After the global financial crash: Individual factors differentiating young adult consumers’ trust in banks and financial institutions

Journal of Retailing and Consumer Services 20 (2013) 26–33

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After the global financial crash: Individual factors differentiating young adult consumers’ trust in banks and financial institutions Soyeon Shim a,n, Joyce Serido b,1, Chuanyi Tang c,2 a

Professor of Consumer Sciences, School of Human Ecology, 2135 Nancy Nicholas Hall, 1300 Linden Dr., Madison, WI 53706, United States The Norton School of Family & Consumer Sciences, 650N. University of Arizona, Tucson, AZ 85721-0078, United States c School of Business, Indiana University Southeast New Albany, IN 47150, United States b

a r t i c l e i n f o

a b s t r a c t

Available online 16 November 2012

Our exploratory study aims to examine individual factors that may differentiate young adults’ trust in banks and financial institutions. We use a longitudinal data set compiled during two, timed surveys, before and after the collapse of the nation’s financial system. Participants (N ¼ 748) were classified into three groups distinguished according to their differing levels of trust. Findings based on ANOVA and three-group discriminant analyses indicate that several individual factors – self-reported well-being (overall well-being, financial well-being, subjective financial knowledge) and financial status (determined by parents’ socioeconomic status and total debt level) – significantly influence young adult consumers’ level of trust in banks and financial institutions. & 2012 Elsevier Ltd. All rights reserved.

Keywords: Consumer trust Financial institutions Young adults

1. Introduction Given the importance of trust in economic exchange and politics, trust in banks and financial institutions should play an essential role in economic activities, particularly in light of the global financial crisis which began since 2008–2009. Although some research has been done with regard to consumer trust in relation to customer loyalty and service quality (Eisingerich and Bells, 2007), Internet banking (Durkin et al., 2008), and coproduction and customer loyalty (Auh et al., 2007) in the context of financial institutions, we know very little about consumers’ trust in banks and financial institutions in general. Furthermore, we have clear evidence that consumer trust has been rapidly declining in the United States. In 1976, 40% of Americans reported having a great deal of trust in banks and financial institutions, but according to the latest (General Social Survey, 2008), by 2000 that number had dropped to only 30%, and by 2008 it had declined to a mere 19%. In the wake of the 2007–2008 economic meltdown in particular, it is probable that consumer trust has continued to decline in the years since the GSS’s 2008 study. In response, market analysts and society leaders have begun to speak of an urgent need to regain the consumer’s trust in financial services (Turner, 2009) and in so doing perhaps speed the recovery of the industry (Grayson et al., 2008) and hence the economic recovery of the nation. Therefore, and in the

expectation that efforts to rebuild consumer trust can benefit from a better understanding of the forces that promote or impede consumer trust among young adults, our goal was to examine the individual factors that may influence young adults’ trust in banks and financial institutions. We focused on young adults for a number of reasons. When young adults move out of the family home – many to attend college – the pathway to financial independence opens wide for the first time. Self-sufficiency becomes a paramount goal, and financial independence seems to be an important and tangible standard, one that young adults, at least those in western societies, regard as a top priority (Arnett, 2000). To live on their own in a responsible and stable fashion, these young adults must, for example, choose a bank and establish a checking account, and they must learn how to use credit, which is the most fundamental tool of the financial system. Even more so than previous generations, however, the young adults of today seem to be faced with greater difficulties when making personal financial decisions. This is partly because they are presented with increasingly more complex consumer choices in the marketplace, but to a greater degree it is because they are now coming of age amid the uncertain and changing economic realities ensuing from the financial market collapse, which engendered a deep and widespread mistrust of financial institutions in general (Sapienza and Zingale, 2009). 1.1. The social importance of trust

n

Corresponding author. Tel.: þ1 608 262 4847; fax: þ1 608 265 4969. E-mail addresses: [email protected] (S. Shim), [email protected] (J. Serido), cytang@ufl.edu (C. Tang). 1 Assistant Research Professor. Tel.: þ520 621 5820; fax: þ 520 621 3401. 2 Visiting Assistant Professor of Marketing. 0969-6989/$ - see front matter & 2012 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.jretconser.2012.10.001

A number of studies have established the importance of trust as a fundamental requirement for social integration, democracy, and national wealth (Robinson and Jackson, 2001; Putnam, 2000),

