Social Media Imperatives for Retail Banks

• Cognizant Reports

cognizant reports | november 2011

Executive SummaryRetail banks thrive on customer loyalty. Custom-ers spend a lot of time online and, not surpris-ingly, prefer performing most of their banking activities on their computers and mobile devices. Social media, with its inherent ability to gener-ate more customer engagement than traditional advertising media, presents a new opportunity for promotion and brand-building. Internally, social tools can create a collaborative work environ-ment in the organization and boost productivity.

At the heart of this is the idea that customers — internal and external — are the best source of feedback and marketing power for banks. Orga-nizations that realize and build on this concept stand to gain the most from their forays into social networking.

Following the financial industry meltdown, social tools can help banking institutions boost their retail operations and rebuild trust. Retailers have already jumped on the social media bandwagon, using it for customer service and marketing; banks can’t afford to miss out on this opportunity, too. Similarly, companies that have implemented social tools within their organizations have expe-rienced clear benefits.

Social networking sites are thriving, with users interacting with fellow customers and businesses. On Facebook alone, an estimated 30 million

messages are exchanged daily. Nevertheless, this medium is in its infancy, and initial social net-working activities by banks have delivered mixed results. But what has clearly emerged is that banks need a strong social media strategy that is supported by senior leadership. The approach must be driven by clear goals that are aligned with the larger business objectives.

This may not come easily. Banks are complex organizations, operating multiple lines of busi-ness under stringent federal regulations. Regu-latory compliance, in particular, has proved a consistent deterrent for customer-facing social media initiatives. It is critical, therefore, that these initiatives be backed by organization-wide buy-in and address the specific risks that social networking poses for banks.

Banks are inundated with customer and market data, which resides in individual silos within the organization. The rising use of social media by customers makes a stronger case for integrat-ing these silos of data to create a single version of truth. Consistent customer data throughout the organization will enhance communication, which could embolden banks to accelerate their embrace of process virtualization via cloud com-puting models. To optimize customer loyalty and strategic planning objectives, banks will need to invest in analytical tools that can accelerate actionable insights derived from this data.

cognizant reports 2

Grow Revenues, Regain TrustStringent regulatory requirements are signifi-cantly impacting banks’ bottom lines. In response, banks will have to optimize their business models, operations and processes and refashion siloed systems into integrated, enterprise-wide views to achieve cost-efficiency.

For instance, the Volcker Rule1 put an end to proprietary trading, which was a rich source of revenue for banks, while also limiting banks’ investments into private equity and hedge funds to 3% of their Tier 1 capital. Furthermore, new capital adequacy regulations encourage banks to increase retail deposits. All these factors are forcing banks to focus on their retail business for growth. This, in turn, means an increased emphasis on improving customer-facing activi-ties for retaining existing customers and adding new ones.

With competition heating up, however, this is become increasingly difficult. There are over 8,000 banks in the U.S. market, which remains one of the biggest and most competitive in the world, generating $750 billion a year via retail and commercial operations. Over the years, large for-eign players have moved into the market, quickly increasing their market share. Some have cut into the market share of U.S.-based banks with more innovative approaches (e.g., online-only banks such as Discover Bank). These organizations, with their strong online presence, carry little or no bur-den of the legacy systems that have hamstrung the operational flexibility of U.S. banks.

Following the recession, banks have also heav-ily cut costs, with several closing down branches and eliminating jobs. This trend is unlikely to stop in the coming years as regulators lower banking fees, a move that — while much needed — is pro-jected to undermine industry performance. The Durbin Amendment, which went into effect in July 2011, cut supermarket swipe fees from $0.44 to $0.12 per transaction, which is expected to cost the banking industry $12 billion annually in lost income. Banks have responded to this in a predict-able way, such as trying to charge monthly fees for usage of debit cards and other plans. Exten-sive regulatory reporting obligations mean banks need a solid technology framework for capturing and sharing data in order to remain compliant.

