Confidence in the U.K Banking System
Effects of recession in the UK: The Current Level of Confidence/Trust in the Banking System
Chapter Two: Literature Review
Given the need to satisfy the specific objectives formulated for the report on recession
and its subsequent impact on the levels of trust and confidence in the United Kingdom’s banking
system, it becomes prudent to acknowledge that the literature review is tailored towards
satisfying the purpose of this paper. For instance there is need for emphasis on how consumer
confidence has affected the decision making process among consumers, there is the additional
need of determining the role of banks in the financial crisis, as well as using empirical evidence
to establish the level of consumer confidence exhibited towards banks in the United Kingdom.
The other objective which is elucidated in the literature review is an analysis of the customer
confidence and how it has changed since the onset of the financial crisis while the last objective
revolves around methodologies that can be used by the UK banks to improve the confidence of
CONFIDENCE IN THE U.K BANKING SYSTEMS 2
the consumers in their current banking system and practices (Demirgu¨c¸-Kunt & Maksimovic,
Therefore this literature review targets to examine current schools of thought surrounding
consumer behavior, the pertinent principles of consumer decision making, trust or confidence as
well as processes involved when consumers make their decisions. Specifically, the 2008-2009
economic recession caused a shock to the global financial system. The 2008 recession was much
bigger than that experienced during the Wall Street Crash in the 1930s. The crisis which begun
as a result of a foiled hedge funds by an American property firm known as the Bea Stearns.
Despite the government’s attempts to stabilize the economic situation at that time, the dollar
effect led to the rapid and spontaneous spread of the recession to other countries across the
The UK banking system was majorly affected to the extent that the government was
forced to intervene and bail out the UK banks that were being affected by credit risks, high
forfeiture of loans and credit losses. Hill, Wayne and Highfield, (2010) observed that
corporations were also affected which led the UK economy into a huge recession evidenced by a
negative growth in their gross national product in the year 2009. The same year, unemployment
rose to 5.25% and further increased to 8% in the year 2010 as firms begun to lay-off employees
as a cost saving strategy. There was a total economic decline of 4.75% between 2008 and 2009
which apparently impacted on the banks. In return, the Central Plan Bureau reports that this
chain reaction affected the ability of the banks to perform, issue out loans and even sustain their
operations thus the consumer’s confidence was greatly compromised. Gitman, (2005) reported
that the shortage of credit facilities was the main contributing factor towards financial constraints
since the customers had to cut on their investment spending, marketing, technology and
CONFIDENCE IN THE U.K BANKING SYSTEMS 3
employment as one measure towards curbing the crisis. The corporations and customers had to
find alternative sources of funds because of the shortage of financial resources. These companies
had to raise more working capital owing to the economic constraints and more so limit their
2.1 Consumer Behavior and Decision Making Process
Hutchison, Farris and Anders, (2007) states that consumer behavior is a term borrowed
from economics to illustrate how customers tend to react to the forces of demand and supply
which shapes economic markets. The financial markets have made researchers to be more
interested in this subject of study and as such their studies have intensified over the last decade.
Thus decision making is majorly a reaction accrued from consumer behavior which is an
augmentation of mental or cognitive processes which lead a customer into selecting a certain
product at the expense of the other. The decision making process is majorly affected by choice
and cost preference which collectively affect the action of the consumer towards the final
decision. According to Bradach & Eccles, (1989) consumer behavior is defined as an act that
motivates individuals into not only obtaining but also using economic services and goods among
them being decision processes which determine their actions. Understanding consumer behavior
is a complex because of the interplay of social, economic, physical and psychological factors
which are hard to ascertain using statistical measures. Generally, it is assumed that consumer
behavior is progressive since the preference, taste and choice of each and every consumer is
varied with their level of awareness.
