Friday, April 10, 2009

Banking Regulators Should Make Use of Social Media Mandatory

Back on May 6, 2005, then Acting Comptroller of the Currency Julie L. Williams, delivered a press release titled, "Acting Comptroller Williams Discusses Management and Supervision of Reputation Risk In Large Banking Organizations; Stresses Important Role of Ethics and Corporate Values."

Ms. Williams, through her press release, stated that there is no more elusive, difficult to manage, and feared risk than reputation risk. Ms. Williams stressed the importance of establishing within a bank's overall risk management program, a defense against reputation risk that ensures that banks are grounded in a sound corporate culture and value system. This statement was released in 2005, years before the social media boom that we find ourselves in today.

Since Mr. Williams' release, the banking industry has undergone significant stress. These stresses have resulted in a significant outlash against banks by consumers, regulators and lawmakers. Events triggered by IndyMac, AIG, Bear Stearns, et al, have resulted in significant criticism at the macro and micro levels. And social media platforms such as Facebook, Twitter and LinkedIn have acted as the conduits for many of these disgruntled messages.

Therefore, if we believe Ms. Williams and agree that reputation risk has been historically difficult to manage, then the banking community should agree that one method of effective management is through the deployment of a social media strategy that includes as an objective, the use of social media to track and timely respond to events that affect the reputation of financial institutions.


In 2008, Johnson & Johnson released a marketing campaign targeted at mothers with newborns that use slings for carry their children. The campaign that utilized a web commercial that suggested that mothers used such slings for trendy reasons. The campaign asked mothers to use Motrin for relief from back, shoulder and neck pain associated with the use of the slings.

For some reason mothers were disgusted at the suggestion that these slings were merely trendy baby accessories. The result was a Twitter-based protest that snowballed and attracted significant attention. The protest attacked Johnson & Johnson and its Motrin brand on the basis of "not getting it" relative to why mothers use the slings. Eventually the protest reached Johnson & Johnson's ad agency and an apology and retraction of the ad campaign took place.

This social experiment created a reputational issue for Johnson & Johnson and resulted in a significant waste of money and a muddy face for some ad agency and Johnson and Johnson folks associated with the campaign.


In 2007, HSBC Bank was the target of a Facebook campaign against the Bank's decision to charge a 9.9% interest rate on certain student overdrafts. The virtual "Stop the Great HSBC Graduate Rip-Off" protest was organised by the National Union of Students, which had called for a boycott of Britain’s largest bank. The campaign attracted nearly 5,000 members on the Facebook site.

As with Johnson and Johnson, the event became widely publicized and became a black eye to the global banking giant.

Social Media as a Reputation Risk Tool

According to the Office of the Comptroller of the Currency, reputation risk is the risk to earnings or capital arising from negative public opinion. This affects a bank's ability to establish new relationships or services, or continue servicing existing relationships. This risk can expose the bank to litigation, financial loss, or damage to its reputation.

Reputation risk exposure is present throughout the organization and is why banks have the responsibility to exercise an abundance of caution in dealing with their customers and community. The assessment of reputation risk recognizes the potential impact of the public's opinion on a bank's franchise value. This risk is inherent in all bank activities. Banks which actively associate their name with products and services are more likely to have higher reputation risk exposure. As the bank's vulnerability to public reaction increases, its ability to offer competitive products and services may be affected.

As noted, with Johnson and Johnson and HSBC, an enterprise need not do anything "wrong" to end up with a battered reputation. Further, banks have an affirmative responsibility to manage reputational risk from wherever it may arise.

Enter social media. As the two examples above demonstrate, consumers in the Web 2.0 era no longer write letters - at least most do not. Instead, the disgruntled seek to unite with others who are similarly disgruntled. They band together and utilize the effective word of mouth capabilities built into social media applications such as Twitter and Facebook. The result can be quick and devasting to a bank's image. As such, for a bank to effectively manage its reputation risk in the current environment it must fight fire with fire by itself utilizing the same tools that can be used against the bank.

