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Social Media and Banking Essay

Introduction

Social media and banking do not seem to have a strong relation at the first look on the topic, but are indeed complexly related in today’s world with the continuous evolution of the banking sector and the huge impact of social media on the masses. While today many international banks are using social media as a connectivity and marketing tool with its customers, Indian banks are also not far behind. ICICI, one of India’s biggest banks, already boasts a Facebook app allowing clients to view their account details, check statements and upgrade their debit card, among other activities, but still maintains a cautious attitude to social media strategy. While there is no doubt that social media is all the rage amongst retail and advertisings sectors, it is yet to make major inroads in the financial services and banking sectors. A new report from Ovum, the technology arm of market analyst firm Datamonitor reveals that a majority of banks worldwide aren’t yet ready to embrace social media.

Privacy and Data Security are two of the biggest hindrances to mass-scale social media adoption in the banking sector. Moreover, many banks do not think social media gives them an edge to engage customers. In fact, they believe that it’s a dangerous proposition which may compromise sensitive financial data .Startling as it may seem, the recent Ovum research indicates that 60 per cent of the world’s retail banks have no plans to use social media in the future. There are noticeable exceptions though – UK’s First Direct, Australia’s NAB, Wells Fargo in the US and Rabobank in the Netherlands have adopted social media as a communication channel. While American banks mostly rely on Twitter, Australia’s NAB used YouTube and Twitter to pacify disgruntled customers after its online banking system fell over.

And going by the encouraging response received so far, the move appears to be fetching the desired results. 14 per cent banks currently use social media as a marketing tool, with a further 12 per cent planning to use it to promote their business by the end of 2012. Some challenges which the sectors might face are as follows: The banking sector relies on sensitive financial data all the time. Though Facebook has made several changes to its privacy norms over the last couple of years, a lot more needs to be done in order to simplify who gets to see what information. Perhaps, a different set of privacy controls for banks and financial institutions would help.

Given the current situation, it’s unsurprising that most banks prefer Twitter over Facebook as the former has virtually no privacy vulnerabilities. The Ovum report indicates that social media offers a massive untapped opportunity for financial institutions. Consumer confidence in the banking sector has hit an all-time low and a personal touch of social media would serve as a perfect shot in the arm to lift the struggling global financial industry. Before we plunge into this fast deepening relation between social media and banking, let us first understand some basic concepts about banking and social media separately.

Banking

Under the Central Government Act,
Section 5(b) in The Banking Regulation Act, 1949

(b) ” Banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise;

In general, a bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank connects customers who have capital deficits to customers with capital surpluses.

Due to their influence within a financial system and an economy, banks are generally highly regulated in most countries. Most banks operate under a system known as fractional reserve banking where they hold only a small reserve of the funds deposited and lend out the rest for profit. They are generally subject to minimum capital requirements which are based on an international set of capital standards, known as the Basel Accords.

Standard activities

Banks act as payment agents by conducting checking or current accounts for customers, paying checks drawn by customers on the bank, and collecting checks deposited to customers’ current accounts. Banks also enable customer payments via other payment methods such as Automated Clearing House (ACH), Wire transfers or telegraphic transfer, EFTPOS, and automated teller machine (ATM).

Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending.

Banks provide different payment services, and a bank account is considered indispensable by most businesses and individuals. Non-banks that provide payment services such as remittance companies are normally not considered as an adequate substitute for a bank account.

Products
Retail banking

* Checking account
* Savings account
* Money market account
* Certificate of deposit (CD)
* Individual retirement account (IRA)
* Credit card
* Debit card
* Mortgage
* Home equity loan
* Mutual fund
* Personal loan
* Time deposits
* ATM card
* Current Accounts
Business (or commercial/investment) banking
* Business loan
* Capital raising (Equity / Debt / Hybrids)
* Mezzanine finance
* Project finance
* Revolving credit
* Risk management (FX, interest rates, commodities, derivatives) * Term loan
* Cash Management Services (Lock box, Remote Deposit Capture, Merchant Processing) Economic functions

The economic functions of banks include:

* Issue of money, in the form of banknotes and current accounts subject to check or payment at the customer’s order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a check that the payee may bank or cash.

* Netting and settlement of payments – banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economize on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them. * Credit intermediation – banks borrow and lend back-to-back on their own account as middle men. * Credit quality improvement – banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers.

The improvement comes from diversification of the bank’s assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position. * Asset liability mismatch/Maturity transformation – banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long.

With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemption of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets). * Money creation – whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of virtual money is created.