S. Shim et al. / Journal of Retailing and Consumer Services 20 (2013) 26–33

and as a generator of social capital. As a powerful economic motivator, social trust measures the health of a society: the more trusting the members of the society, the stronger its social bonds. In turn, social trust reduces the transactional costs involved in interacting with others (Mutz, 2005). As Knack and Zak (2002) discovered, a 15% increase in the proportion of people who think their compatriots are trustworthy raises per capita output growth by 1% for every year thereafter. A loss of trust, on the other hand, particularly a loss of trust in the financial system, can bring even the richest and most advanced economies to a rapid halt (Robertson, 2009). In fact, many economists have characterized the current financial crisis as the worst economic recession since the Great Depression of the 1930’s and have concluded that it has significantly diminished Americans’ trust in the financial system (Sapienza and Zingale, 2009). We would add that those Americans who are attaining young adulthood during this time will be characterized as the first generation to interact with the nation’s financial institutions following the global financial crisis. 1.2. Theoretical concept, nature, and dynamics of trust Various disciplines, such as economics, psychology, social psychology, and sociology have defined trust in various ways (Rousseau et al., 1998). Whereas psychologists define trust in terms of the tendency to hold positive expectations of the intentions or behavior of others (Rotter, 1971), sociologists view trust as either having to do with the socially embedded properties of relationships among people (Granoveter, 1985) or with the characteristics of the institutional environment (Zucker, 1986). Meanwhile, economists view trust as a rational and calculative response to expected future behaviors (Williamson, 1993), while marketing scholars base their understanding of trust on mutually beneficial relational exchanges in the marketplace. Partly because trust is viewed in these various ways, and also partly because trust is situation-specific (i.e., context matters), the conceptualization of trust has been relatively weak (Blomqvist, 1997). However, researchers seem to agree that the propensity to trust other people (i.e., interpersonal trust) differs from a propensity to trust in public institutions (social trust) or private institutions (institutional trust). Institutional trust is more cognitive and abstract than interpersonal trust, and it is based on the inferences that an individual makes concerning shared interests and the common norm and values (Kasperson et al., 1992); institutional trust thus depends on an individual’s perception of the characteristics of institutional environments (Zucker, 1986). In other words, a person’s trust in banks and financial institutions exits within a larger context of trustworthiness, one that pertains to the industry itself (Grayson et al., 2008). And because trust also implies a transaction between two parties—in this case between people and financial institutions, we contend, as do Devos et al. (2002), that trust in institutions requires an individual to have ‘‘trust that these institutions are reliable, observe rules and regulations, work well, and serve the general interest.’’ Although some scholars view trust as enduring and independent of one’s life experience (Uslaner, 2002), others believe that the tendency to trust evolves over time, either growing deeper and stronger or declining and dissolving, or even sometimes waning and then waxing again during the course of a longstanding relationship (Corritore et al., 2003). Regardless of its resilience, however, trust is usually viewed as fragile, difficult to initiate, slow to grow, and hard to mend once it is damaged (Rousseau et al., 1998). Also, researchers believe that any degree of trust will lead to greater trust over time, while any degree of mistrust will lead to greater mistrust in the absence of any reassurance and perhaps regardless of whether or not reassurance

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is offered (Rousseau et al., 1998). Hence, the process of building trust appears to be self-enforcing. The dynamics of trust, however, depend on a number of factors such as age, period of life, and cohort. Across disciplines, there is agreement that, for trust to arise, risk and interdependence must exist (Rousseau et al., 1998). This, on its face, seems reasonable, since no trust should be necessary whenever an action can be undertaken with certainty of its outcome and at no risk. In most relationships, however, some measure of risk exists, and as Mayer et al. (1995) concluded, the risk will come from one or both of two sources. One is external, deriving from ‘‘environmental uncertainty’’—that is, the uncertainty caused by contextual and situational factors existing outside the relationship that has formed between the trustor and the trustee. The other is behavioral uncertainty—that is, an uncertainty about whether the trustee intends to and will act appropriately. The trustee thus determines behavioral uncertainty, while environmental uncertainty is beyond the control of the trustee. Clearly, the current global financial crisis exemplifies an environmental or external uncertainty, and how much impact the collapse of the banking industry has had on an individual’s trust in institutions will depend on how much behavioral uncertainty that individual already possessed, prior to the collapse of the banking industry.

1.3. Trust, young people and individual factors Recent studies have found evidence suggesting that trust is a personal characteristic that continues to change though interactions with others on the path toward adulthood. According to a 34-year longitudinal developmental study using growth curve modeling, Whitbourne et al. (2009) found that trust (mistrust) did not remain static after college and throughout midlife, but rather changed in relation to individual factors, such as age, education, and social status. A separate study, conducted by Robinson and Jackson (2001), found that the youngest trust the least; then, as individuals age they develop more trust, and they attain their highest level of trust at some point in adulthood, and this level of trust then tends to hold steady into old age. In general, too, it is during adolescence and young adulthood that individuals develop, or fail to develop, a fundamental trust in the society in which they live (Flanagan and Gallay, 2008). Additionally, the trust that young adults place in social institutions is linked to their sense of civic responsibility and their desire to participate in the political process in order to create political efficacy (TorneyPurta et al., 2004). A few researchers have found correlates of trust among adolescents and young adults. Three separate studies, for instance, found that adolescents’ social trust is related to their civic engagement (Flanagan et al., 2005; Seligman et al., 2000). Flanagan and Gallay (2008), in yet another study of adolescents, found that adolescents with optimistic or trusting dispositions, also have more trust in government and/or the American ideal than do those adolescents who lack such dispositions and experiences. Perrin and Smolek (2009) also found that, among young adults, demographics and life satisfaction predicted an individual’s level of trust in government. Those who were more satisfied with life, for instance, and more highly educated, and white (versus African American) and female, demonstrated a significantly higher trust in government. Similarly, Smith (1997) found that mistrust of other people was higher among those with lower socioeconomic status, those who were members of racial and ethnic minorities, and those who had experienced negative life events.

