Trust Culture and the Effectiveness of Consumer Protection

By | July 15, 2021

In our recent paper, we study consumer complaints filed with the Consumer Financial Protection Bureau (CFPB), the watchdog agency charged with protecting consumers from financial abuses, and their disciplinary effect on bank behavior. Since its establishment, the role and effectiveness of the agency has been subject to debate—the previous administration tried to dismantle it, while the current administration wants to return the agency to its original incarnation. Our focus is on the interaction between local culture and the effectiveness of consumer protection. We find that a higher level of trust in a location (state, city, or zip-code) is associated with fewer complaints against financial institutions (such as banks, credit reporting companies) there. Further, after the establishment of the CFPB, which was mandated under the Dodd-Frank Act, banks in low-trust areas reduce fees charged to consumers (such as late fees and overdraft fees) more compared to banks in high-trust areas. Our results suggest that publicizing consumer complaints and the threat of enforcement by a centralized agency do provide a disciplinary effect on financial institutions. The effectiveness of such regulation hinges on consumers’ concern for self-protection, however; if consumers blindly trust banks, they may be less vigilant, which potentially undermines consumers’ roles as monitors. Overall, the results in this paper extend our understanding of the interplay between social norms and the enforcement of laws through private citizens’ monitoring.

Our measures of consumer trust are motivated by specific cultural transmission channels of trust norms—vertically (from parent to children) and horizontally (from peer to peer). Because the literature on trust suggests that trust is partly shaped by a person’s local environment and social networks, our analysis incorporates measures of trust that vary geographically. We begin by measuring trust at the state level using data from the General Social Survey (GSS), a personal-interview survey of social characteristics and attitudes. To explore variation in trust across time, we consider the revelation of the Wells Fargo account scandal in 2013 as a negative shock to trust in financial institutions. With this revelation, we indeed find a decline in the level of trust, as measured by the GSS, especially in places with Wells Fargo branches. We also use census data to construct a trust measure that takes advantage of information about the ancestral origins of the local population, at various geographical levels. This measure is thus largely driven by historical immigration patterns and the attitudes of trust in immigrants’ countries of origin, and is expected to capture the inherited, persistent component of trust.

Using both cross-sectional and time-series variation in trust, we find a robust negative relation between local norms of trust and the number of consumer complaints. This negative relation holds across states, as well as across a bank’s branches in different cities or zip codes within a state. It also holds when we compare (non-Wells Fargo) complaints before and after the revelation of the Wells Fargo account scandal across locations that are affected by the revelation to different degrees.

Next, we investigate the potential governance role of consumer complaints. The disciplinary effect of consumer complaints could increase under the CFPB’s new complaint regime due to several regulatory features. The public disclosure of complaint data, along with the CFPB’s enforcement and regulatory powers, increases the potential costs to banks of consumer complaints. At the same time, the establishment of the CFPB as a single, central agency for consumer complaints effectively reduces the cost of complaints to consumers. As a result, individual consumers’ complaints to the CFPB may have spillover effects: the increased threat from consumer complaints after the establishment of the CFPB may reduce banks’ willingness to employ aggressive policies. We hypothesize that the greater threat from consumer complaints under the new regime makes banks treat their customers better, especially in places where trust is lower. To test this hypothesis, we employ a difference-in-differences (DID) approach around the implementation of the new complaint regime in 2011, and measure banks’ behavior related to the complaint regime using fees charged to consumers.

We find that, overall, banks reduce fees during the post-treatment period compared to the pre-treatment period. More importantly, banks in places with lower trust reduce fees more than banks in places with higher trust. Further, we find that the disciplinary effect from the threat of consumer complaints is stronger when a bank faces greater local competition, as measured by the concentration of deposits where the bank is located. Taken together, the results suggests that the effect of consumer complaints could derive from banks’ desire to improve their reputations and retain customers—an effect that is more salient when the competition in the local banking industry is stronger.

To summarize, our results shed light on the interaction between informal culture and formal institutions, and on stakeholders’ influence on corporate policies. Our findings point to the role that trust plays in determining the intensity of consumer complaints and the effectiveness of consumer complaints in curbing the opportunistic behavior targeted by bank consumer protection regulation. While the existing literature mainly speaks to the positive aspects of social trust, such as its potential to mitigate frictions like information asymmetry, our findings of its negative effect on consumer complaints highlight a new aspect of trust. Finally, both the popular press and academic literature tend to focus on corporate executives and directors as the most important figures shaping firm policies. Our paper finds an impact of consumer voice on bank policies (fee charges), which suggests an important role for other stakeholders too, and that consumer protection “takes a village.”

Rachel M. Hayes is a Professor and Associate Dean of Faculty & Research at the University of Utah David Eccles School of Business

Feng Jiang is an Associate Professor at the University of Buffalo School of Management

Yihui Pan is an Associate Professor of Finance at the University of Utah David Eccles School of Business

This post is adapted from their paper, “Voice of the Customers: Local Trust Culture and Consumer Complaints to the CFPB, available on SSRN.

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