Laws Related To Banking In India
1.1.Reserve Bank of India Act, 1934
1.2.Banking Regulation Act, 1949
1.3.Negotiable Instrument Act, 1881
1.4.Consumer Protection Act, 1986
1.5.Limitation Act, 1963

Social Media

Social media employ web- and mobile-based technologies to support interactive dialogue and “introduce substantial and pervasive changes to communication between organizations, communities, and individuals.” Social media are social software which mediate human communication. When the technologies are in place, social media is ubiquitously accessible, and enabled by scalable communication techniques. In the year 2012, social media became one of the most powerful sources for news updates through platforms such as Twitter, Facebook, and Google+.

Classification of social media

Social media technologies take on many different forms including magazines, Internet forums, weblogs, social blogs, microblogging, wikis, social networks, podcasts, photographs or pictures, video, rating and social bookmarking. By applying a set of theories in the field of media research (social presence, media richness) and social processes (self-presentation, self-disclosure) Kaplan and Haenlein created a classification scheme in their Business Horizons (2010) article, with six different types of social media: collaborative projects (for example, Wikipedia), blogs and microblogs (for example, Twitter), content communities (for example, YouTube), social networking sites (for example, Facebook), virtual game worlds (e.g., World of Warcraft), and virtual social worlds (e.g. Second Life). Technologies include: blogs, picture-sharing, vlogs, wall-postings, email, instant messaging, music-sharing, crowdsourcing and voice over IP, to name a few. Many of these social media services can be integrated via social network aggregation platforms. Social media network websites include sites like Facebook, Twitter, Bebo and MySpace.

Mobile social media

Social media applications used on mobile devices are called mobile social media. In comparison to traditional social media running on computers, mobile social media display a higher location- and time-sensitivity. One can differentiate between four types of mobile social media applications, depending on whether the message takes account of the specific location of the user (location-sensitivity) and whether it is received and processed by the user instantaneously or with a time delay (time-sensitivity).

* Space-timers (location and time sensitive): Exchange of messages with relevance for one specific location at one specific point-in time (e.g., Facebook Places; Foursquare) * Space-locators (only location sensitive): Exchange of messages, with relevance for one specific location, which are tagged to a certain place and read later by others (e.g., Yelp; Qype) * Quick-timers (only time sensitive): Transfer of traditional social media applications to mobile devices to increase immediacy (e.g., posting Twitter messages or Facebook status updates) * Slow-timers (neither location, nor time sensitive): Transfer of traditional social media applications to mobile devices (for example, watching a YouTube video or reading a Wikipedia entry)

Mobile social media can also be used on the go when one is not near a personal computer, lap-top…etc. With all the new devices that are arriving at our finger tips, gadgets such as tablets, iPods, phones, and many other new products, there is no use for sitting at home using ones PC; mobile social media has made other sources of internet browsing obsolete, and allows users to write, respond, and browse in real-time. New media of social networking such as “Instagram” allows the world to interconnect and makes space and time much smaller. Instagram allows individuals to snap a photo wherever they may be and share it with the rest of the world instantly, delivering a social media site full of foreign accomplishments and strange scenarios. This feature was introduced by Facebook and other existing social media sites, Instagram is a recent addition to the social media scene, and has made picture sharing much easier. Mobile social media is a relatively new platform since it is contingent on mobile devices’ ability to access the Internet.

There are various statistics that account for social media usage and effectiveness for individuals worldwide. Some of the most recent statistics are as follows:

* Social networking now accounts for 22% of all time spent online in the US. * A total of 234 million people age 13 and older in the U.S. used mobile devices in December 2009. * Twitter processed more than one billion tweets in December 2009 and averages almost 40 million tweets per day. * Over 25% of U.S. Internet page views occurred at one of the top social networking sites in December 2009, up from 13.8% a year before. * Australia has some of the highest social media usage in the world. In usage of Facebook, Australia ranks highest, with over nine million users spending almost nine hours per month on the site. * The number of social media users age 65 and older grew 100 percent throughout 2010, so that one in four people in that age group are now part of a social networking site. * As of May 2012 Facebook has 901 million users.