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S. Shim et al. / Journal of Retailing and Consumer Services 20 (2013) 26–33

1.4. Hypotheses Intuitively, we expect that young adults’ objective financial knowledge as well as total debts (including educational loans) should increase as they advance in their academic career. However, and on the basis of Weiner’s (1985) argument that people tend to seek reasons for why the event occurred and to engage in ‘‘spontaneous casual thinking’’ in order to effectively manage themselves in their environment, we can surmise that an unexpected negative event, such as the current financial crisis, can have a negative impact on individuals’ subjective well-being and subjective knowledge. Therefore, we established H1 as follows: H1. Within the context of a severe financial crisis, significant differences will be found in young adult’s overall and financial well-being between Time 1 and Time 2 as follows: H1a. Young adults’ overall well-being, financial well-being, and subjective financial knowledge will decline. H1b. Young adults’ objective knowledge and total debt will increase. Since there is virtually no existing data concerning the individual factors that influence young adults’ trust in financial institutions, we established the following exploratory hypothesis by deriving potential antecedents of trust from the literature discussed earlier, i.e., life satisfaction (Perrin and Smolek, 2009), education and socio-economic status (Flanagan and Gallay, 2008; Perrin and Smolek, 2009; Smith, 1997); gender (Perrin and Smolek, 2009) and economic impact (Grayson et al., 2008): H2. Significant associations will be found between young adults’ trust in banks and financial institutions and individual factors as follows: H2a. Trust levels will be positively associated with overall well-being, financial well-being, subjective and objective financial knowledge, and parents’ socio-economic status. H2b. Trust levels will be negatively associated with total debt and perceived economic impact. H2c. Trust levels will be associated with gender, with women displaying more trust than men.

2. Methods

were entered into a raffle for a chance to win one of two cash prizes (i.e., $500 and $100). The data for this study comes from the 748 young adults (34.6% male and 65.4% female) who responded both at Time 1 and at Time 2. There were no significant differences in socio-economic status, gender, or ethnicity between the Time-1 sample and the Time-2 sample. However, the Time-2 sample differed significantly from the Time-1 sample with respect to self-reported GPA, with 77% of the subsample’s respondents reporting a GPA greater than or equal to 3.0 as compared to 67% reported by the Time-1 respondents (po.001). 2.2. Measures 2.2.1. Overall and financial well-being In both Time 1 and Time 2 surveys, we measured the respondents’ overall well-being and financial well-being by using a 5-point scale, ranging from 1 (strongly disagree) to 5 (strongly agree), which we adopted from Shim et al. (2009). Respondents were asked to rate their overall sense of well-being as well as their level of agreement with three statements regarding financial well-being. The coefficient alpha for the financial well-being statements was 0.84 at Time 1 and 0.82 at Time 2. 2.2.2. Subjective and objective financial knowledge At both Time 1 and Time 2, respondents’ financial knowledge was measured in terms of both subjective and objective knowledge. Subjective financial knowledge, a factor we adopted from Shim et al. (2009), was measured by means of a single item asking young adults to assess, on a five-point scale ranging from 1 (very low) to 5 (very high), their overall understanding of money management concepts. To measure the young adults’ objective financial knowledge, we asked them to answer 15 True/False questions selected from Hilgert et al. (2003) and relating to money management, credit, and saving. Sample questions included: ‘‘If you expect to carry a balance on your credit card, the APR is the most important thing to look at when comparing credit card offers (T or F),’’ ‘‘With compound interest, you earn interest on your interest as well as on your principal (T or F).’’ 2.2.3. Total debt In both surveys, we asked young adults to provide an approximate dollar amount of debt they owed on education loans, credit cards, and other debts (e.g., auto loan).

