The fact is that innovation is one of the greatest traits of the US economy. The more we innovate, the more things grow and change. The same is true in the banking industry where technology has produced dramatic change in the industry. Mobile and RDC are two of the up and coming and spreading technologies. As these technological advances continue, the relationship between banks and their customers has also changed. Many banks are reducing the number of physical branches that they maintain and instead serve their customers virtually through the internet. In addition, to keep up with the changing environment financial institutions have begun to explore the use of social media as a means of achieving growth. And just as you might have expected, the regulatory agencies that monitor banks have considered the risks that the growing use of social media presents. Recently, the FFIEC published proposed guidelines for the use of social media by the financial institutions that they regulate. This proposed guidance establishes the fact that social media is an area that examiners will review in the coming years.
Social Media as a Tool for Growth
Social media sites such as Facebook, Twitter and LinkedIn have been all the rage for some time. Not only young people but the parents of young people use these networks extensively. The fact is that millions of people around world stay connected and get the bulk of their information from these sites. There is no question then that social media represents the opportunity for banks to connect with a much larger market than the ones that traditional advertising reach. Taken a step further, sites such as Facebook and Twitter give financial institutions yet another means to reach out to communities that may have been under banked or altogether overlooked in the past.
A cleverly designed Facebook page or a well-placed twitter campaign can produce impressive results for advertisers that include these sites as part of the marketing plan. Banks can benefit from the potential to reach customers that had heretofore been unreachable. On the other hand, potential customers can ask questions on the internet that they may be embarrassed to ask in person. In addition, they can review information from a bank at their own pace and without the pressure of a bank employee looking at them.
Used the proper way, it is clear that including social media in the overall strategic and marketing plans can create opportunities for growth at financial institutions.
Social Media as a Risk Consideration
Along with the potential for growth, the use of social media presents the possibility of adding a great deal more risk to financial institutions portfolio. The FFIEC proposed guidance is designed to focus on this risk and the steps that financial instructions should take to manage this risk. The guidance mentions three types of risk to consider:
- Compliance Risk
- Reputational Risk
- Operational Risk
Compliance risk generally derives form the possibility that social media is designed d to become a form of formal advertising. When financial institutions advertise that are several regulations that apply. Included in these are the Truth in Lending and Truth in Savings Acts. Both of these regulations act in similar fashion and require a great deal of disclosure when “triggering terms” are used. The guidance points out that in the event that social media is used as advertising, there should be systems I place to make sure that all required disclosures are being made. Moreover, social media is an outlet for customer complaints and if a financial institution is going to use social media there has to be a mechanism to monitor and quickly respond to official complaints.
Reputational risk comes from the need to manage and maintain social media sites. The fact is that information moves swiftly on the internet and it is very easy for a site that is not constantly monitored to become obsolete overnight. The guidance here is that when a financial institution commits to using a social media site, the commitment has to be full-fledged. There must be a system for limited the numbers of people who can make changes to the social media and this pole have to be tasked with constant monitoring of the site. Websites are viewed by the public as the internet manifestation of the financial institution and the material on the website must properly reflect the mission and overview of the Board.
Operational risk is described by the guidance as the possibility that the use of social media will increase the possibility of internet attacks on the bank. Social media sites must be administered with the full complement of security procedures to ensure that privacy of financial information is maintained at all times.
The good news is that the guidance mirrors the structure of the several other pronouncements form the FFIEC. The steps that should be taken by an institution include policies and procedures, reporting to the Board and internal controls to prevent security breaches and compliance concerns. If a financial institution chooses to use social media, then the policies, procedures, reporting and testing should be documented.
Though this is proposed guidance today, the fact of the matter is that the guidance will soon become official and examiners will be directed to review this rea as part of the compliance and safety and soundness examinations. Now is the time to embrace the change and develop strategies for use of social media.
Based upon our reading of the guidance and the overall emphasis with financial institutions regulators, it is clear that the “hot spots” for social media usage will be:
- Advertising- ensuring that any social media used as advertising has proper disclosures
- Privacy- ensuring that customer information is properly protected
- Complaints- Developing a system to ensure that complaints on social media are monitored
- Discouragement – Ensuring that social media sites don’t lend themselves to discouragement of potential customers from classes
Even though the guidance is proposed at the time of this writing it is clear that social media will be an issue for financial institutions in the near future and examiners will include this area in the scope going forward.