A Research Paper By the Centre for Global Finance University of Nottingham Ningbo, China. Measuring Trust in Retail Banking in China

Transcription

1 A Research Paper By the Centre for Global Finance University of Nottingham Ningbo, China Measuring Trust in Retail Banking in China By Christine Ennew Research Fellow, Centre for Global Finance June

2 INTRODUCTION It is widely acknowledged that trust plays a central role in the way in which financial services organisations present themselves to their customers and this is particularly apparent in retail markets. The combination of intangibility, product complexity, and the long term nature of many products means that customers face high levels of risk in making purchase decisions; they will often have difficulty in judging product performance and will need to trust financial services institutions (FSIs) to offer products of an appropriate type and quality. The importance of trust for an efficient and effective financial sector cannot be understated. Trust underpins retail customers willingness to engage with the financial services sector. If the financial services sector is to fully mobilise private savings to support economic development and is to provide individuals with the means of managing risk and maintaining financial well being, it must command the trust of its customer base. Although clearly important, our understanding of the concept of trust can be both variable and imprecise. Its importance as a means of ensuring stability within social systems and facilitating economic transactions is widely accepted; its precise meaning is open to rather more debate and rigorous empirical evidence is in short supply. This paper reports on work undertaken by the Centre for Global Finance at the University of Nottingham Ningbo, China in conjunction with the Financial Services Research Forum to measure levels of trust in retail banking in China. The paper begins with an overview of trust in financial services and then moves on to present a framework for measuring trust. The next section presents the result of a large scale survey and examines both levels and drivers of trust. The paper closes with a summary and conclusions. TRUST AND FINANCIAL SERVICES In a business context, much of the discussion about the meaning of trust has its origins in literature relating to organizations and organizational analysis. Within this body of research, trust has attracted the interests of psychologists, sociologists, economists and management researchers; as a consequence there are a variety of different approaches to understanding the concept of trust and a 2

3 variety of different definitions 1. What is apparent from the many different definitions and approaches to trust is that there are certain key themes that emerge and appear to be recognised as integral to the concept of trust 2 ; trust depends on the existence of risk if the outcomes of a particular action are certain, then there would be no need to trust; trust depends on interdependence between actors if actors are not somehow dependent on each other, there is no need to trust; trust is associated with vulnerability risk and interdependence create vulnerability; trust involves confident expectations about future behaviours an actor will only accept vulnerability in the presence of strong expectation of the positive future behaviour of another actor; some form of trust is likely to be inherent in most relationships few relationships are or can be characterised by complete certainty or complete contracting. Thus, a common view of trust would suggest that it is concerned with an individual s willingness to accept vulnerability on the grounds of positive expectations about the intentions or behaviour of another in a situation characterised by interdependence and risk. Existing perspectives on trust suggest that this willingness to be vulnerable may arise from a calculation of costs and benefits, an individual s existing predisposition to trust, a detailed knowledge and understanding of exchange partners and/or a faith in social systems and institutions. Thus, to the extent that there is vulnerability, risk and interdependence associated with the purchase of financial services, then there will be a role for trust 3. From the perspective of retail consumers, the buying process for financial 1 Rousseau, D M, Sitkin, S B, Burt, R S, Camerer, C (1998) Not So Different After All: A Cross Discipline View of Trust, Academy of Management Review, Vol. 23 (3) p Sheppard, B., and Sherman, D., (1998), The Grammars of Trust: A Model and General Implications, Academy of Management Review. Vol. 23, No. 3, pp Berry, L., (1995), Relationship Marketing of Services Growing Interest, Emerging Perspectives, Journal of the Academy of Marketing Science. Vol. 23, pp