2.1. Procedure and data collection Time-1 data (N¼2098) were collected, using an online survey and also a pencil-and-pen survey, from first-year young adults enrolled full-time at a major, land-grant, public university over an 8-week period during spring 2008. We invited the entire freshman class (approximately 6000 young adults) to participate in the study, and we used various means to recruit subjects, first by publicizing the study using the university’s email accounts, campus media, flyers, and class announcements. All respondents were offered a nominal incentive (e.g., $10 each to the first 1000 respondents and $5 to each of the subsequent respondents) for their participation. In addition, every student who completed the 15 min survey was automatically entered into a raffle with a chance to receive a prize (e.g., an IPod Touch). Exactly a year later, in spring 2009, Time-2 data were collected from 748 (36%) of the Time-1 respondents. After receiving the Human Subject Committee’s approval, we sent emails to the young adults who were still enrolled at the university (1950, or 93% of the original sample) asking them to complete an online survey. The first 500 young adults who completed the survey each received $10, and the names of the additional 248 young adults

2.2.4. Perception of economic impact of financial crisis At Time 2, we measured the respondents’ perception of the impact of the financial crisis by using three items rated on 5-point scale ranging from 1(not at all) to 5 (a great deal). The measures were designed to reflect each student’s perception of the economic impact that the financial crisis had made on family and/or parents’ financial situation, the student’s own financial situation, and the way the student had managed his or her money. The coefficient alpha was 0.85. 2.2.5. Trust in banks and financial institutions We adopted the trust measure developed by Davis et al. (2001) for General Social Surveys (GSS). The GSS is a sociological survey that collects face-to-face data by the National Opinion Research Center at the University of Chicago among a random sample of adults (18þ). The survey began in 1972 and was conducted every year from 1972 to 1994 (except in 1979, 1981 and 1992) and every other year since then. The GSS asks a wide range of questions, including a number relating to levels of trust in 13 institutions (i.e., the military, the scientific community, medicine, the Supreme Court, education, organized religion, banks and

S. Shim et al. / Journal of Retailing and Consumer Services 20 (2013) 26–33

2.2.6. Socioeconomic variables We determined parental socio-economic status (SES) using the CSI (Computerized Status Index) method (Coleman, 1983) and by asking participants to report the education levels of both parents and the total household income.

3. Results 3.1. ANOVA of the repeated measures among the three groups The total of 681 respondents who responded to the trust measure were classified into three groups: hardly any trust (N¼142 or 20%), some trust (N¼399 or 60%), and a great deal of trust (N¼140 or 20%). To examine the changes in the young adults’ financial conditions across different trust groups during the current financial crisis, we performed a repeated-measure ANOVA for those variables and using the data collected at both time points to reveal significant withinsubject changes occurring in a respondent’s financial condition and well-being over the time period between Time-1 and Time-2 data collection (see Table 1 for results). Moreover, with each ANOVA, the respondent’s trust in banks and financial institutions (three groups) was tested as a between-subject factor in order to compare the difference across trust groups during the changes. The results of our analysis revealed that all of the main effects were significant, and we thus could accept H1a and H1b. To facilitate an interpretation of these effects, we have provided graphic representations of the results. During the period between the Time-1 survey and the Time-2 survey, respondents’ financial well-being (Fig. 1), overall well-being (Fig. 5), and subjective financial knowledge (Fig. 4) all significantly decreased across all trust groups. During the same time, their total debt also significantly increased (Fig. 2). The results also show a significant interaction between the young adults’ level of trust and their objective financial knowledge during the period. Fig. 3 depicts this interaction between level of trust and patterns of change. Whereas young adults with a great deal of trust suffered only a slight decrease in their objective financial knowledge during the period, young adults with only some trust or hardly any trust, actually gained objective financial knowledge. This was especially true for the young adults who had hardly any trust in banks and other financial institutions and had the least amount of objective financial knowledge at Time 1: by Time 2, they had surpassed the other two groups with respect to objective financial knowledge. Furthermore, the between-subject effects of trust were significant for financial well-being and overall well-being. In general, those young adults with hardly any trust in banks and financial institutions reported levels of financial well-being that were significantly lower than those reported by young adults who had a great deal of trust and those with only some trust. Further, the young adults with hardly any trust in banks and other financial institutions also reported levels of overall well-being that were significantly lower than those reported by young adults who had a great deal of trust. 3.2. Multiple discriminant analysis among the three trust-groups To further determine factors that may differentiate the three groups of young adults, we performed a three-group multiple

Table 1 Repeated measures analysis of variance. Source of variance

Sum of squares

Mean Degree square of freedom

Financial well-being Intercept 10214.77 Trust 14.90 Error 1043.06 Wave 21.70 Wave*trust .45 Error 287.58

1 2 677 1 2 677

Total debt Intercept 2508841209 Trust 128255678.6 Wave 267206493.90 Wave*trust 99217546.45 Error 9019905022

1 2 1 2 538

Objective financial knowledge Intercept 101497.02 Trust 28.26 Error 5089.91 Wave 16.62 Wave*trust 28.99 Error 2427.32

