The Psychology of Banking

February 3, 2020 Stan

On understanding the motives of bankers and clients in the banking business using the knowledge of psychology…

As financial markets are going through rapid changes and considerable turmoil, I thought I must do a psychology of banking. I’ll steer clear of all economics and focus simply on what it means to be a banker or an investor from the psychological perspective. Of course the driving force of banking is money and banks thrive on a consumerist culture. Banks have diverse functions from stabilizing an economy to stabilizing a person’s credit history and banks can have commercial, investment, savings, retail, private or mortgage focus. There are two ways by which the psychology of banking could be framed. One way is to understand the psychology of the banker and the other is getting into the mind of the client or the customer/investor. Banking is like any other business yet the only difference between banking and other businesses is that in case of banking, bankers and clients deal directly and only with money and this can have a significant impact on how much importance they give to their banking operations. Money is something primal and raw, it’s almost like an object stimulating some sort of basic need, and the prospect of dealing with raw money is exciting and intimidating.

The Banker:

The banker’s psychology is based on his personal, social and political need for money. The banker first and foremost is concerned about his own profits, about how much more he is adding up to his account and it is almost an addiction. Just as a merchant or shop owner is obsessed with the goods available, the banker will be obsessed with the money he is able to lend, borrow or do business with. The dire need for making more money is what drives bankers in the first instance. This could be considered as a ‘personal’ need and craving for money to largely fulfill personal wants. Any investment or commercial banker or broker or anyone in the financial sector will presumably have a healthy or unhealthy personal need for money. Of course, we all need and love money but bankers are more focused on money.

Secondly, the banker being in love with money, is focused not just on his money but also on other people’s money. It is essential to understand that money remains the prime object of attention for a banker and the smell of money could make him rather altruistic in focus so there is a general or ‘social’ need to protect and nurture other people’s money as well.

Thirdly the banker has a larger political need whether he manipulates/controls his money or other people’s money and this ‘political’ need would stem from understanding the economic condition of the country and a realization that he has an active part to play in stabilizing the economy.

Whereas the first personal need for money satisfies basic drives of individuals, the social need to protect other people’s money is rather altruistic and the political need to stabilize a nation’s economy is largely a power need. Money to a banker thus serves his altruistic wants, his power needs and his personal desires. This can almost be explained psychologically with a Maslow’s hierarchical model in which the basic desires come first, followed by power needs and then by altruistic needs. Considering this, any banker would be first interested in his own profits, secondly in the economy and stability of the nation and only lastly concerned about his clients and investors.

The Clients:

The second aspect of the discussion is on how banking could help in deriving the psychology of clients, customers or investors. There are different types of clients and people have different priorities or expectations from banks and bankers. The customers may have borrowing need, investment need or saving need based on their age or the phase of life they are in. For example, young students and people with lower income are interested in borrowing facilities through credit cards and loans and they consider the banks as a support to hold on to for their financial problems. Of course borrowing is equally important to businessmen and professionals but the motivation may be different. The ‘borrowing’ need arising in turn from personal or professional needs would be the most important reason for banking among young people and young people, students, graduates or people who are between jobs or newly employed will be propelled to banking due to their borrowing needs. So generally, the 18-30 years old are usually less interested in interest rates and more interested in the borrowing facilities they can get on their credit cards or loans during this ‘stepping in’ phase of their life.

The young professionals and middle aged individuals are usually more banking savvy and would be looking to increase their already earned money through investments. This is the group focused on better interest rates and better returns on investments rather than direct borrowing unless absolutely necessary. The ‘investment’ need of young and middle aged professionals can overlap with borrowing needs when buying a house or setting up a new business becomes a priority. Yet these are again investments so the 30-55 year old are mainly looking for investments and banking helps to satisfy their investment need during the crucial ‘building up’ phase of their life. The late middle age to old age is marked by a heightened fear of life’s losses and need to save for the future. We are attuned to worry about the future and mainly about old age and dependence. The decline of physical strength and a productive work life being very real, we want to save for old age, which begins after 50 and continues at least until 70. Although this realization should occur to us earlier, we usually don’t seem to manifest our saving needs until we at least reach late middle age. During the late middle age, the banking needs are primarily motivated by a ‘saving’ need and clients in their late middle age are looking to save their earnings and not too concerned with investments. This is a time when people begin to consciously move away from social and professional life although very gradually. Elderly men and women simply want their money to be there when they need it during this ‘moving away’ phase of life.

Of course during very old age, the need to borrow, invest or save decline progressively. The psychological phases described above are general and do not consider individual differences. Many people develop saving or investment needs early in life and there could be social and cultural patterns in banking and financial behavior of individuals. Considering a more subjective/individualistic viewpoint, the borrowing, saving and investment needs in any individual can be interestingly explained with the help of psychoanalysis. Freud suggested that all of us go through oral, anal, phallic, latency and genital phases of sexuality in our childhood and our personality patterns are largely shaped by whether we have effectively resolved conflicts during this period or simply became fixated at a certain stage. Thus anal retentive personalities are ones who have excessive need for control or precision so these individuals are more likely to save from a very young age and even show extreme parsimony in money matters or banking behavior. The anal expulsive personality is the one who wastes too much so these individuals will be interested in excessive borrowing and can turn their credit history into a mess. The oral aggressive personalities are the ones who are ambitious and have extreme investment needs and although this may be a positive aspect, bankers should be aware of the more psychological aspects of individuals before lending them too soon. Maybe banks should perform psychological tests on individuals before lending to understand which clients are likely to repay and which clients are not likely to fulfill obligations and maybe then we will be able to avert banking disasters in the future.