The Bankwatch

Tracking the consumer evolution of financial services

The nature of social capital and trust in banking and financial services

I have enjoyed a re-read of Bowling Alone during a recent vacation.  Its a fascinating book written very academically, so not an easy read.  Tons of statistics.  However the concepts that it explores are relevant and interesting for Banks.  For me it helped to sort out differences between Banks and others, and the nature of trust.  It helped me better understand social capital.

What is especially interesting and relevant for our times is that it was written in 1999.  This book predated the dot com crash, and predated the rise of social networks, yet it nailed the much of the direction of internet that we have witnessed through the twentyfirst century to date.

It does that because it takes a sweeping century wide view of social progress, and lays out the possible reasons for the shifts in a quite objective and analytical manner.

The basic premise is that the fabric of US society has altered dramatically in the last 1/3 of the twentieth century, and people are significantly less civically engaged than in the first 2/3.

We care less <here> about civic engagement, but more about the underpinnings of that shift.  In the discussion Putman talks about social capital, and the shifts in that capital.

I see relevance here for Banks to understand their customers from a perspective that normal segmentation will not pick up.  First some definitions that the book uses, then discussion.  I am keeping this deliberately relatively brief, and if you want to delve deeper, then 540 pages await you!  Worth the read if you care about this stuff.

First some definitions, which you can skim, then the discussion.

Definitions [from “Bowling Alone]:

Social Capital:

“How does social capital work?
The term social capital emphasizes not just warm and cuddly feelings, but a wide variety of quite specific benefits that flow from the trust, reciprocity, information, and cooperation associated with social networks. Social capital creates value for the people who are connected and – at least sometimes – for bystanders as well.

Social capital works through multiple channels:
– Information flows (e.g. learning about jobs, learning about candidates running for office, exchanging ideas at college, etc.) depend on social capital.

Social networks are important in all our lives, often for finding jobs, more often for finding a helping hand, companionship, or a shoulder to cry on.  [Fischer]”

Bonding Capital:

… inward looking and tend to reinforce exclusive identities and homogeneous groups.  eg fraternal organisations, church based womens groups, fashionable country clubs, ethnic enclaves, start up financing groups, etc. [sociological superglue]

Bridging Capital:

Bridging networks, by contrast are better for linkage to external assets and for information diffusion.  .. when seeking jobs, political allies the weak ties that link me to distant acquaintances who move in different circles from mine, are actually more valuable than the strong ties that link me to relatives and intimate friends, whose sociological niche is very like my own.   [sociological WD-40]

Thick trust:

Social trust embedded in personal relations embedded in personal relations that are strong frequent and nested in wider networks.

Thin Trust

Social trust that exists beyond thick trust.  e.g. an acquaintance at the coffee shop, or at work.  Think trust rest implicitly on some background of shared social networks and expectations of reciprocity.  A standing decision to give most people – even those whom one does not know from direct experience – the benefit of the doubt.

the test: “Generally speaking, would you say that most people can be trusted, or that you can’t nbe to careful in dealing with other people” – this taps feelings about .. thin trust.


Putnam discusses throughout the continual balance between legal trust constituted by law and order and civil law versus the thin trust that exists around us all.  This goes to reputation of people, of groups of cities, and of countries.  Generally he concludes that thin trust is less now than 30 years ago, and there are many drivers attributed to that including television, lack of personal time, commuting separation of home location and work location etc etc.  In any event people feel less engaged and are less engaged.

However what he notes and is interesting is that people still respond to social capital despite the disincentives in our modern life.  He notes in particular the potential of internet and information technology to dramatically improve the opportunities for social capital.  [note book written in 1999].

Whether we look at social lending, or social networks like Facebook, there is much discussion and optimism on topics of ‘friends’, and levering social capital in simple and convenient ways.  It is interesting to look at those two examples plus traditional banking.

What struck me the most is that these examples are largely based today on different kinds of trust.  Facebook is all about thick trust for the most part.  Exceptions are those that choose to gather lots of friends, and in those cases I would argue not even thin trust exists, but it may be somewhat developable.