Creating a clear strategy in such times can be difficult. Banks realize they need to create

innovative products and services to stay ahead of the competition, as well as rebuild customer trust. In a 2011 survey conducted by Ernst & Young, 55% of U.S. respondents said their trust in banks had decreased.2 Banks play a crucial role in the econ-omy, and hence there are demands for a more responsive banking industry from various stake-holders. Winning back consumer trust is crucial to the survival of banks, and this is where social media fits into the picture. A well-planned social media strategy can help banks create a space where customers interact with the bank and each other, thus allowing banks to gauge customer sen-timents, preferences and attitude. These insights help create innovative products and services, improve branding and promote transparency.

In today’s multichannel banking environment, social media is a key enabler of customer engage-ment. Customers want to interact with their bank wherever and whenever they wish (such as via Web sites or mobile devices) rather than having to physically go to the branch or use a landline phone. Social media is unique in the sense that it operates across different channels, such as Twit-ter, Facebook, forums, chats, review sites, social shopping sites and the bank’s own Web site, just to name a few, thus allowing banks to create a connected and integrated customer experience.

Customer Behavioral ShiftsThe global financial crisis has had a huge influ-ence on customer behavior. Consumers have become more wary of debt and how they spend their money. Many began saving more and plan-ning their financials for the long term. This change in spending patterns was accompanied by a greater sense of responsibility. Buying decisions are now enhanced by research, mostly online, which involves reading reviews on dedicated forums and seeking advice from friends and fam-ily, which invariably leads to social networks.

The fast uptake of social media by users is a reflection of its power. Facebook reached 700 mil-lion users within seven years of its launch; Twitter reached 200 million within five years; MySpace, despite all its financial troubles, has 80 million users. According to the research firm Nielsen, Facebook reaches 56% of the active U.S. Inter-net universe, with an average monthly usage of six hours. These numbers are indeed compelling, but perhaps more important is the fact raised by research that active social media users are twice

cognizant reports 3

as likely to shop for a new bank, compared with less connected consumers.3

Today’s consumers are more connected online than ever, whether through computers, smart-phones or tablets. Leading the way is the millen-nial generation.4 This generation of digital natives constitutes 30% of the total U.S. population, and 35% of the Internet-using population, according to the Pew Research Center. Individuals in this generation have adopted new technologies very quickly and in ways that are all encompassing. Many use advanced tools to plan their invest-ments and place a greater emphasis on the online service capabilities of banks when researching a new financial institution, compared with their baby boomer generation parents. Millennials’ understanding of financial institutions is limited, which means banks need to reach out to them and create awareness about the various services available. In addition to millennials, social net-working has cut across all age groups, with the number of users significantly increasing over the past few years (see Figure 1).

This clearly represents a big opportunity for banks to leverage the power of social media to create much-needed interaction with customers of all age groups. Done right, banks can create a vibrant space where they interact with a diverse base of customers on a personalized basis.

Spreading the Message, FastAt a time when banks are looking to cut costs wherever they can, while extending their reach to a wide audience, social media presents an opportunity that can help with both of these goals. Customers use these sites to share their banking experiences, and banks stand a better chance of delivering the kind of service that will send a positive message across the board by lis-tening intently and learning from social media users. Social media takes the concept of word-of-mouth publicity to a whole new level as messages spread at an exponential rate. A tweet or a status update read by several people can be re-tweeted or commented on by followers if they are compel-ling enough. The ability of banks to exploit this phenomenon will determine how successful their social media strategies will be.

Companies that have created a presence across the popular social networking sites have suc-ceeded in realizing social media’s potential. Fur-thermore, they have used various channels such as mobile devices and their Web sites to direct users to their social networking pages. This has allowed them to listen to and engage with their customers.

Customers typically include a set of people called influencers, who tend to be users of a social net-work with many followers. Other categories of influencers include celebrities, technology gurus

Social Media Use has Increased Across Age Groups

Figure 1

Source: "Internet & American Life Project," Pew Research Center' s April 29-May 30, 2010 Tracking Survey Base = 2,252 adults 18 and older

Dec-2008 May-2010

67

36

20

9 114

35

83

62

5043

34

16

61

0

10

20

30

40

50

60

70

80

90

Millennials (18-33)

Gen X (34-45)

Younger Boomers(46-55)

Older Boomers(56-64)

Silent Generation

(65-73)

G.I. Generation

(74+)

All Online Adults (18+)

% of Internet users who use social network sites, over time

cognizant reports 4

or experts in a particular field. Their advice or choices tend to be taken seriously by other users, and banks that have such users in their networks can generate some visibility for their marketing efforts.