1 2 615 1 2 615

Subjective financial knowledge Intercept 8542.72 1 Trust 5.49 2 Error 604.72 652 Wave 88.20 1 Wave*trust .29 2 Error 294.72 652 Overall well-being Intercept 14080.49 1 Trust 12.604 2 Error 784.05 674 Wave 13.00 1 Wave*trust 1.64 2 Error 329.79 674 n

F

10214.77 7.45 1.54 21.70 .22 .43

2508841209 64127839.3 267206494 49608773.2 16765622.7

101497.02 14.13 8.28 16.62 14.49 3.95

8542.72 2.74 .93 88.20 .14 .454

14080.49 6.30 1.16 13.00 .82 .49

Pvalue

6629.95 4.84

.00* .01*

51.09 .53

.00* .59

73.83 1.89 15.94 2.96

.00* .15 .00* .05

12263.62 1.71

.00* .18

4.21 3.67

.04* .03*

9210.70 .00* .2.96 .05 195.13 .32

.00* .73

12104.11 5.42

.00* .01*

26.57 1.68

.00* .19

P o.05.

3.5 3.4 Financial Well-being

financial institutions, major companies, organized labor, the Executive Brand, Congress, television and the press). To measure trust, the GSS asks respondents to indicate, on a three-category scale (1¼hardly any, 2¼ only some, 3¼a great deal of confidence) the amount of trust they have for each of these 13 institutions. To measure our respondents’ trust in banks and financial institutions, we adopted the same measure used by the GSS.

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3.3 3.2

Trust groups A great deal

3.1

Only some

3.0

Hardly any 2.9 2.8 2.7 Time1

Time2

Fig. 1. Profile plot for financial well-being by trust groups.

discriminant analysis involving SPSS and using the 10 variables collected at both time points as well as three additional variables (SES, gender, and Time 2 impact of the current financial crisis). A simultaneous estimation, rather than a stepwise estimation, was used as a computational method because we were more interested in exploring how all of the independent variables function

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S. Shim et al. / Journal of Retailing and Consumer Services 20 (2013) 26–33

3.9

4000

3.8

Total debt ( )

Trust groups

A great deal 2000

Only some Hardly any

1000

Overall well-being

3000

3.7

Trust groups

A great deal

3.6

Only some 3.5

Hardly any

3.4 3.3

0 Time 1

Time 2

3.2

Fig. 2. Profile plot for total debt by trust roups.

Time1

Fig. 5. Profile plot for overall well-being by trust groups.

Objective financial knowledge

10.6

Table 2 Discriminant analysis test statistics.

10.4

Function Eigenvalue Variance (%)

Canonical correlation

Wilks’ lambda

Significance

1 2

.238 .176

.914 .969

.029 .274

10.2 Trust groups

A great deal

10.0

Only some Hardly any

9.8

9.6 Time 1

Time 2

Fig. 3. Profile plot for objective financial knowledge by trust groups.

3.4 Subjective financial knowledge

Time 2

3.2 Trust groups

3.0

A great deal Only some

2.8

Hardly any 2.6 2.4 2.2 Time 1

Time 2

Fig. 4. Profile plot for subjective financial knowledge by trust groups.

rather than in limiting the results to include only the most discriminating variables (Hair et al., 1995). Two discriminant functions were calculated during the analysis (see Table 2). The first function maximally separated those young adults who reported virtually no trust from those who reported some or a great deal of trust in banks and other financial institutions. The second function distinguished those young adults who reported some trust from those who reported a great

.60 .32

65.4 34.6

deal of trust and those who reported hardly any trust. The results showed that the two functions have a combined w2(26) ¼.029 (p o.05). However, after we removed the first function, the second function proved no longer significant (w2(12) ¼.274, p4.05). The two discriminant functions accounted for 65.4% and 34.6%, respectively, of the between-group variability. These results further indicated that the predictors successfully differentiated those young adults who hardly have any trust from those who have either some or a great deal. The accuracy (i.e., the hit ratio) obtained by using this means of classifying the discriminant functions was a percentage of the cases correctly classified. Of the 681 young adults sampled, 411 (60.4%) were classified correctly, compared to the 292 (42.9%) who would be correctly classified by chance alone. The stability of the classification procedure was checked by means of a cross-validation analysis. In this type of analysis, the discriminant model’s accuracy is estimated by leaving out one case and then predicting that case using the estimated model. This method obtained a hit ratio of 58.7%, which was deemed within the accepted range of the hit ratio of the original sample and therefore indicated that the classification scheme was achieving a high degree of consistency. The standardized discriminant function coefficients and the loadings of the correlations are presented in Table 3. The discriminant loadings describe the degree of correlations between the predictors and the functions. Since the second discriminant function proved insignificant, our interpretation mainly focused on the first function. Function 1 suggests that the young adults’ overall well-being (Time 1 and Time 2), financial well-being (Time 1 and Time 2), total debt (Time 1 and Time 2), and subjective financial knowledge (Time 2) were significant. Furthermore, their parents’ socioeconomic status also proved to be significant. Therefore, H2a and H2b were accepted. Given that gender was not significant, H2c was rejected. In general, the young adults who had either some or a great deal of trust in banks and other financial institutions tended to report a higher level of overall well-being and financial wellbeing, and to display a greater subjective financial knowledge, as