4 services can be complicated because of the variety and complexity of the products available and the difficulties of making comparisons between different products. Despite the relatively recent development of the retail banking sector in China, there is, nevertheless, a considerable variety of traditional banking products available alongside the variety of insurance based products that are increasingly being distributed via bank branch networks. Even what might be regarded as relatively simple products, such as bank accounts, savings products and loans may appear complicated to many consumers and difficult to compare. In addition, financial services are generally considered to be uninteresting to large sections of the retail market and accordingly many customers are unwilling to invest time and effort in trying to understand such products. The difficulties associated with understanding financial services are compounded by the inability to judge how well they will perform in the future; the consumer can only assess the product once it has been bought and even then, that assessment may take a number of years as is the case with products designed for the longer term. With many protection products, performance evaluation may only take place in the event that a customer needs to make a claim and for many customers, this maybe never. Even in the case of products whose performance can be assessed over a rather shorter term period, the consumer may find difficulties in assessing product performance. For many products, performance depends on both the skills of the product provider and the future performance of the economy as a whole. The performance of similar product types may vary considerably according to the time period over which they are assessed and the timing of initial purchase. Poor performance might be due simply to bad fortune and timing. This forces the consumer to rely heavily on credence qualities on trust and confidence in what a provider does and has done 4. Indeed, it has been suggested that the main function of trust is to reduce uncertainty thereby making risks manageable and simplifying choice 5. 4 Diacon, S R and Ennew C T (1996) `Can Business Ethics Enhance Corporate Governance : Evidence from a Survey of UK Insurance Executives, Journal of Business Ethics vol 15 pp Morrison, D., and Firmstone, J., (2000), The Social Function of Trust and Implications for E-Commerce, International Journal of Advertising. Vol. 19, pp

5 Based on this explanation of the purchasing process, the conditions that make trust important are clearly in evidence in relation to financial services; Risk consumers identify significant risks associated with financial services because they are effectively surrendering some control over their finances to a third party. Risks are associated with poor product performance, which may be due to the poor quality of the product but could equally be due to misfortune. Risk is inherent in financial services but is compounded by consumer s typically low levels of understanding and the impacts of uncontrollable factors. Vulnerability since financial services can and do have a significant impact on the consumer s well being, a poor performing product can have a very significant impact on individual customers. For example, savings product with poor returns or an insurance product that does not provide the expected cover can easily have significant adverse impacts on consumers. Interdependence the functioning of financial markets means that in general, individuals need the services of a specialist intermediary to deal with their financial needs. More significantly, product variety and complexity mean that the customer is dependent on a financial services organisation for advice and the more limited the customers understanding of financial services, the greater the dependence on a financial services provider or a financial adviser. The specific features of financial services and the importance played by front line staff and sales staff means that trust may be based in the organisation, the brand or the individual; traditionally, trust in the individual has always been of considerable significance to the industry. Increasingly though, as methods of distribution change, the importance of the brand as the basis for a relationships and a basis for trust is increasing 6. 6 Dall Olmo-Riley, F (2000) The Service Brand as Relationship Builder, British Journal of Management, vol 11(2) pp

6 DEVELOPING THE TRUST INDEX While there is widespread recognition of the importance of trust, attempts to measure trust all too often rely on simple measures of the concept, using perhaps single statements and often simple yes/no answers. Research in the area of trust (and the related concept of trustworthiness) highlights the richness and complexity of both concepts. Accordingly, in attempting to evaluate and monitor trust and trustworthiness in the financial services sector, the Financial Services Research Forum sought to develop a more robust and rich measure. The measurement framework, which is outlined in Figure 1, proposed that consumer trust in an organisation may be low level or cognitive (ie based around notions of reliability and dependability) or high level or affective (ie based around notions of being concerned about the best interests of the customer). Figure 1: A Framework for Measuring Trust in Financial Services Expertise and Competence Consumers disposition to trust Integrity and consistency Communications Organisational trustworthiness Trust in the organisation Shared values Concern and benevolence Cognitive Affective In line with marketing studies which have reported close associations between these forms of trust it is suggested that cognitive trust can lead to affective trust. Consumer trust is also related to individual characteristics, reflecting work within the psychology tradition which would argue that consumers may have different dispositions to trust. The other major determinant of trust is organisational 6