Social Media Inside the BankAs pervasive as social media has become, there is a strong case for encouraging this medium within the banking organization, as well. A bank’s internal customers are as important a source of feedback as external ones, and putting in place a system that can collate employee feedback and turn it into useful insights can have a multitude of benefits. These tools, known as Web 2.0 or Enter-prise 2.0, are designed to create a collaborative workspace where employees across departments and geographies can interact.

The collaborative tools idea is not new. But this area has now evolved to create an environment that encourages participation and boosts creativ-ity. These tools, which include corporate social

networks, blogs, videos, wikis, RSS feeds and podcasts, cut across hierarchies and can allow employees at all levels to contribute to the orga-nization’s cause. Idea creation campaigns, prod-uct naming/tagline contests, internal blogs and wikis are among the initiatives banks should use to capture and convert grassroots ideas into valu-able insights that can illuminate customer per-ceptions and improve internal processes. Amid the industry’s ongoing turmoil, such tools could have a wide array of benefits, from short-term operational cost reductions, to lasting benefits of ensuring better coordination of innovation thoughts and strategies across the organization.

Indeed, early social media adopters in compa-nies across various industries have enjoyed mea-surable benefits, according to McKinsey & Co. (see Figure 2). Companies with intensive integra-tion of Web 2.0 technologies are likely to experi-ence greater benefits in the future. Additionally, such companies also tend to deploy these tech-nologies more effectively in customer- and sup-plier/partner-facing operations.

Web 2.0 Technologies Have Delivered Measurable Benefits

Source: "How Companies are Benefiting From Web 2.0," McKinsey & Co., September 2009.

Use of technologies

Internal purposes: Base = 1,032

Customer-related purposes: Base = 870

Working with external partners/suppliers: Base = 627

Percent of respondents within each industrygaining at least one measurable benefit from using Web 2.0 technologies*

Percent of respondents within each region gaining at least one measurable benefit from using Web 2.0 technologies*

41

52

53

41

47

54

36

47

55

Developing Markets**

China

Latin America

24

37

52

46

60

62

48

65

75

20

32

51Financial

Manufacturing

Business/Legal/

Professional services

High-tech/Telecom

Asia-Pacific

36

47

57

35

45

58

36

54

62

43

46

64

Europe

North America

India

Figure 2

* Includes respondents using at least one Web 2.0 technology, even if on a trial basis.** Excludes China, India and Latin America.

cognizant reports 5

Getting it RightThe social networking space is in itself dynamic, with several networking sites coming and going in rapid succession. It is only in the past few years, with the emergence of strong contenders such as Facebook and Twitter, that this space has stabilized.

Many organizations were wary of leveraging these sites for a variety of reasons. In the financial space, regulatory concerns and unclear return on investment proved to be a strong deterrent. Those that managed to overcome initial resistance have been able to leverage their experience quickly to reap benefits.

Compared with other consumer-serving indus-tries such as retail and consumer goods, the retail banking sector has been a late entrant to social network engagement (see Figure 3). Neverthe-less, the wariness seems to be giving way to curi-osity, which in turn has led many banks to under-take formal social networking initiatives. This trend is only going to accelerate as late-arriving banks join the frenzy. Banks are inherently ser-vice-focused, high-customer-touch organizations, and social media presents an opportunity that can be used to their advantage. The Aite Group estimates that by 2012, two-thirds of financial institutions will look to social media for customer retention.

A Mixed Bag So FarA look back at banks’ social media activity over the past couple of years reveals mixed results. While some banks have taken to the medium as a natural extension of their customer-facing strat-egy, others have struggled due to lack of clarity.

Take, for example, 1st Mariner Bank, which was one of the first U.S. banks to engage in social media. To begin with, the bank did not have a clear-cut strategy, but it was sure that this medium could not be ignored. The bank exploited social media’s ability to make up for lost interactions at the branch level. Through social communication and surveys, 1st Mariner was able to create a product that appealed to its target audience — customers in their late teens. It also created personal finance management (PFM) tools in association with the Web site Geezeo, which aggregate financial prod-ucts from different banks to suit users’ financial requirements.