Today, bank risk managers must work closely with those managing the bank's existing social media applications. To the extent that a bank does not currently have such capability, the risk manager should make the case for the establishment of some form for social media tool such as Twitter, in order to receive complaints and comments. Once received, such feedback must be promptly addressed by the appropriate parties.

Banks that do not make themselves available through social media platforms or that ignore negative feedback are the banks that will find themselves the victims of runaway social media smear campaigns that ultimately result in negative publicity, unnecessary expenses and other potential adverse affect on the bank's bottom line.

To the extent that a bank finds itself being attacked, the bank should rely on a set of incident reponse procedures that include social media attacks. The procedures should address minimizing the negative effect by addressing the issues in an open and direct manner and ensure transparency. The bank should also consult with a social media specialist to determine the most effective manner of quieting the campaign being targeted at the bank.

Social Media Primer for Bankers

Unfortunately, many bankers are not well versed in the uses of social media. As such, bankers should consult with professionals with experience in utilizing social media for risk management and crisis management purposes.

As a first step I would encourage all bankers to download The Community Bankers Guide to Social Network Marketing. It is a free ebook that I wrote to provide a primer to bankers on social media and social networks.

Next I would recommend that risk managers evaluate the processes they have in place to measure reputation risk. In most cases banks focus on the primary risks such as credit risk, liquidity risk, interest rate risk, etc., and do not actively address reputation risk which can have consequences just as severe as the other risks monitored. Risk managers should ensure that social media is incorporated as a measuring tool to ensure that the bank has the opportunity to respond to issues before they become disasters.

In most cases, managing a bank's reputation can be compared to watching the grass grow - it just isn't very exciting. Unfortunately, all it takes is one major event to ruin everyone's day. With a little planning and some knowledge of dealing with the Web 2.0 community, bankers should have a good shot at minimizing or preventing a public relations disaster.


  1. Jesse: What a wonderful, well written article your wrote. Bravo!!!

    I agree with everything your wrote. The disgruntled will get together very quickly for sure. What you wrote about is exactly what happens in politics too as you already know.

    Trying to predict how people will react is very difficult. I suggest companies hiring places to conduct focus groups first before they launch a significant idea.

    These days, people must always be ready to refute things and react very quickly. Public opinion is very powerful, and trying to predict how the public is going to react is very difficult. Lucky for me, I have been born with a gift where I can kind of foresee when things are not going to work in the things that I keep myself involved in.

    Jesse, this is wonderful that you are writing these kinds of articles for your banker community. I hope they really read it, and think about what you are writing. It is all true.

    "As the bank's vulnerability to public reaction increases, its ability to offer competitive products and services may be affected." Very true and it applies not just to banking...

    You are really are a maven:

  2. I have no idea why my profile said APADRC instead of Lisa Chong... lol.. What I wrote is my opinion and not APADRC's. Don't know how that happened... :)

  3. Thanks Lisa. You're right. While social media is a great tool for strengthening relationships, it can also against firms (and politicians). Speaking of banking specifically, many banks have not incorporated social media into their business strategies feeling that they do not need it. However, I believe that more organizations will jump aboard once they see the value from the risk management perspective.

  4. In Canada, some banks (mainly RBC) jumped into the social medias bandwagon to adress a specific market (young adults). However, I doubt there is something done at a higher strategic level.

    The fact that consumers really use social medias (FB, Twitter, Youtube and so on) to share (good or bad) experiences on banking services remains to be verified. At least in the provice of Quebec, I took a look searching for comments on Desjardins or National Bank and found just nothing...

    Jacques Brisson

  5. Jacques,
    What you have seen in Canada is not uncommon. Very few banks in the U.S. participate in social media in order to create conversations and address customer concerns/isssues.

    Unfortunately many - though not all - do not have the thick skin to do so. Getting involved requires being able to accept criticism and respond honestly and transparently. Bankers to some degree believe that it is not a good idea to do so and others are just afraid of letting go of control over the communication lines.