* Social media has overtaken pornography as the No. 1 activity on the web. * In June 2011, it was reported that iPhone applications hit one billion in nine months, and Facebook added 100 million users in less than nine months. * If Facebook were a country it would be the world’s third largest in terms of population, larger even than the US. * In June 2011, it was also reported that U.S. Department of Education study revealed that online students out-performed those receiving face-to-face instruction. * YouTube is the second largest search engine in the world. * In four minutes and 26 seconds 100+ hours of video will be uploaded to YouTube. * One in six higher education students are enrolled in an online curriculum. * In November 2011, it was reported Indians spend more time on social media than on any other activity on the Internet. A brief overview of Indian banks-Pictorial statistics

Facebook

Twitter

The Why and How of Social Media w.r.t Banking
Why Social media matters to Banks?
Whether a bank’s ultimate goal is enhancing its brand, reducing costs, increasing customer satisfaction, boosting innovation ,or driving revenue ,social media can be a valuable pursuit. Enhancing the brand

Social media can play an important role in differentiating brands and making them more relevant to consumers. Much of its power in this regard derives from the fact that in a consumer’s mind, the most credible spokesperson a company can have is a “person like me.” In fact, research shows that the number of people who trust such a hypothetical person more than they trust brands or organizations increases around the world each year. How can banks take advantage of “people like me?” American Express, for one, created OPEN Forum, an online community dedicated to connecting businesses with each other and providing valuable content to customers with which the company wants to have relationships. Today, OPEN Forum has more than 10,000 businesses involved, monthly traffic has reached as high as 1.5 million visits,5 and the majority of content is produced by the community. The result is a new touch point that drives brand affinity, provides American Express with an immense opportunity to create brand impressions, and gives the company a chance to be at the center of important conversations among its customers.

Reducing Costs

Social media can be a major contributor to banks’ ongoing cost reduction efforts, especially as they pertain to service, sales, and marketing. For instance, banks can use social media as a low-cost channel to distribute messages, host conversations, provide customer service, identify dissatisfied customers, and increase the impact and reach of traditional media efforts. Consider Bank of America, which was the first and largest bank in the world to use Twitter for customer service. The bank uses a dedicated Twitter page on which a wide variety of real people—with their actual photos— help customers solve their issues. User feedback reveals the sentiment among customers that receiving help through this page is easier and faster than traditional customer service.

In addition to driving customer service costs down, the page creates brand impressions across consumers’ social graphs, thereby allowing other consumers to see the value of the channel for a variety of goals. The channel also can enhance the impact of marketing. Consider, for example, how Discover Bank recently created a Facebook identity for “Peggy,” a character from its popular series of TV ads. Today, that character is “liked” by nearly 9,000 consumers, and interacts with them several times a day. Such campaigns create millions of additional brand impressions inside of Facebook, as well as new opportunities for brands to interact with their customers in a low-cost format.

Creating and improving innovation :

Banks can use the channel to create better, more innovative products and services that reflect real-time consumer demand. Chase, for example, created an online community of mass-affluent consumers and tasked the group with designing a credit card purpose-built to their specific wants and needs. The result: its highly successful Chase Priority Club Rewards card. Chase also created a Community Giving program that allows consumers to direct the bank’s donations to specific charities. As of this writing, that community had directed more than $5 million to 100 local charities. Through this initiative, Chase’s philanthropic entity is opening up its decision-making to crowds and involving millions of people in the process Increasing revenue While the use of social media to drive revenue within banks is still in its infancy, results from other industries further along the growth curve are encouraging. Avis, for example, has been able to use a variety of coordinated social media efforts to boost its sales by 9 percent—in a competitive, commoditized industry with flat or declining revenues.

As an example of a more specific and successful effort, USAA, a financial services provider for members of the US armed forces, allows site visitors to rate products like auto insurance or home equity lines of credit and add a written review. In fact, USAA customers have added thousands of reviews to products, and consumers have responded strongly: In the first year of adding product reviews to the site, USAA claims incremental sales of over 15,000 products. This tactic clearly shows a direct impact on growth and demonstrates the value of “people like me.” In both cases, using social media to unlock increased revenue requires firms to focus on fundamentals. Providing service that customers want to talk about and delivering products that are worth recommending. Once those conditions exist, the chance of successfully using social media to drive revenue goes up exponentially. A uniquely challenging industry

For many banks, all of the examples in the world are not enough to get off the starting blocks. Typical challenges include:

• External communications are strictly governed by a host of rules and regulations that limit what they can and cannot say. • Banks must observe strict rules regarding consumers’ personal information and data security. • Sanctioned employees, whether from customer service, marketing, or another functional group, must be knowledgeable about products, services, rules, and how to get things done within the bank—and they must be mature enough to make decisions and craft responses to difficult questions. Plus, all this must be done within the strict legal and regulatory framework that banks inhabit and occur within real time in order to be effective.