7 trustworthiness which is determined by expertise and competence, integrity and consistency in behaviour, effective communications, shared values and concern and benevolence. Multi-item likert-scales were develop to measure each of the above concepts, working with the following definitions (see Appendix): Trust Consumers trust in a financial services institution (FSI). This is an attribute of consumers. Trust may vary across consumers because of different experiences and personality traits even where perceptions of trustworthiness are similar. Trustworthiness The extent to which an FSI is perceived as being worthy of trust. This is an attribute of the FSI; it is central to the image and reputation of the institution and can be managed by both internal policy and practice and through external communications. Benevolence The extent to which an FSI is concerned about its customer s interests from a customer perspective. Integrity The extent to which an FSI is honest and consistent in what it does from a customer perspective. Ability/Expertise The extent to which an FSI is seen as having the necessary skills and ability to deliver its services from a customer perspective. Shared values The extent to which consumers believe that an FSI has values similar to their own. Communications The extent to which an FSI communicates well/effectively from a customer perspective. 7

8 In addition, data was also collected in relation to the concept of system trust, to assess the extent to which individuals believed that the financial system could be relied upon to protect them and their interests. Although not formally part of the model, the system trust concept is included in the detailed analysis in the next section. CUSTOMER TRUST IN RETAIL BANKING IN CHINA Using the measurement instrument developed by the Financial Services Research Forum, a survey of retail bank customers in China was carried out during December 2007 and January A total of 1000 customers in the Yangtze River Delta region were interviewed about their relationship with their bank; this area was chosen as being one of the most economically developed regions of China and thus one in which consumers were likely to have a greater diversity of banking needs, thus ensuring that the data collected related to broad and diverse banking relationships. Respondents were asked very specifically about their relationship with their bank and were also asked to provide comparative ratings of other non-financial institutions (employer, supermarket and mobile phone provider) to provide a benchmark against which the performance of the banking sector could be evaluated. As Table 1 shows, the sample was spread across the key metropolitan areas of the Yangtze Delta, with the largest number of respondents coming from Shanghai. Table 1: Sample Distribution by City City Group Total Shanghai Nanjing Suzhou Hangzhou Ningbo Count Col % % % % % % % There is evidence of a slight bias towards female as table 2 shows, although this is not large enough to give any cause for concern. 8

9 Table 2: Sample Distribution by Gender Gender Group Total Male Female Count Col % % % % The sample is dominated by relatively younger customers as Table 3 shows, with some 50% of respondents being under 35. While direct comparisons between the sample and the population of bank customers are not possible, there are no reasons to believe that this pattern is not representative. Table 3: Sample Distribution by Age Age group Group Total 18 to 24 years 25 to 29 years 30 to 34 years 35 to 39 years 40 to 44 years 45 to 49 years 50 to 54 years 55 to 59 years 60+ Count Col % % % % % % % % % 9.9% % As would be expected, the sample is dominated by relatively higher income groups with over 50% of respondents earning in excess of RMB5,000 per month. Table 4: Sample Distribution by Income Monthly household income Group Total RMB RMB1,000-1,499 RMB1,500-1,999 RMB2,000-2,499 RMB2,500-2,999 RMB3,000-3,499 RMB3,500-3,999 RMB4,000-4,499 RMB4,500-4,999 RMB5,000-5,499 RMB5,500-5,999 RMB6,000-6,499 RMB6,500-6,999 RMB7,000 or above Count Col % 2.2% % % % % % % % % % % % % % % Table 5 shows the distribution of respondents by bank, with the dominance of 3 of the big four being clearly in evidence. The Industrial and Commercial Bank of China (ICBC) has the largest number of respondents followed by the Agricultural 9

