what’s behind consumers’ fears, and the ways in which financial institutions can assuage them.

KW:  One of the questions raised in the September edition of MasterCard’s Road to Recovery report was: Why in the world do so many U.S. consumers maintain multiple checking accounts? What have you found?

TI:  It’s really very interesting. This is something that vexes bankers across the country, and I’m hearing it more and more:

“We know we’re not seeing all of our depositors’ liquid assets. We know that they’re not going into savings accounts, because the interest rates are so crummy. Anybody who’s trying to save money is not going to send them to somebody who’s got a tenth of a percent better CD somewhere — that may account for a very small percentage of where the money’s going, but we’ve surmised that most of it is going to other DDA accounts.”

The question that banks of all sizes want answered is why — and that’s the question we asked in the September report.

The answer, frankly, gobsmacked me.

It turns out that consumers, by and large, don’t know how safe their money is. With everything that they read in the newspaper or online or see on TV about hacks, they know that if their money’s gone, it’s gone. They may or may not understand about the FDIC protection, but they figure they’re safer if they maintain separate DDA accounts — or at least they feel it’s a way to hedge their bets.

I would never have guessed this as the reason. I had thought consumers were well aware of the protections that were in place for their liquid assets at the bank level. But in fact, a surprising percentage of consumers are suggesting to us that they are not aware of this.

The good news is, of course, that this is something banks can fix. They can do so by constructing new product typology and by making sure that consumers are educated as to how safe their money is.

KW:  Is this new, or has it always been this way?

TI:  That’s a great question, and that’s something that we can discover with further research.

I don’t believe that it predates the existence of the debit card, nor do I believe that it predates — by any significant stretch of time — any of the more spectacular hacks that we’ve seen.

Remember that the hacks that we’ve seen have by and large been either at the point of sale or at the point of interaction with an ATM. It has not been a question of someone draining a consumer’s checking account. Identity theft is probably what these people are worried about, but I don’t think they’re making the distinction in their own minds. Because if your identity is stolen, your identity is stolen as the depositor at Bank “A” as well as the depositor at Bank “B.”

I do think that there is a great deal of alarm as to how safe their liquid funds are, and this is something that banks can address through product design, information and consumer education.

KW:  I think you’re right. But I also think — and I’m sure you would agree with me — that sometimes perception is harder to change than reality. It may take time for consumers to truly believe it, because it’s almost remarkable that consumers harbor this fear given, as you point out, there’s never been an incident.

TI:  You’re absolutely right. Perception, in this case, is reality.

I have blogged on my own site, Global Insights for MasterCard, about the very real presence of irrational behavior and attitudes on the part of U.S. consumers when it regards their money.

I was recently at a very informative event in New York called “America’s Customer Festival,” which was all about online marketing. There was a panel that included a representative from Thorntons, a big independent gas station/convenience store chain. He told a story about the man who went to the ATM and spent $2 in a foreign ATM fee in order to save $1 when he gassed up his car using cash. That kind of thing happens all the time. He said, “You won’t believe how crazy-irrational people are with their petroleum purchases.”

My feeling is you won’t believe how crazy-irrational people are when it comes to their money, as well.

The notion of Adam Smith’s “Economic Man” — this frictionless braniac who’s out there making perfectly rational decisions and doing absolutely everything in his own self-interest, all the time — is a creature of myth. He doesn’t exist. When it comes to their money, people get very, very weird, and they tend to do weird things and think in weird ways.

I’m not saying it’s going to happen overnight — and there is going to be a certain percentage of the population that is going to continue to believe that their money is safer when being spread among different demand deposit accounts at different institutions — but there is something that banks can do to change this. It’s not something that they simply have to accept as a fact of life.

KW:  Do you believe that this is a perception that certain types of consumers have, or is it really all consumers? For example, do young people and older people have the same concerns, or did you observe any differences there?

TI:  That’s a very interesting question — and, yes, we did do a demographic slice of this. It turns out that the consumers who are most concerned about this are younger consumers. You can’t say that this is all about Luddite geezers such as yours truly. This is about kids.

I think it plays into what some other market research is showing, which is that millennials are more prone to use, for example, debit cards than is the general population; I also think than again, it plays into the financial crisis. That crisis was an immense event that we have not yet fully processed as an industry or even as a culture.

The millennials were the kids that were sitting around the kitchen table when they were in elementary or middle school and hearing adults talking about losing a job, losing a house, turning into a one-income family…whatever the case may have been. What that has done is made millennials into today’s Depression Babies.

I’m a baby boomer; my parents were Depression Babies. My attitude towards money was night and day compared to theirs, but my kids’ attitude toward money is that it could go away in a heartbeat — because they’ve heard about that happening when they were younger.

I think that this is a knock-on effect from that. This is simply a crude but, in their own minds, effective way of making sure that if something bad happens, they at least have some of their liquid funds saved.

KW:  What’s also interesting is that it speaks to the trust issue, just in general, as well as to perhaps an awareness of the vulnerabilities of a digital environment. Millennials are more active users in that world, more so than members of an older generation may be who have trust in financial institutions, because they’ve grown up with them in a different way.

TI:  I agree with you. In an earlier report that we did (all of the work Iacobuzio references is available at insights.mastercard.com) called “Five Personas” about consumer attitudes toward data privacy, we learned that consumers trust their banks. They may not like them very much, but they trust them. They trust them more than they trust retailers, after which there’s sort of a precipitous decline. But at the top of the pyramid of trust — in all of the studies that we’ve done — are financial services institutions.

So this is not a question, I don’t think, about trusting one particular institution more than another; it’s about being afraid of the environment.

It’s not that they’re taking the money out of the bank and putting it under the mattress; it’s that: “Well, if something happens to this bank, something won’t happen to that bank.” No one’s saying that it’s rational or even smart, and it’s surely not beneficial to the financial services institution in question — but it is happening.

To download the September edition of the MasterCard Road to Recovery report, click here.

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