For many banks, technology itself is a major concern when it comes to implementing a social media strategy. Banks must identify and implement the tools they will need to be active in social networks, from simple listening platforms to sophisticated tools that enable the integration of social media with legacy CRM systems, customer service tools and workflows, reporting and record keeping requirements, and overall marketing analytics. Finally, some banks will need to overcome a lack of organizational structures and in-house talent to derive full business value from social media. More specifically, many banks may find they have to close talent gaps and bridge internal divisions between product-oriented teams, all while gaining senior leadership support for a company-wide approach to social media. This is no small task, especially given the fact that most senior leaders are not well-versed in social media.

A path toward social media mastery

While the preceding paints a picture of industry-wide challenges, there is a path that banks can use to begin their social media journey. It starts with gathering critical knowledge that will guide the development of their strategy and assure positive outcomes. To begin, banks must strive to understand what their customers, prospects, and competitors are discussing online, as well as the social technologies that seem most relevant. This includes developing profiles of how various customer segments actually use social technology and understanding the practical implications of those uses. For example, strategies for student loan customers may vary widely from those designed for private wealth management clients in areas of execution, content, and technology. Banks also must assess their current social media capabilities and activities: All too often there are separate, potentially conflicting social media initiatives under way, as well as underutilized technology, insights, and experience. Banks must begin to consider their collective presence versus that of individual lines of business.

Consumers don’t make those distinctions, and neither should banks. It is critical for banks to get a firm grasp on what competitors are doing in the social media space, and where “white space” exists. Bank of America, American Express, and Chase all have done this with their respective social media efforts, but that does not mean no space is left to establish a presence. To find this space, banks have to ask two questions of themselves : What can we deliver to our customers that we don’t offer today, and how will it provide them with value? Social media sponsors must critically review risk. Specifically, they must identify specific social media concerns, assess their likeliness, and establish processes to handle adverse events. Prior to involving senior management, it is necessary to have answers to these questions, examples of how others have navigated similar waters, and concrete ideas on the trade-offs between risk and reward.

And as mentioned earlier, banks must establish clear business objectives and map them to specific areas in which social media can generate value. All of the above becomes a moot point if efforts are not driven by real business goals. By addressing each of the preceding areas, social media teams can build senior leadership support for and sponsorship of overall social media efforts. In Accenture’s experience, successful initiatives typically involve one or more executives with deep passion for and experience with technology and social media. It is crucial to find and engage these people and use their influence to open the eyes of the broader C-suite.

Crafting a Social Media Strategy

All of this work will prepare banks for the successful development and implementation of a comprehensive social media strategy. To be effective , such a strategy must encompass the following areas:

Crafting the Vision:

With an overarching framework in place, social media can be designed from the ground up , versus as a collection of disparate tactics .It also can focus on a specific segments and experiences, as well as on the necessary internal ‘piping’ to implement social media connections across channels. Indeed, every good customer experience is carefully designed and good social media experiences must follow suit.

Defining and Measuring Success :

A Bank’s Social media strategy must encompass well-defined metrics that reflect progress toward the bank’s business goals ( as defined in the vision). However, first and foremost , they must align with the same type of metrics that drive business today . For Example, a social media strategy focused on sales as an outcome should look at driving traffic from social media, converting that traffic into leads, and successfully cross-selling and up-selling customers that are interacting across social media channels. In effect, viewing the efforts through the same eyes that traditional channels evaluate success.

Governance:

A social media strategy should include clear governance and effective organizational structures, whether that means establishing a dedicated social media center of excellence or appointing social media champions across the bank’s functional groups and/or product lines. Regardless of the specific measures or structures in place , the bank’s goal should be to support efficient , effective engagement in social media with the right skills, staff, and controls . this Structure must be nimble, include processes for iteration ,and have senior leadership included.

Technology:

Perhaps counter-intuitively, it is only when the vision, metrics , and organizational structures have been defined that the bank should start thinking about technologies and the tactics they dictate. Banks Should start with basic learning and listening platforms that allow them to “test the waters” and identify areas of potential engagement, and then progressively integrate that platform with existing CRM tools to achieve a single view of customers. Banks must also consider what technologies are appropriate for record keeping and adherence to the policy.