Additionally, consumers continuously evaluate, discuss and talk about the services and
goods provided by the businesses thus the dimension of behavior exhibited by consumers is a
complex integration of interdisciplinary schools of thoughts, theories, attitudes, beliefs and
CONFIDENCE IN THE U.K BANKING SYSTEMS 4
experiences, sociology, psychology, socio-psychology among other individual factors (Ben-
Horim & Levy, 2008). In order to understand consumer behavior and determinants of the
decision making process, a myriad of buying behavior models have been instigated. The
behavior economic model illustrated by the figure below presents a strong basis upon which the
consumer behavior and decision making will be analyzed.
Figure 1: Katonas behavior economic perspective
The behavior economic model represents an economical model that attempts to explain
the rationality with which people make decisions regarding which products or services to
purchase. The model is applicable to the literature review and into the banking scenario as well.
The model is supported by assumptions drawn from microeconomic theories and assumptions
such as heuristics, framing and market inefficiencies. Heuristics means that customer’s behavior
is basically guided by logic (Baltagi, 2008). On the other hand framing describes a collection of
beliefs and stereotypes that determine either the mental or emotional filters that guide the
response systems. Market inefficiencies describe such factors as pricing and interest rates which
collectively affect decision making on the use of bank services.
From the Katona’s behavioral perspective figure, it is made evident that psychological
processes are influenced by economic conditions. Similarly, the psychological processes
influence consumer sentiment which plays an essential role in influencing the discretionary
spending of consumers. In defining the terms used in the model, consumer sentiment is
appreciated as being an indicator of how the attitude of the consumers is proportionate to the
changing economic times. According to the utility index of consumer sentiment abbreviated as
CONFIDENCE IN THE U.K BANKING SYSTEMS 5
ICS as it was examined by Kajal Lahiri and Ivanova, the behavioral economic model is pertinent
in predicting the possible expenditures to be made by consumers (McKnight, Choudhury &
2.2 Consumer Involvement and Decision Making Process
As supported by Leach and Melicher, (2009) the decision making process is a product of
the consumer behavior which in return influences the degree or the level of involvement
exhibited by the consumers when purchasing goods and services. Piet, (2009) therefore concurs
that involvement is a measure of the degree of commitment measured using parameters such as
the quantity of time spend and the devotion of the consumer in terms of searching for a given
good or service. Consumer involvement is measured using the level of motivation whereby high
levels are associated with much involvement and vice versa. Qualitative researchers have shown
concern that consumer involvement is a significant determinant when classifying consumer
decisions thus it influences the decision making process as a whole. Contrary to these research
findings, Reason, (2008) argued that involvement cannot be ranked as being high or low. This is
because consumers tend to concentrate on selecting certain brands but their psychology plays a
major role in influencing their decision making patterns as elucidated in figure 2 shown below.
Figure 2: Types of consumer purchasing decision situations
CONFIDENCE IN THE U.K BANKING SYSTEMS 6
From the diagrammatic representation, it is made clear that low involvement among
customers often determine the perception of manufacturers. For instance, research showed that
products with a low customer involvement index were less costly while high involvement
products are costly. Among the high involvement products are financial services and products
which according to Alfayoumi and Abuzayed, (2009) were among the highly searched on the
internet search engines. The reason for the high search and involvement shown by the customers
is spiked by cognitive dissonance.
2.3 Factors Influencing Brand Preference and Selection
A brand is any patented product or service, which is provided on the market for sale. It
represents the actual product which forces the individual consumers to make a choice on which
the brands to purchase. Understanding the relevant factors in this context are essential in
determining why financial services provided by some banks in the U.K have come under
criticism especially after the 2008 economic recession (Ruben, 2012). The most dominant factor
influencing selection of banking services and brand selection among customers in the United
Kingdom is the level of risk associated with the financial services. Additionally there it the cost
CONFIDENCE IN THE U.K BANKING SYSTEMS 7
of the service which is established and measured on the scale of interest rates demanded by the
banks while issuing the loans. In particular the interest rates increased during the recession as a
counter reaction towards the high demands versus the low supply of cash among the banks in the
U.K. these factors are analyzed in depth under the following subheadings.