Banks Lag in Creatinga Social Media Presence

Figure 3

Source: "Are Banks Ready for the Next-Generation Customer?" Efma and Oracle Financial Services, September 2010. Base = 100

YesNo, but we will within 12 monthsNo, but we will within 6 monthsNo plans yet

31%

16%

16%

37%

This strategy is aimed at maintaining customer interest in a bank’s products and gives banks a chance to be the first choice of consumers when they decide to buy a product. This tool has gained popularity with Generation X5 customers, and the bank plans to reach out to millennials as well, over time.

Along similar lines, SunTrust Bank started its LiveSolid Network, which combines PFM and social media and is targeted at women aged 25 to 45 years. Wells Fargo has been able to leverage its large customer base to create online communities, in which customers get free advice on financial planning.

Customer engagement, education and branding seem to be top priorities for these banks as they start off in the social media space. Admittedly, there is no one-size-fits-all social media strategy. But these banks have a first-mover advantage and are in a position to quickly adapt if needed.

There are also cases where banks have experi-enced the negative effect social media can have. Australia’s Commonwealth Bank came under heavy criticism when its social media policy was made public, which stipulated that employees report any criticism of the bank made by others on social networks — or face disciplinary action. Social media can also exacerbate potentially embarrassing events that, before the advent of social networks, would have been easily over-looked. Consider the case of Chase Bank, which

cognizant reports 6

wrongfully had a customer arrested at a bank branch who it thought was cashing a fraudulent check, as reported by ABC News.6 Later, the bank was subject to continued criticism on social media sites for its poor handling of the aftermath.7

Bank of America also faced vitriol over its recent debit card fee announcement — since withdrawn — as it was perceived to mainly impact low-income customers. A Facebook campaign titled “Bank Transfer Day” was started to encourage BoFA customers to switch to smaller banks that do not charge this fee. The campaign attracted several aggravated customers to sign up and was aided by the Occupy Wall Street protests. The bank’s efforts to highlight other attractive offers were lost in the chaos. It finally succumbed to pressure to cancel the planned fee, as did at least three other competitors that had similar plans in the works. Such campaigns demonstrate the power that social media holds. While there are risks associated with social media, what is clear is that banks can ill-afford not to have an active pres-ence in this space. gram development. Such a strategy is the key to

social media success, and banks that figure out what works for them stand to benefit.

Much of social media remains a largely uncharted territory for banks (see Figure 4); those that have done well are the ones that have taken cau-tious yet well-planned first steps. Mastering this medium will not be easy. Banks need to plan for the long term and stick to it. Otherwise, they risk taking hasty steps that do more harm than good.

Furthermore, these social media initiatives need to be organization-wide and should be integrated with other channels. While banks might see indi-vidual channels differently, for customers they are all a gateway to interaction with the bank. As such, they demand a similar level of service across channels.

To exploit the potential of social media, banks need to create a presence across various social networking sites, such as Facebook, Twitter, LinkedIn and other industry-specific forums. This should be supported by links across channels, such as their Web site, mobile sites and smart-phone applications that lead users to these social networking pages. This way, banks can build a strong platform in the form of active online com-munities that will be critical to their future social media initiatives.

Banks’ Social Media Experience Remains at a Nascent Stage

Figure 4

Q. Which statement best describes your firm's experience regarding social media?

Source: "Social Media at the Starting Blocks: A Look at Financial Institutions in Europe and the United States," Aite Group, November 2010. Base = 166

Advanced: We have a social media competency and regularly use social media tools.

Intermediate: We have launched social media efforts but don't consider ourselves experts.

Novice: We have not launched any social media efforts.

Beginner: We have launched social media efforts but are not very experienced.

8%

32%39%

21%

Full-Fledged, Compelling SocialMedia StrategiesFor a successful venture into social media, banks must start by looking within, identifying strengths and building on them. It is important to realize that each bank is unique. Each holds personal-ized data about clients, which can offer crucial insights that can be used to inform customer segment strategies. These segments can be targeted with specific offerings/campaigns.

