Consumer Protection and Trust in Financial Services
By Moayad Ghannam
“Please sign here, here, and here, and write down your initials there”. A simple condition to access many of the services that make up today’s modern society. As many hastily comply, with minimal knowledge of what they are agreeing to comply with, it is almost too easy to forget that such conditions were put in place to protect us. While the shape of this practice has evolved to checking a box on a device, it has indeed become ingrained in the fabric of ‘convenience’, that we ourselves are creating.
This of course is no shortcoming on the part of the consumer. Many studies have suggested that such terms and conditions display an imbalance in the cost-benefit tradeoff. This is especially true given that the time-related costs of reading such documents are high, and the benefit is low as agreement to it is necessary to access services. To make matters more complex, a study conducted on “sign-in-wrap” contracts, which are contracts that combine agreement to terms and conditions with the onboarding process, found that the level of readability of such contracts was comparable to academic papers that do not normally target the general public1. While “sign-in-wrap” contracts are mostly online agreements, they are arguably a subdivision of adhesion contracts. Adhesion contracts are those which are drafted by one party with greater bargaining power over the second party. An example of this would be a contract between a financial institution and a consumer. This, therefore, brings into question the purpose of such contracts. Given that consumers have little influence over the content of such contracts, which are necessary to access integral services of today’s modern world, with the added element of low readability and comprehension of such contracts to the party agreeing to them, to what extent would these practices be considered as legitimate means of consumer protection by the financial sector?
Consumer protection is associated with important outcomes for the financial sector. It preserves the health and integrity of the economy, in addition to the wellbeing of consumers. In and of itself, consumer protection is associated with an important market force exerting its influence on various market players: trust and reputation.
Trust is arguably the lifeline of the financial sector. In essence, it can be broken down into two categories: trust between participants in financial transactions, and trust by the general population that the financial sector is efficiently undertaking its central operation of optimizing the allocation of private funds to financial investment leading to productive economic growth2. With reference to the latter, this transcends mere expectations of adequate risk-adjusted returns. Societal trust is hinged on the society’s expectations that markets will serve sustainable economic growth and contribute to the well-being of society in various forms3. In 2012, the former Governor of the Reserve Bank of India, Dr YV Reddy stated that “Trust is difficult to measure, but on the basis of surveys conducted and anecdotes reported in the media, there appears to be an erosion of trust in the financial sector as a whole, and banking in particular, in advanced economies”4.
One outlook to this, however, is that maintaining trust and a good reputation has dropped in importance for players in the financial services ecosystem. In fact, in 2013, Yale Law School in a seminar description stated that the failing importance of reputation and trust in the financial sector occurred as a result of two factors5:
1. the growth of reliance on regulation rather than reputation as the primary mechanism for protecting customers
2. the increasing complexity of regulation, which made technical expertise, rather than reputation, the primary criterion on which customers choose who to do business within today’s markets
Although the former factor identified represents an integral argument, the latter is up for debate. In fact, a study of the “Trust Imperative” has identified trust as second only to ease and convenience of service in the top five factors influencing consumers to choose a bank6. In fact, 45% of respondents valued trust, as opposed to 43% choosing prices. Consequently, the importance of trust and reputation to consumers remains high.
As for the first factor identified by the Yale Law School5, regulators around the world have continuously strived to increase consumer protection through laws and regulations. However, there is a limit to the ability of regulation to substitute for the market forces working around trust and reputation. In essence, regulation should be complementary to reputation for players in the financial sector, and reputation is stringent on consumer trust and public confidence. Based on the aforementioned, financial service providers should not stop at compliance with laws and regulations, but should instead approach consumer protection as a competitive advantage synonymous with cost-saving phenomena that would increase profitability and competitiveness.
That being said, after periods of sustained decline and stagnation, trust in financial service providers has witnessed a notable increase in recent years6. This increase is associated with the increased prevalence of technology in the administration of financial services. Technology presents a tool that can achieve higher transparency, increased emphasis on data protection and privacy, and the personalization of services to better meet consumers’ needs and expectations. This, therefore, presents integral considerations for financial institutions to better protect their consumers and nurture trust within their relationship.
Transparency is perhaps one of the most important factors in sustaining and increasing consumer protection, and gaining trust as a result. As terms, conditions, and contracts become more complex and riddled with industry-specific and legal jargon, consumers’ ability to navigate the financial ecosystem safely is negatively affected. This especially applies to consumers who were previously financially excluded, and are naturally more prone to fraud. In addition, it risks low comprehension of the rights and responsibilities of consumers. Technology presents a tool through which financial institutions can better communicate with large numbers of customers instantly. It enables alternative and creative means of conveying the terms of service and ultimately produces more empowered financial consumers.
Data protection and privacy goes hand-in-hand with transparency and represents an integral consideration for all companies in ensuring consumer protection and the trust of consumers. This, however, is exaggerated for institutions in the financial sector given the particular sensitivity of financial data. Strict regulations, such as the EU’s GDPR, are emerging around the world for the protection of data. However, financial institutions need not wait for regulatory or legal enforcement. In adopting and maintaining internal policies and procedures that emphasize the protection of consumer data, financial institutions will ensure that digitalization does not put consumers at increased risk, and will be rewarded with an increase in consumer trust.
Previously, banking and financial services had a valuable personal connection component which was achievable through in-branch banking. However, technological developments and the change in consumer preferences have increasingly substituted this form of banking with others such as mobile wallets, mobile banking, and e-banking. That being said, this personal experience can be maintained in the digital sphere. The increased data generated through financial and non-financial transactions extends an unparalleled level of insight into the needs and expectations of consumers. This empowers financial service providers with the ability to personalize and customize product offerings to better serve their consumers’ needs, enriching their interactions with positive experiences and ensuring consumers’ financial needs are met appropriately.
In addition, through the extended richness of data possible through technological advancements, financial institutions are able to better prevent instances of fraud and financial crime. This is especially relevant in the Middle East, where organizations reporting instances of consumer fraud went up from 36% in 2018 to 47% in 20207. Ultimately, fraud prevention will protect financial consumers from financial crime, incentivizing them to expand their business with institutions.
In conclusion, consumer protection should never be regarded as a regulatory requirement or an issue of compliance. Instead, financial institutions should build on the financial sector’s foundation of trust in ensuring the protection of their consumers. Technology presents endless opportunities to do so, expanding the promise of resilient and empowering relationships between financial consumers and financial institutions.
1. Benoliel, U., & Becher, S. I. (2019). The Duty to Read the Unreadable. SSRN Electronic Journal. doi:10.2139/ssrn.3313837
2. Vanston, N. (n.d.). Trust and Reputation in Financial Services (United Kingdom, Government Office for Science).
3. Trust and financial markets. (2019). OECD Business and Finance Outlook OECD Business and Finance Outlook 2019. doi:10.1787/4d7c9b81-en
4. Reddy, Y., Dr. (2012). Society, economic policies, and the financial sector. Lecture presented at The Per Jacobsson Foundation Lecture, Basel, Switzerland.
5. Yale Law School 2012-2013. (2012). Bulletin of Yale University, (10), 108th ser.
6. Cassidy, F. (2020, July 29). The Trust Imperative. Retrieved December 13, 2020, from https://www.raconteur.net/infographics/the-trust-imperative/
7. Harnessing technology to combat fraud: PwC Middle East Economic Crime and Fraud Survey. (2020). PwC.