S. Shim et al. / Journal of Retailing and Consumer Services 20 (2013) 26–33

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Table 3 Standardized discriminant coefficients and discriminant loadings. Variables

1. Overall well-being (Time 2) 2. Financial well-being (Time 1) 3. Subjective financial knowledge (Time 2) 4. Financial well-being (Time 1) 5. Overall well-being (Time 1) 6. Total debt (Time 2) 7. Parent social-economic status 8. Total debt (Time 1) 9. Objective financial knowledge (Time 1) 10. Gender 11.Subjective financial knowledge (Time 1) 12. The impact of current financial crisis (Time 2) 13. Objective financial knowledge (Time 2) n

Standardized coefficients

Discriminant loadings

Function 1

Function 2

Function 1

Function 2

.345 .111 .534 .171 .158  .217 .184  .110 .294 .315  .054 .059  .323

 .108 .316  .058  .493 .307 .390  .040  .352 .563 .389  .333  .030 .064

.599n .477n .476n .463n .436n  .389n .375n  .300n .269 .131 .273  .153  .201

 .091 .010  .186  .360 .208 .313  .080  .162 .490n .371n  .334n .258n .219n

o.05.

compared to those who reported having hardly any trust at all. The former also tended to come from families that had higher socioeconomic status and that carried less total debt than the latter. The absolute magnitude of the standardized discriminant function coefficients reflects the relative importance of the predictors. Function 1 suggests that subjective financial knowledge (Time 2) and overall well-being (Time 2) were the best predictors for discriminating between those young adults who hardly have any trust and those who have either some or a great deal of trust.

4. Discussion Many studies have shown that human societies cannot function on all levels unless a sufficient number of the society’s members trust in the institutions by which the society operates (Robinson and Jackson, 2001; Putnam, 2000). Since this may hold true especially with respect to economic exchange and politics, it seems reasonable to conclude that the amount of trust the citizens of a nation place in their nation’s banks and other financial institutions will largely determine not only each citizen’s personal economic well-being but also the overall economic wellbeing of the nation. Furthermore, as a number of other studies have shown, individuals begin to develop trust early in life and pass through developmental periods during which specific external factors can promote or erode trust. For this reason, as we have stated, we limited our study’s scope to include only those individuals in the period of young adulthood, when most people first begin to seek financial self-sufficiency. We also focused on young adults attending college because the set of data (Time 1) we had collected just prior to the financial crisis had focused on this same group and could thus provide us with a unique ability to measure the changes that had occurred in the group’s financial and overall well-being. By conducting a second survey (Time 2), we were able to verify that such changes had occurred, and we could also measure their magnitude (including changes in the young adults’ levels of objective and subjective financial knowledge). Consequently, we could then assess the extent to which changes in these individual factors and other socioeconomic variables have influenced the trust that these young adults place in banks and other financial institutions. Our findings indicate that individual factors – self-reported well-being (overall well-being, financial well-being, subjective financial knowledge) and financial status (measured by parents’ socioeconomic status and total debt level) – significantly

differentiated those young adults with hardly any trust at all from those who have a great deal of trust and those who have only some trust. Furthermore, we found that regardless of trust level, these young adults reported that their financial situation and well-being had deteriorated since the beginning of the current financial crisis, as compared to a year before the crisis. They also reported suffering a significant decrease in self-reported financial knowledge. We also found that young adults who place more trust in banks and other financial institutions tend to come from families that have a higher socio-economic status and less total debt. They tend to be satisfied with their financial situations as well, and, too, their lives overall. We describe these findings in greater detail in the following section. 4.1. Young adults’ well-being after the financial crisis As we have said, our study found that the financial crisis (and its aftermath) has indeed affected the financial and overall wellbeing of a majority of young adults in our study and probably young adults in general. Most of the young adults we surveyed reported that their financial conditions and well-being had deteriorated since the beginning of the current financial crisis, as compared to a year before the crisis. Furthermore, most of these young adults, regardless of trust level, reported a significant increase in their total debt and a significant decrease in their financial well-being and overall well-being. Also, almost all the young adults (95%) in our sample reported that the current financial crisis had an impact on their own as well as their family’s financial situation. This correlates with the impact that the crisis has had on young adults in general, nationwide, as verified by Coy (2009) and Murray (2009). In this respect, our study also supports Weiner (1985) who contends that an unexpected negative event will affect an individual’s tendency to make causal inferences, which in turn may cause the individual’s sense of well-being to diminish. 4.2. Financial knowledge: Objective and subjective Intuitively, we would expect to find that as young adults advance in their academic careers and gain financial experience, their subjective and objective financial knowledge will advance as well. However, we found instead that (1) the young adults’ objective knowledge either remained the same or increased only slightly between Time 1 and Time 2 across the trust-groups, and that (2) the young adults’ subjective financial knowledge actually decreased significantly. On the basis of this finding, we will