For example, Generation Y and baby boomers have different expectations from their banks. While the former need assistance with financial planning and prefer the Web as a medium for banking activities, the latter do not expect simi-lar assistance and prefer banking at the branch. A social media campaign that targets the younger generation, therefore, needs to take these factors into consideration.

Beyond this, banks need to be clear about which areas they want to focus on for value generation. They should work to create a comprehensive social media strategy that spans all phases of social CRM. This includes developing social com-munities for brand- and trust-building, listening to social media and applying these insights to pro-

cognizant reports 7

Best Practices Revealed Customers value organizations that value them. Successful use of social media depends, to a great extent, on how banks keep users engaged. Banks’ social media activity must be driven by their over-all service objective. Banks need to be nimble in managing their daily interaction with customers. The following are among the best practices we’ve observed that banks can incorporate into their social media activity.

Be active. This may sound simple, but having an active social media presence is at the heart of a successful strategy. An inactive social media presence will mean that banks lose customer attention. And a prolonged state of inactivity could create a negative image of the bank altogether.

Have a real person talking to customers. Social networks are informal places, and cus-tomers expect casual, day-to-day interac-tion rather than an automated response or exchanges that seem straight out of the bank’s corporate communications department.

Keep conversations interesting and relevant. Responses on social networks often depend on how interesting the post is. Banks that consistently post interesting messages and questions will maintain a high level of user engagement.

Respond quickly. Slow responses to queries do not resonate well with users. Fast responses result in increased customer satisfaction, while also making the job of the frontline staff easier.

Create a sense of community. Banks that manage to drive a sense of community into their social networks stand to reap the ben-efits, as the community’s influence tends to drive customer choice.

Track customer sentiment. Tracking positive and negative sentiments on various social net-works provides an idea of the prevailing senti-ment about a bank. Banks need to do this on a regular basis, as this input acts as the pulse of the people.

One technology that has emerged as a must-have in the social arena is social media analyt-ics.8 These systems help banks make sense of the chatter on various social networks and can dig out useful insights that can drive fact-based

decisions on products and services. Analytical tools also allow banks to forecast the response to new products, leading to possible enhancements to their offerings.

Overcoming ChallengesBanks operate in highly regulated environments. Any external communication must pass a due dili-gence check. Indeed, this is one reason why sev-eral banks have stayed away from entering the social sphere. In a survey by the American Bank-ers Association, 74% banks said that social media efforts were vetted by the compliance depart-ment before going live.9 This can cause delays in response, which in turn could damage the bank’s image. To overcome this, it is important that a bank’s compliance effort is embedded into its social media strategy. Furthermore, employees must be educated about the institution’s social media policy so they know what they are allowed to discuss in public.

Another area of concern for banks is data privacy. Banks typically accord high confidentiality to their customer information. This makes it impera-tive for them to create safeguards that prevent leakage of private data. This calls for robust data management structures that span the organiza-tion. Standardized data management structures can eliminate data silos and create a single ver-sion of the truth. Such a system will help in pro-tecting customer data and delivering a consistent customer experience.

Social media initiatives are inevitable and call for a change in the existing culture in banks. This cul-tural change will go a long way toward maximizing the benefits banks derive from social media tools.

Established banks face competition from new entrants that have already created strong social media presence and are not burdened by legacy systems. They must, therefore, identify and imple-ment tools that integrate social media into their legacy systems. For larger banks, it is imperative that proper coordination exists between the dif-ferent teams that interact with the customer. This calls for strong leadership support. Bank leaders must drive social media strategies and identify the right talent in-house who can act as change agents in creating a pro-social media culture.

cognizant reports 8

Footnotes1 According to the Financial Times, the Volcker Rule aims to limit risky behavior within banks. Banks that take retail

deposits are not allowed to engage in proprietary trading that is not directly relevant to customer-related market making and trading activities. These banks would also be prohibited from owning or sponsoring hedge funds or private equity funds.

2 “A New Era of Customer Expectation: Global Consumer Banking Survey 2011,” Ernst & Young.

3 “Consumers Who Use Social Media Are More Likely to Purchase,” blog post, Council on Financial Competition, Corporate Executive Board, April 5, 2011.

4 The Pew Research Center defines millennials as the generation that was born after 1980 — the first generation to come of age in the new millennium.