Recognizing that not all starting points are the same:

The level of Social Media experience that a bank has plays an important role while crafting a social media strategy. The scope of the social media strategy depends on the relative social media maturity of the bank. The strategy used by a bank that has significant experience in social media will differ in some aspects from the strategy used by a bank which is new to social media. Banks with less experience in Social Media: The social media strategy used by the banks with no or relatively less experience in social media should address the following questions: * They should pay attention to the scope in terms of the functional areas covered by the strategy, important business goals, and the business processes used to achieve those goals. *

They should also focus on building engagement among key stakeholders and assessing their willingness to participate in the initiative This is as much about creating an initial “coalition of the willing” as it is about telling a compelling story on how social media can positively impact business results. * They should also learn from lean on agency partners and others that have been through the fire before. Banks with significant experience in Social Media: The social media strategy used by the banks with significant experience in social media should address the following questions: * The Social media champions within these banks must know when it is time to seek help from inside and outside the firm.

This is needed because the expanding range of social media analysis and reporting will begin to overwhelm marketing staff and merits the involvement of dedicated analytical and technical staff. * As these banks begin to expand the use of social media across product lines, they have to design governance models that can keep pace, as well as focus on integrating social media technologies with CRM systems to achieve a truly holistic view of cross-channel, multi-product customers.

Successful Integration of Social Media into the Operations:

Banks that have been successful in integrating social media into their operations often have grass-roots efforts to thank. These banks have passionate leaders who have led social media efforts for individual product or service lines. The key to moving beyond grass roots and getting the entire organization pulling in the same direction is actively engaging senior leadership. Only then will the full brand-building power of social media truly be realized.

How banks use social media

According to the survey conducted by MHP Communications amongst the heads of communications and public relations specialists at more than 35 global banks to gain an understanding into social media habits across the banking industry. In broad terms, use of social media is high with the majority of respondents (53%), using social media both in a private and a business capacity. 30% use social media outside of a work context and 3% for business purposes only. 15% of all respondents do not use social media at all, which is a high percentage given that social media generally sits under the communications department’s remit. Whilst social media has become a mainstream activity, it is notable that more respondents use social media for personal means than in a business context. When looking at the purpose of social media, it is widely seen as a good source of information on what is happening in the media (75% of respondents).

Interestingly it is less seen as a direct route to the customer, but more to communicate broadly and advertise products and solutions: More than two thirds say they use social media for communications and public relations purposes, whereas 42% use it for marketing and sales activities. Customer service is a key purpose for 25% only. In the retail banking sector social media has a more established footprint than in the investment banking world. This follows the logical conclusion that for customer service and customer engagement purposes the mass consumer market is appreciative of being able to communicate with banks through these new, yet very much established platforms. And banks are increasingly keen to appear more customer-friendly whilst tackling the image the sector has as consisting of traditional and staid organizations. In the investment banking world social media takes on a different purpose, and has even become a platform to be feared and avoided.

It is also not seen as a traditional direct route to clients. This is changing however, and one senior PR manager commented that the bank’s trading desk recently received a client request for traders to be given access to Twitter to monitor and engage with client comments throughout the trading day. The use of social media within the internal communications function is relevant for around one third of respondents (36%) – which represents a vast untapped potential given the range of opportunities to share knowledge and information internally that social media creates. Free tools such as Yammer, Twitter with protected tweets or Google+ with individual circles make information available only to a selection of people, so they can be used to streamline internal communication processes. However, and this is a key problem for a heavily regulated industry such as the banking sector, social media platforms are provided by external third parties.

Any shared data which is of a sensitive or confidential nature will in many cases be stored on the provider’s servers which may not provide sufficient protection or peace of mind for the banking sector. Most providers are based in the US where legislation may, under certain circumstances, require them to reveal their clients’ identities or other data. Also, social media platform providers are commercial operations and there is the risk that data is misused, misplaced or falsely allocated. Many banks feel that sensitive data should only be stored and transmitted on their own infrastructure to ensure full compliance. At the same time, regulatory bodies such as the Financial Services Authority (FSA) in the UK aim to make social media more widely user-friendly for banks by publishing guidelines and recommendations.

As a consequence there is a high level of insecurity as to what can and cannot be done. Despite these issues, social media is now seen as forming a strategic part of a communications program rather than representing solely a tactical activity, with 84% of banks now having a specific social media strategy. Nearly one third has started to execute a strategy, and 15% have a fully developed strategy in place. More than 40% are currently in the process of creating a strategy, and only 16% have not started thinking about or have decided not to have a social media strategy in place. A number of banks do have a social media strategy, but no defined goals for the strategy: 27% responded that they have not established specific goals for their social media strategy. Measuring the success of a social media program is perceived to be more complicated than for traditional PR which may explain why metrics and, in effect, goals remain vague.


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