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speculate that, in reaction to the financial crisis, many individuals have lost some measure of confidence in their ability to deal with financial matters even though the extent of their objective knowledge remained unchanged. If so, then it seems reasonable to conclude that the current financial crisis has affected many individuals’ perception of their ability to manage their financial matters (when in fact their objective knowledge did not change). This would suggest that subjective knowledge will fluctuate as an individual’s perceived or real financial well-being is influenced by environmental uncertainties.

at Time 2 (after the financial crisis) suggests that institutional trust may be more enduring than situational. If so, this could be an important finding in that it would substantiate the contention that a financial crisis alone, or the impact of one, may not dramatically alter an individual’s trust in banks and financial institutions. However, the potential indirect effects produced (via an individual’s overall well-being, financial well-being and subjective financial knowledge, all of which declined after the crisis) should not be understated. It is also possible that the effects of the impact were subsumed by the other self-report measures, notably overall and financial well-being.

4.3. Correlates of trust Membership in the three trust-level groups turned out to have a relatively normal curve distribution, with 20% having a great deal of trust, 60% having some trust, and 20% having hardly any trust at all. This distribution correlates with the distribution found by the recently published GSS survey (2008), wherein 19% of Americans reported having a great deal of trust. Our further analysis found that young adults with a great deal of trust in banks and financial systems were not significantly different (with respect to the variables we investigated) from those with at least some degree of trust. Both groups were, however, differed with respect to these variables from those with hardly any trust. This suggests that how much trust a person has may not matter as much as whether or not the person has any trust at all. While subjective financial knowledge (measured at Time 2) and overall well-being (measured at Time 2) prove to be most important predictors when all individual factors are considered simultaneously, other factors (financial well-being, total debt, and parents’ socioeconomic status) also distinguish those young adults who have either some or a great deal of trust from those with hardly any trust. Taken together, these findings suggest that those young adults who place more trust in banks and other financial institutions tend to come from families that have a higher socio-economic status and less total debt. They are also more likely to be satisfied with their financial situations as well as their lives overall. This finding is consistent with previous studies that found trust to be higher among those with higher financial status (Smith, 1997). While subjective financial knowledge proved to be a differentiator, objective knowledge did not. Those who displayed a higher level of subjective financial knowledge, i.e., trust in dealing with financial matters, also tended to report that they place more trust in banks and other financial institutions. Notably, those who reported possessing virtually no trust and who displayed the least amounts of objective knowledge at Time 1 also demonstrated a significant increase in their objective knowledge at Time 2, improving in this respect to a level that slightly exceeded the levels achieved by the other groups. Still, objective knowledge did not differentiate the groups, while subjective knowledge did. This suggests that subjective assessments of personal and financial well-being, and of financial knowledge as well, may instill in young adults a feeling of trust and optimism. Consequently, it would seem that our findings emphasize the importance of considering subjective factors in addition to objective factors when seeking to understand the process by which young adults develop trust in banks and financial systems. That the perceived economic impact, which was measured at Time 2, proved insignificant indicates that a young adult’s trust in banks and financial institutions may not necessarily be directly affected by the magnitude of a change in the young adult’s own financial situation. That overall well-being and financial wellbeing at Time 1 (which occurred prior to the financial crisis) were significant predictors of one’s trust in banks and financial systems