2.3.1 Perceived Risk
Perceived risk was described by Gefen and Straub, (2003) and Lamb, (2012) as being a
key factor that influences the customers involvement levels as well as their preferences during
the decision making process. The two authors separately defined the various dimensions of risks.
In this paper, only six risks are analyzed among them being; financial risks which are perils
associated with the loss of money on bad or unplanned purchases. Secondly, performance risk is
related to the perils associated with the functionality of the products. Psychological risk refers to
the post purchase dissonance which is a feeling of disappointment when a product fails to
achieve the desired objective. Physical risks are perils associated with the health and safety of the
product of services. There are social risks which is an indicator of the disappointment as
perceived by the customer to the friends and lastly, time risk which is the loss of time spend
searching and purchasing a product (William & Marlene, 2009).
Ralf, (2009) definition is made more inclusive unlike the definition and examples made
by Lamb when he includes other risks such as ego risk. Reflecting on the recession and its
impact on the customer’s confidence, it is worth noting that financial products have a high cost
of usage as well as costs thus any loss of money is likely to cause extensive loss of confidence
and this is risky to the reputation enjoyed by the banks in the United Kingdoms. Additionally the
increase in perceived risk is likely to trigger the involvement of the customers which will lead to
CONFIDENCE IN THE U.K BANKING SYSTEMS 8
loss of confidence and trust in the banking system of any given country as people will blame
their losses on the banks.
2.3.2 Social Influences
Social influences also affect selection and brand preference. This is because social
influences aggregate towards creating awareness among the customers. The buying behavior of
customers is highly dependent on their social class and grouping. These groupings come a long
way into influencing the buying behavior and lifestyles of the people in the same class thus it is
highly likely for people in the same class to use certain goods and services. In the U.K the
banking system was affected by the negative word of mouth that was being spread among the
business class (Harold & Lee, 2004). Apparently this affected the trust and confidence of the
people of U.K in the banking system especially after the risks that were presented by the 2008
Global economic recession.
2.3.3 Availability of Capital
The third influencing factor is the availability of the capital. The United Kingdoms’
financial system was among most affected owing to the volatility of their financial system which
was equally hit by the scourge of sub-prime loans. These loans are very risky to the banking
system because they quickly accrue to bad debts and non-performing loans. As a result, the
government was forced to salvage the British Bank Northern Rock from imminent collapse
through a bail out process facilitated by the Central Bank’s intervention of Fenny Mea, AIG and
Freddy Mac (Harold & Lee, 2004). One year into the global recession, the Lehmann Brothers
operational in the United States collapsed and this came as a huge shock to the world banking
system, which was still reeling from the effects of recession. Because of these factors, the
CONFIDENCE IN THE U.K BANKING SYSTEMS 9
amount of cash that was readily available for loaning was limited thus it influenced availability
of services and goods which translates to limiting the preferences and selection made by the
2.4 Variables that Shape Decision-Making
Decision-making is influenced by a number of determinants and factors. Harold and Lee,
(2004) classifies these factors into three groups which include environmental influences,
individual differences and psychological processes. On the other hand, Lamb (2012) established
two major factors which are psychological and individual factors. The two factors are supported
by cultural and social influences which collectively form the variables that shape the decision
2.4.1 Environmental influences: Situation
Environmental influences such as in the case of the 2008-2009 Global economic
recession have been attributed towards shaping the behavior of consumers. The environmental
influences are reflected in the recent economic recession when the GDP of U.K declined with
sharp margins being reported in the industrial production sector. These factors further affected
trade flows and the overall ability of the banks to issue loans and maintain their credit
worthiness. As compared to previous recessions, the severity of the recent recession was shown
by the shrinking of trade by 12% which shows that the business environment was greatly
affected (William & Marlene, 2009). The fall in output affected the banking system as customers
as their decision making process was barred by the fear of potential high risk loss.