5 According to the Pew Research Center, Generation X constitutes the population aged between 34 to 45 years.

6 Reshma Kirpalani and Christina Ng, “Washington Man Wrongfully Arrested for Check Fraud at Chase Bank Branch,” ABC News, July 9, 2011.

7 Gavin James, “Transforming Negative Sentiment into a Winning Customer Experience,” blog post, Beyond the Arc, October 2011.

8 “Building Sustainable Competitive Advantage with Advanced Analytics,” Cognizant Research Center, June 2011.

9 Brett King, “Social Media and Bank Compliance Departments: Eternal Enemies?” blog post, Banking4Tomorrow.com.

In our view, banks can successfully leverage the power of social media by doing the following: Put in place a full-fledged and comprehensive

social strategy aligned with business goals. Create organization-wide buy-in by ensuring

sponsorship by executive leadership. Identify and measure key metrics related to

the social media strategy.

Invest in educating employees about social media policy.

Embed social media into the organization’s culture.

Identify compliance-related risks and incorpo-rate appropriate measures in the strategy.

Standardize data management struc-tures across the organization to improve coordination.

Bibliography“Eight Principles for Social Media in Banking,” IDC Financial Insights, September 2011.

“The Durbin Amendment: Swipe Fees Impact On Credit and Credit Scores,” Credit.com, June 2011.

“Social Media Expertise is A Joke,” Bank Systems & Technology, May 2011.

“Despite Low Interest Rates and Dismal Returns, There is Hot Competition for Customer Deposits,” The Economist, May 12, 2011.

“Social Media: More Than Just a Passing Fad, Say Bankers,” Finextra, April 2011.

“Implications of Dodd-Frank for the U.S. Banking and Financial Services Industry,” Reflections Journal, Cognizant Technology Solutions, May 2011.

Lisa Banks, “Banking Sector Must Learn from NAB Social Media: Ovum,” Computerworld.com, February 16, 2011.

Dion Hinchcliffe, “As Collaboration Goes Social, Where Will it Thrive?” blog post, ZDNet, February 15, 2011.

About Cognizant

Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-sourcing services. Cognizant’s single-minded passion is to dedicate our global technology and innovation know-how, our industry expertise and worldwide resources to working together with clients to make their businesses stronger. With over 50 global delivery centers and more than 130,000 employees as of September 30, 2011, we combine a unique global delivery model infused with a distinct culture of customer satisfaction. A member of the NASDAQ-100 Index and S&P 500 Index, Cognizant is a Forbes Global 2000 company and a member of the Fortune 1000 and is ranked among the top information technology companies in BusinessWeek’s Hot Growth and Top 50 Performers listings.

Visit us online at www.cognizant.com for more information.

World Headquarters

500 Frank W. Burr Blvd.Teaneck, NJ 07666 USAPhone: +1 201 801 0233Fax: +1 201 801 0243Toll Free: +1 888 937 3277Email: inquiry@cognizant.com

European Headquarters

Haymarket House28-29 HaymarketLondon SW1Y 4SP UKPhone: +44 (0) 20 7321 4888Fax: +44 (0) 20 7321 4890Email: infouk@cognizant.com

India Operations Headquarters

#5/535, Old Mahabalipuram RoadOkkiyam Pettai, ThoraipakkamChennai, 600 096 IndiaPhone: +91 (0) 44 4209 6000Fax: +91 (0) 44 4209 6060Email: inquiryindia@cognizant.com

© Copyright 2011, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.

Credits

AuthorAkhil Tandulwadikar, Cognizant Research Center

Subject Matter ExpertSanjit Bose, Manager, Cognizant Business Consulting, Banking and Financial Services

Matt Gunn, “Social Media: Perhaps Retail Banks Just Don't Get It,” Bank Systems & Technology, February 23, 2011.

“Web 2.0 Banking: Fresh Thinking for a New Decade,” Booz & Co., January 24, 2011.

Penny Crosman, “Channel Innovation: Building Online Relationships,” Bank Systems & Technology, April 27, 2010.

Rob Garcia, “7 Reasons Why Banks Have Failed at Social Media … Miserably!” blog post, LendingClub, November 10, 2010.

“The Future of Retail Banking,” McKinsey & Co., November 2010.