5. Implications Because trust can be situation specific, conceptualizing trust has been difficult (Blomqvist, 1997). But for this same reason, our study, by focusing specifically on consumer trust in banks and financial institutions, should contribute to building a better conceptual understanding of young adults’ trust in financial systems. By identifying correlates to trust in banks and financial systems we can further substantiate the antecedents and consequences of trust and begin to build a theoretical model that shows how trust unfolds over time. Because we have identified overall well-being (as well as the subjective and objective aspects of financial well-being and financial knowledge) as an antecedent of young adults’ trust in banks and financial institutions, we can say that trust may be highly correlated with subjective feeling and well-being. We can also say that since the perceived economic impact of the financial market’s collapse was not directly linked to young adults’ trust in banks and financial institutions, then macro-events may have an indirect effect through financial well-being, rather than a direct effect. We should probably be alarmed that only 19% of the young adults surveyed indicated that they had a great deal of trust in banks and financial institutions, especially because this percentage also applies to Americans of all ages (GSS, 2008). And we should perhaps be equally concerned that the majority of young adults we surveyed have only some or no trust at all, particularly since levels of trust are typically formed during adolescence and young adulthood (Flanagan and Gallay, 2008). Consumer education would seem a good tool for addressing this condition since financial independence requires an ability to spend wisely and navigate the financial system. In fact, previous research found that customer education is an important determinant of customer trust and loyalty (e.g., Bell and Eisingerich, 2007). Knack and Zak (2002) also determined that trust levels can be raised directly by increasing communication and education, as well as indirectly through policies that initiate a virtuous cycle. While we do not have information about our subjects’ current banking practices, nor can we predict the financial products they might own in the future, it is likely that people who have little trust in banks and financial systems use banking and financial services the least (National League of Cities, 2009). In fact, young adults are not only the fastest growing user segment but also the segment that is reported to over-represent the unbanked population (Stone, 2009). Given this and the fact that the young adults in our study who reported no trust in banks and financial systems also tend to come from lower socioeconomic families and to possess a lower level of financial and overall well-being, we will argue that consumer education should emphasize the importance of sound financial information and low-cost banking options aimed at addressing the needs of individuals and families with fewer financial resources. In addition, because these same young adults tend to lack subjective financial knowledge, educators should find ways to help them gain self-trust. In other words,

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today’s young adults need to be provided with reliable information and viable banking and financial service options. A recent survey shows that as many as 22 million households (or 20% of U.S. households) are unbanked or under-banked (Seidman, 2005). Unfortunately, many of these consumers resort to using high-cost financial services they cannot afford and are thus disadvantaged when building their financial assets. If, as it would seem, consumer trust is critical to an economic recovery, then it may behoove consumer financial advocates or consumer protection agencies to work collaboratively with banks and financial institutions to educate young people about sound practices and consumer safety regarding banking and financial products (Johnson, 2009). Such collaborations should, as a matter of policy, seek to protect these consumers from the misinformation and/or misunderstandings that can result from the aggressive marketing practiced by some financial institutions. Also, given the current economic and financial-market climate, banks and financial institutions wishing to win back the trust of their customers should be encouraged to adopt socially responsible business philosophies and practices. Certainly this encouragement would occur if consumers were better educated and more discriminating when doing business with financial institutions. Once again, we want to emphasize our belief that, because our original study was designed to provide a longitudinal examination of how young adults develop financial attitudes and behaviors, the current study provides an excellent opportunity to examine, from a developmental perspective, the process by which young adults’ trust builds or erodes over time. To understand the role that trust plays in the process by which individuals acquire financial attitudes and adopt financial behaviors, future studies also should examine the ways in which the predictors of trust in banks and financial institutions might predict the financial wellbeing of young adults in the long term. References Auh, S., Bell, S.J., McLeod, C.S., Shih, E., 2007. Co-production and customer loyalty in financial services. Journal of Retailing 83 (3), 359–370. Arnett, Jeffrey J., 2000. Emerging adulthood: a theory of development from the late teens through the twenties. American Psychologist 55 (5), 469–480. Bell, S.J., Eisingerich, A.B., 2007. The paradox of customer: customer expertise and loyalty in the financial services industry. European Journal of Marketing 41 (5/6), 466–486. Blomqvist, Kirsimarja, 1997. The many faces of trust. Scandinavian Journal of Management 13 (3), 271–286. Coleman, Richard P., 1983. The continuing significance of social class to marketing. Journal of Consumer Research 10, 265–280, December. Corritore, Cynthia L., Kracher, Beverly, Wiedenbeck, Susan, 2003. On-line trust: concepts, evolving themes, and model. International Journal of HumanComputer Studies 58 (6), 737–758. Coy, Peter, 2009. The lost generation: the continuing job crisis is hitting young people especially hard- damaging both their future and the economy. Business Week, October 8. Davis, James A., Smith, Tom W., Marsden, Peter, 2001. General Social Surveys: 1972–2000. National Opinion Research Center, Chicago. Devos, Thierry, Spini, D., Schwartz, S.H., 2002. Conflicts among human values and trust in organizations. British Journal of Social Psychology 41 (4), 481–494. Durkin, H., Jenning, D., Mulholland, G., Worthington, S., 2008. Key influences and inhibitors of an adoption of the internet for banking. Journal of Retailing and Consumer Services 15, 348–357. Eisingerich, A.B., Bell, S.J., 2007. Maintaining customer relationships in high credence services. Journal of Services Marketing 21 (4), 253–262. Flanagan, Connie, Gallay, Leslie, 2008. Adolescent development of trust (circle working paper 61). The Center for Information & Research on Civic Learning & Engagement. (ERIC Document No. ED 505258).

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