Today, marketing strategies and initiatives have become big business for many financial institutions across the country. Not only do they represent a significant financial investment by a financial institution, they also can mean the difference between surviving or being lapped by the competition. To help tip the scales in the bank’s favor, it’s important to understand the numerous risks that are presented when marketing bank products and services.
Now, it’s quite common to just think about the compliance risk – the risk to earnings or capital arising from violations of, or non-conformance with, laws, rules, and regulations – when undertaking a marketing campaign. As many of you will probably agree, the advertising rules for deposit and loan products are fairly straight forward.
Take a closed-end loan for example, if the advertisement contains a trigger term, such as the number of payments or period of repayment, the amount of any payment or the amount of any finance charge then additional information must be disclosed with the market piece. Or, if an advertisement for a bank certificate of deposit contains the annual percentage yield (aka APY) then the advertisement would be required to disclose the minimum balance requirements, term of the account, and early withdraw penalties may reduce the earnings on the account, just to name a few.
But, what about the other risks that sometimes go unnoticed. Like, reputation risk, which is the risk to earnings or capital arising from negative public opinion. Maybe the reputation risk for a certificate of deposit advertisement is inherently low risk and not worth the consideration, but what about a closed-end mortgage loan advertisement that may potentially have a disparate impact on a prohibited basis under the fair lending laws. Now, this could certainly have an impact on the financial institution’s ability to establish new relationships or services or continue servicing existing relationships.
And, don’t forget about transaction risk, which is also referred to as operating or operational risk and is the risk to earnings or capital arising from problems with service or product delivery. This risk may arise if the advertisement were to create an issue with delivering on the promise for the product or service being advertised. For example, an incredibly low mortgage loan interest rate (which would be advertised as the annual percentage rate (APR) as we always must take into consideration compliance risk) may lead to an influx of loan applications. This may throw a wrench into the loan operations resulting in service delivery challenges, which also may be reflected in potential reputational risk.
As you can see, risk is present in all things we do. It’s important for financial institutions to take a holistic approach when advertising products and services to ensure all potential risk is considered and appropriate responses are taken to manage that risk in accordance with the institution’s risk appetite. Not all advertisements will present the same level of risk, but all advertisements will present risk that may impact the financial institution’s ability to meet its strategic goals and objectives.