2.4.2 Individual differences: Attitudes (confidence/trust)
CONFIDENCE IN THE U.K BANKING SYSTEMS 10
In definition, attitude referrers to the countenance of approval or disapproval towards a
given service, good or brand. Altman, (2008) supports that attitude is determined by an
individual’s definition of value and as well as their value systems. Attitude is dynamic hence it
keeps changing with the rise in the social class or with the development of new values which are
possibly influenced depending on the availability of information. Attitude therefore brings about
the individual differences which in the case of financial decisions can be described as risk
averseness, risk neutrality and risk seekers (Wells & Foxall, 2012). Whereas risk seeker attitude
makes people to exhibit aggressive traits, risk averseness attitude makes people to be
overprotective therefore the latter group of individual differences have an impact on their trust
levels and confidence. The same effect trickles down into affecting the U.K banking system.
2.5 Consumer Confidence/Trust
Confidence is exhibited when two or more parties trust each other. Trust is built with the
increase in reliability and partly with integrity which form the major ingredients towards the
formation of trust. The decision making process is dependent on the level of trust among the
trading parties. In the recent past, several researchers have done researches with the aim of
understanding the impact of trust on psychology and marketing. At least 90% of the researchers
have identified that trust is directly proportional to the quantity of sales made. In fact relationship
selling is purely pegged on trust. According to Springford, (2011) trust is the process of
depending on an agent to conduct a business in the best of your interest according to the
agreement or contract made and signed by both parties. This is because trust instils a feeling of
security and belief into both parties thus facilitates their interaction. The lack of competence in
the banking system caused by recession is one such incidence where trust could lead to lack of
CONFIDENCE IN THE U.K BANKING SYSTEMS 11
Other variables such as uncertainty, vulnerability and dependability are the main barriers
to confidentiality and trust (Altman, 2008). Uncertainty is a state of mistrust caused by inability
to estimate the potential damage to be incurred. It thus causes either risks or profits depending on
the risk averseness of the investor or the customer. Trust plays an essential role in financial
services because of the high degree of perceived risks involved.
2.6 Benefits of Consumer Confidence/Trust
Trust just like the pricing of financial services is paramount in the determination of a
good or services. For instance the banking system has been affected because of the decline in
trust which makes the customers to prefer other forms of lending and keeping of their money.
Confidence or trust can be blamed for the complexity of relationships especially when it is
lacking but when trust is present then customer decision making process is highly enhanced
2.6.1 Trust and customer loyalty
In the descriptive study conducted by Soureli and Lewis in the year 2006, it was
established that the banking system is most affected with trust (Springford, 2011). An
aggregation of integrity and reliability are two variables that are so vital in determining consumer
loyalty. The research further established that there is a great correlation between the trust held by
consumers and customer loyalty. The two are further related to inertia especially in the banking
sector thus it is made evident that trust contributes towards customer loyalty.
2.6.2 Competitive performance long term relationship building
The concept of relationship building is supported by relationship marketing theories such
as the network theory and the inter-firm relationship marketing theory. These theories are
CONFIDENCE IN THE U.K BANKING SYSTEMS 12
supported by sociologists where research established that relationships built on trust last longer.
In a research conducted by Piet, (2009) on 120 couples, it was established that nearly 56% of the
relationships based on trust were stable as compared to relationships where partners hide
information from their spouses. The research is vital in emphasizing that competitive
performance is equally influential in promoting competitive performance in the long term among
financial service providers in the U.K.
2.6.3 Brand Building
The building of a brand takes a long time whose essence if driven by the need to augment
the various factors identified as variables that shape decision making. According to Piet, (2009)
trust can influence the consumer’s attitude, perception and decision towards a certain brand. The
brand building process should therefore be treated with a lot of patience which is the same
scenario as that exhibited by the banks in U.K.