Social Lending has thin trust established between the lender and the social lending service.  There is also thin trust established between the borrower and the lending service.  These thin trusts are based on trading of confidential information, between the borrower or lender and the service.  By accepting that role as the trust broker, the social lending service is able to allow the creation of a new thin trust to exist between the lender and the borrower that could not have otherwise existed.

Its clear that all social lenders are not the same, and the securities regulatory environment hinders the development of a  broad development of thin trust by imposing other rules that obscure the underlying benefits, nonetheless this is the promise of social lending and social finance in general.

Traditional banks have no such level of social trust that can be created.  Each relationship is unique and between the customer and the bank as an organisation.  Particularly in lending, that is managed through brokers or different personal lenders each time, the relationship is defined by gathering and validation of information each time.  One of the complaints I frequently heard in my banking career was the lack of continuity in the branch, and the lack of long term relationships being built with the bankers.

Lastly looking at the bridging vs bonding, then similar patterns emerge.  FaceBook is about bonding capital, based on thick trust.

Banks have neither bonding nor bridging.  Social Lenders are to various degrees creating hybrid elements of bridging capital, and although the users are anonymous to each other, they get to know each other by user name identifiers.

Relevance to Bankwatch:

The book helped me at least to differentiate the fundamentals of the model between banks and social lenders, and between social lenders and FaceBook.  The difference is in the type of trust that forms the basis of them  FaceBook is thick trust, and I would argue a bad place to establish a business.  The old adage of doing business directly with friends (real friends) is a bad idea, prone to future disaster for the friendship.

Banks I would argue have neither thin nor think trust.  They are based on legal relationships.

Social lenders, at least, have the opportunity to lever trust, albeit thin trust that could not otherwise exist without the social lending service, and establish some bridging capital.  Bridging capital is the more powerful capital in terms of impacts on people and society.

Written by Colin Henderson

August 26, 2008 at 11:34

Posted in Social Lending

10 Responses

Subscribe to comments with RSS.

  1. Colin: Great find! It’s quite amazing this guy was already talking about “social networks” in a way that nobody had anticipated then.

    Many of the concepts you highlighted apply directly to the social lending industry. No doubt.


    August 26, 2008 at 16:17

  2. @Rob … thanks for stopping by. Yes, the presience of all this in 1999 is remarkable.


    August 26, 2008 at 17:34

  3. Great post! As always, very interesting.
    The different types of trust are an eye opener.


    August 27, 2008 at 06:04

  4. Colin. Great to see a review of this book. I had borrowed it from the library years ago thinking it remarkable in what the author saw in our society as happening then. About a year ago I was going by a bookstore and saw a copy in the cheap bin for $2. Guess it’s time to read it again.


    August 27, 2008 at 19:07

  5. Thanks Gene…. I can recommend its worth the read. Anyone who stops by here no matter how infrequently, will like this book. Key is to not rea every page … once the point is made, Putnam tends to re-inforce several times over as only acedemics can. If you accept the point you can safely move to the next, etc etc. Just my 10c.


    August 27, 2008 at 20:15

  6. Thanks for posting this, Colin, it’s a great lens to view what’s going on.

    You’ll recall that in this country, 2 elections ago Westminster panicked due to low voter turn out. They already know faith in institutions and participation in formal politics was down and wanted to figure out how to “fix it”, but the resulting “Power Commission” research showed that political awareness was in fact very high and engagement in informal politics was actually on the increase.

    In the US this is also exemplified by and what it has achieved in terms of political change from time to time.

    People are clearly forming their own allegiances. Is this thin trust making a comeback, or has it just surfaced in different ways that the statisticians had struggled to catch?

    Simon Deane-Johns

    August 28, 2008 at 04:16

  7. Fantastic piece of work.

    Jeff Carter

    August 29, 2008 at 19:55

  8. Very interesting!

    BTW: i’m adding this book to my TOREAD list.

    José Luis Campanello

    August 31, 2008 at 10:02

  9. Is there anything be learned from “complementary currencies” when asking how new bank-based financial arrangements could enhance different aspects of social capital? Complementary or alternative currencies have that built-in social relationship building component.

    Tim Draimin

    September 1, 2008 at 18:23

  10. Thanks for the comments everyone.


    September 14, 2008 at 17:38

Comments are closed.

%d bloggers like this: