Why the Barclays Scandal Matters for Marketers

15 january 2013

At its heart, commerce is fundamentally about trust, and any agreement in the business world is an expression of trust. Employment agreements are an expression of mutual trust, for instance: the employer trusts that the employee won’t slack off or steal; the employee trusts that her boss won’t be overbearing and that she’ll get paid on time. When our customers buy our products, it’s an expression of trust that the products will work as advertised and won’t blow up in their faces or give their kids cancer. Perhaps the biggest expression of trust is in banking, finance, and insurance: we hand over gobs of our money to companies – in the case of consumer-focused banks, almost all of it – and expect those companies to be good stewards of it, with little more than those companies’ reputation (and some helpful laws) to reassure us.

The trust at the heart of commercial activity fails, occasionally, and for those occasions we have both legal and market remedies – parties whose trust has been breached can sue, or tell others about their difficulties and cause harm to the other party’s reputation.

But most of us, at least, believe that those breaches of trust aren’t systematic. They’re the product of individual bad people doing bad things, we tell ourselves – problems capable of being handled by our legal and market systems. Recent revelations about systematic manipulations of a key interest rate – the Libor – should give pause to that belief.

The Libor scandal is a slightly arcane bit of finance, but the basic gist is this: the 3-month Libor (which stands for London Interbank Offered Rate) is an estimation of how much it costs London’s biggest banks to borrow money. It’s set by simply asking those banks to estimate their 3-month borrowing costs each day, eliminating the outliers, and taking an average. The resulting rate is used in basically two ways: as an expression of global credit risk (rates go up when the financial system is perceived to be in danger, like in the fall of 2008) and as a benchmark interest rate for millions of contracts around the world. Interest rates on adjustable-rate mortgages, for instance, use the Libor rate as a reference. Variable-rate bonds – which finance tens of thousands of companies, nonprofits, and governmental agencies – work in much the same way.

The scandal began in 2007 when Barclays (and possibly other major banks) began to lie about their borrowing costs. Barclay’s agreed that this was an attempt to manipulate the Libor, and that their efforts had some effect – it’s hard to tell exactly how much – on the rate itself. There is also evidence that there was tacit encouragement of that manipulation by major financial authorities. After a long investigation, the US Justice Department and Commodity Futures Trading Commission fined Barclays a collective $360m, and the UK Financial Services Authority fined the company £59.5m. The UK government essentially forced the resignation of both the company’s chairman and its CEO. There are also rumblings of criminal prosecution.

Enough arcanery for now; let’s get back to the effect on marketers and customers. We’ve spoken with several financial marketers over the past few years who seem to have the opinion that this stuff is too complicated for consumers to truly understand. And they’re probably right; most people don’t want to consider the machinations of global finance at the end of a long day of work (or unemployment, as the case may be). But what they will take away from scandals like these is that banks cannot be trusted, and what lots of folks in the financial world neglect to understand is that without trust, their business (and all business) dies. The actions of some of their colleagues at trading desks do more to destroy trust in commerce than anything the wildest-eyed Communist could ever dream of.

Marketers outside the financial world should also understand that these scandals don’t exist solely in the vacuum of that world. They should also understand that there’s a strong likelihood that shenanigans like these make their customers measurably poorer and as such less likely to buy things.

Here’s the takeaway: in most companies, marketers own the interaction between consumers and brand. Most interpret that as a one-way street – we marketers tell consumers what our brand stands for. But it’s not enough to emphasize trust and stability in your messaging; you must also be the voice – however quiet, however small – of the consumer inside your organizations. Is someone cutting corners on product safety? Bilking customers out of money? Manipulating a rate that’s the basis of global finance? Make sure they know that they do not act with impunity, and that the chickens will eventually come home to roost. Because they will, and we’ll all be here to pay the price.