10 Bank of China (ABC) and China Construction Bank (CCB). China Merchants Bank (CMB) and Bank of China (BofC) have similar numbers of respondents, with Bank of Shanghai (BofS) and Bank of Communications (BofComm) being the smallest of the 7 identified banks. Table 5: Sample Distribution by Bank Count Col % Bank ICBC % ABC % CCB % CMB % BofC % BofS % BofCom % Others % Group Total % Table 6 provides summary information on the overall measures of trust and trustworthiness. In contrast to many trust measures, which rely on a simply yes/no comparison, the approach adopted here measures degree of trust. The trust/trustworthiness measures were constructed by averaging across responses to a series of statements and then scaled so that the maximum possible score is 100 and the minimum is 0. To interpret these figures, a score of 100 would mean that all respondents strongly agreed with every statement on trust. A score of 75 would indicate that on average respondents moderately agreed with the statements on trust and a score of 50 would indicate that respondents neither agreed nor disagreed with the various statements. Table 6: Whole Sample Measures of Trust Overall trust Base level trust Higher level trust Trustwort hiness Mean Std Deviation Minimum Maximum Thus, in looking at Table 6, overall consumer trust is slightly below the figure of 75 suggesting that on average, respondents are moderately trusting of their bank. Base level (cognitive) trust is significantly larger than high level (affective) trust as might be expected that is to say, respondents are more convinced about the reliability/dependability of banks and less convinced about the extent to which banks have their interests at heart. Respondents perceptions of the 10

11 extent to which banks are trustworthy is significantly higher than the reported level of overall trust. This would suggest that the reputation that banks project may promise more trust than consumers are willing to offer, perhaps reflecting variations in individual dispositions to trust. However, the observed difference is relatively small. The factors that are believed to influence trust are outlined in Table 7 and the figures should be interpreted in the same way as the figures relating to the aggregate measures. Based on these results, banks attract their highest ratings in relation to system trust, ability/expertise and integrity and are weakest in relation to communication and shared values, both of which display a high degree of variability relative to both expertise/ability and integrity. Table 7: Whole Sample Drivers of Trust Mean Std Deviation Minimum Maximum Ability/exp Shared Communi Benevolence ertise Integrity values cations System trust Figure 1 provides a comparative analysis of trust across leading banks in the sample. ICBC and Bank of China record some of the strongest scores across different measures of trust and trustworthiness while China Construction Bank, Bank of Shanghai and Bank of Communications receive rather weaker customer ratings. 11

12 Trust index Trust index Figure 1: Overall Measures of Trust Overall trust Base level trust Higher level trust Trustw orthiness ICBC ABC CCB CMB BofC BofS BofCom Bank Figure 2 combines trust ratings for banks with the ratings reported for comparator institutions, providing clear evidence that customers display relatively higher levels of trust in their bank, a finding that is consistent with results from surveys undertaken in the UK, Malaysia and Oman Figure 2: Overall Measures of Trust Overall trust Base level trust Higher level trust Trustw orthiness ICBC ABC CCB CMB BofC BofS BofCom Employer Phone Supermarket Institution An overview of the individual drivers of trust is presented in Figure 3, broken down by bank. Consistent with the aggregate figures, customers of ICBC and 12

13 Trust index Bank of China provide high ratings for their bank across most drivers of trust and both communications and shared values are uniformly weak. System trust, which relates to overall trust in the financial system is consistently highly rated across all banks suggesting a high degree of confidence on the part of individuals Figure 3: Drivers of Trust Benevolence Ability/expertise Integrity Shared values Communications System trust ICBC ABC CCB CMB BofC BofS BofCom Bank Two variables likely to have a significant impact on trust and trustworthiness are age and length of relationship because both may have a bearing on customer knowledge and experience. Research in the UK has shown that age in particular has a positive impact on recorded levels of trust with older consumers displaying markedly higher levels of trust than younger consumers. As figures 4 and 5 show, there is evidence of a similar trend among customers of Chinese banks. Trust evaluations dip for consumers in the age group, with a pronounced increase among those respondents who are over

14 Trust index Trust index 80 Figure 4: Overall Measures of Trust by Age Overall trust Base level trust Higher level trust Trustw orthiness Under Over 50 Age 85 Figure 5: Drivers of Trust by Age Benevolence Ability/expertise Integrity Shared values Communications System trust 60 Under Over 50 Age Of course, age and length or relationships are closely related and an analysis by length of relationship, as shown in Figures 6 and 7 displays a similar pattern with higher levels of trust reported by those customers who had maintained longer relationships with their bank. 14