2.6.4 Encouragement of purchase intention
Confidence has been proved by empirical research as being a factor in directing the
intention of customers towards making purchases. In fact relationship marketing which is
associated with the making of repeat sales is basically pegged on confidentiality its ability to
influence the purchase intent of the customers.
2.7 Trust/Confidence in the Financial Products
2.7.1 Nature of the relationship
Springford (2011) states that trust and confidence towards financial products is grounded
on the following factors. The nature of the relationship between the service provider and the
CONFIDENCE IN THE U.K BANKING SYSTEMS 13
customer build by the provision of quality services because the customers purchase expertise and
uniqueness of the service. In this context communication and feedback are important. Secondly,
the relationships are ongoing or progressive which means that the nature of relationship and the
period of interaction leads to escalation of the confidence in the financial services and products
2.7.2 Distrust and inertia
Survey by the SMF established that loss of trust is the sole cause of inertia as compared
to exit costs. Inertia is often weighted according to the costs of exiting thus the lower the cost of
exiting from one service provider to the other, the lower the inertia and vice versa (Beranek,
2003). This survey is seconded by a behavioral economics research which identified that market
complexities could make the consumers to associate a financial product with distrust. Providers
of financial services such as the financial institutions and the banks have more often than not
managed to exploit such inertia in order to hold onto to customers who have lost confidence in
their services. In addition, these service providers lure more customers using teaser rates and
promise for interest free overdrafts but disguise their services behind poor quality, strict
adherence to terms and conditions, hidden charges and reduced coverage.
The intensity of competition has been a determining factor in the current loss of
confidence in banking systems which coupled with recession has caused a lot of mistrust.
Among the activities that have further contributed towards the diminishing confidence has been
the undercover dealing among them the allowance of banks to cross- sell loans and credit cards
among other products. The teaser rates have often been transferred to customers thus making the
financial products markets to be entangled in low-trust equilibrium. As a result, trust has been
classified into several forms and levels. Springford, (2011) identified three types of trust in the
CONFIDENCE IN THE U.K BANKING SYSTEMS 14
financial markets. These trusts is essential for smoothening operations between agents,
consumers, intermediaries and markets with the aim of protecting interests and profitability.
The first is agent trust. It protects the value of savings accrued from financial services.
The second type of trust is trustworthy information which is vital in guiding decision making by
the customers. Trustable information will eliminate malice and mistrust because the information
provided is trustable and verifiable. Market trust is the third type which means that the
intermediaries and the agents have to be trustable so as to promote the interests of the consumers
and be beneficiaries of the financial products at the expense of the customers.
2.8 Role of Banks in the 2007 Financial Crisis
The banks in both the United States and the United Kingdoms contributed towards the
2007 financial crisis in the following ways. Increase in bad loans. The willingness of the banks to
lend out in spite of the credit worthiness of the customers and the agents led to the credit crunch.
Mortgage companies and the banks loosened their credit issuing criteria because of the increased
competition. Most of the customers were issued with loans with limited checks thus the ability of
the customers to pay was limited. Repackaging and reselling of bad loans (AccountAbility,
2009). The bad loans were being sold to other financial institutions across the global financial
markets. United Kingdom was among the biggest buyer of the mortgage bundles from United
States and this exposed them to financial risks. The collapse of the housing market in the U.S
resulted into loss of finances in the banking sector while at the same time making it impossible
for them to borrow from money markets.
2.8.1 Effects of Recession on household finances in the UK
CONFIDENCE IN THE U.K BANKING SYSTEMS 15
The UK was significantly affected with the reduction in the lending rates by the banks
which reduced the household finances. This is because the banks reacted to the losses by
reducing their mortgages and loans (Andy, Alan, Anna & Isobel, 2009). The chances of getting
credit was limited which forced the government in UK to bail out some of the banks but the
reality that the banks were unreliable harmed the confidence that had earlier been exhibited by
the customers in the UK. The loss of trust and confidence led to reduced investments and
spending among the households.
CONFIDENCE IN THE U.K BANKING SYSTEMS 16
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