15 Trust index Trust index Figure 6: Trust by Length of Relationship Overall trust Base level trust Higher level trust Trustw orthiness Under 3 years 3-5 years 6-10 years Over 10 years Relationship Length Detailed analysis of the relative impact of both age and relationship length suggests that it is age which is the more important in explaining changes in levels of trust. However, there is evidence that relationship breadth ie the number of products that a customer holds does influence levels of trust. Customers holding 3 or more products from a given bank report higher levels of trust than those holding fewer that 3 products. 85 Figure 7: Drivers of Trust by Length of Relationship Benevolence Ability/expertise Integrity Shared values Communications System trust 60 Under 3 years 3-5 years 6-10 years Over 10 years Relationship Length 15

16 There is also evidence to suggest that trust ratings vary significantly by gender with female customers reporting higher levels of trust than males. This pattern is clearly in evidence across both the aggregate measures of trust and the drivers of trust, as Tables 8 and 9 demonstrate. Table 8: Overall Measures of Trust by Gender Male Female Mean Mean Base Higher Trustwort Overall trust level trust level trust hiness Male Female Mean Mean Table 9: Drivers of Trust by Gender Ability/exp Shared Communi Benevolence ertise Integrity values cations System trust There is weak evidence of a relationship between income and trust with a slight tendency for higher income earners to report higher levels of trust. The analysis thus far highlights the importance of a variety of personal factors that influence respondents assessments of levels of trust and trustworthiness in relation to their bank. In order to understand what lies behind these perceptions, the framework introduced earlier in this paper suggested that trustworthiness would be determined by assessments of a bank in terms of ability/expertise, benevolence, communication, integrity and shared values. Regression analysis provides insights into the relative importance of these different drivers. Figure 8 shows the relative size of the coefficients from a regression analysis and it is clear that benevolence and integrity are the most important influences on trustworthiness. In contrast, communications, although highlighted earlier as an area in which the banks generally were perceived to be weak, has virtually no influence on perceptions of trustworthiness. 16

17 Figure 8: Drivers of Trustworthiness Benevolence Ability/expertise Integrity Shared values Communications CONCLUSIONS This analysis of trust in retail banking demonstrates that customers do have a moderately high level of trust in their bank, particularly when compared to mobile phone providers, employers and supermarkets. Levels of trust do vary across banks with ICBC and Bank of China scoring relatively highly while ABC and CCB have relatively low scores. Trust tends to increase with both age of customer and length of relationship with bank and female customers display higher levels of trust than males. Customers with a broader relationship ie holding more than 3 products display higher levels of trust than customers with fewer products, highlighting the importance of trust in enabling banks to cross sell to their customer base. Perceptions of bank integrity and benevolence (having the customers best interests at heart) are the most important drivers of consumer trust, suggesting that if banks are looking to enhance levels of consumer trust, a focus on enhancing reputation in these areas would be the most effective strategy. 17

18 Strongly Disagree Neutral Strongly Agree Strongly Disagree Neutral Strongly Agree Appendix: Measures of Trust and Trustworthiness My main BANK.. I trust my bank to do what it says it will do I trust my bank to have my best interests at heart My bank is very reliable My bank is always honest with me My bank is concerned about my best interests Overall I feel I can trust my bank My bank makes every effort to address my needs My bank has a reputation for being reliable My bank has a reputation for being honest My bank has a reputation for being dependable My bank has a reputation for looking after its customers My bank has a reputation for having its customers interests at heart Overall I feel my bank is trustworthy Table A2: Measures of the Drivers of Trustworthiness My main BANK.. Does whatever it takes to make me happy Keeps its word Acts in the best interests of its customers Shows high integrity

19 Is honest Conducts transactions fairly Has the information it needs to conduct its business Is consistent in what it does Can be relied upon to give honest advice Shows respect for the customer Treats customers fairly Has the same concerns as me Is receptive to my needs Competently handles all my requests Is efficient Communicates clearly Is responsive when contacted Informs me immediately of any problems Has the same values as me Informs me immediately of new developments Acts as I would Is knowledgeable Communicates regularly