The Importance of Interpersonal Communication Between Lenders and Borrowers
Abstract
Interpersonal
communication between lenders and borrowers, the process by which information
is related between parties, is extremely important. From the lender’s
perspective it is essential that the bank communicate to a potential borrower
the rules and regulations governing lending, fully disclose the terms of the
loan, including the repayment schedule and interest rate, and ensure that they
understand the borrower’s overall desires and goals. From the borrower’s
perspective, they must communicate to the lender exactly what their purpose is
in seeking financing, how quickly they are able to pay it off, and whether or
not they possess alternative means of repayment (collateral). The borrower must
also be sure that they understand the information transmitted to them by the
lender regarding the terms of their loan.
Every element of interpersonal communication, including sending,
encoding, messaging, decoding, receiving, and feedback, must be present in
order for the effective transmittal of information. Without clear communication
between these two parties, lending deals can sour quickly and the results may
be disastrous for both the debtor and the bank.
Keywords: interpersonal
communication, banking, lending, debt, lender/borrower relationships.
“We all need to develop
interpersonal communication skills,” insists psychology professor Ramaraju, “since
interpersonal communication is woven through all aspects of living and is
meaningful only in the context of living” (2012). The communication process of
transmitting information between one party to another is one that individuals
experience every day when they encode and interpret ideas. In a business
context, as well as in social, personal, and community contexts, this
communication is an essential aspect of building a well-functioning
relationship, and also essential for achieving shared goals, purpose, and
vision. Communication between business parties takes many forms, and can be
transmitted back and forth between different kinds of parties – between employees
and employers, companies and investors, manufacturers and consumers, employees
and customers, and many other groups.
In the banking world, one of the
most important relationships is the one cultivated between the lender and the
borrower. The borrower is a bank customer who needs financing for one of
several different kinds of activities: a construction project, a business
venture, an agricultural development, or a personal investment, such as purchasing
a home or a car. The lender is the banker, or loan officer, who will discuss
the terms with the borrower, approve or deny the loan, and perhaps, if the loan
exceeds a certain amount, bring it before the bank’s loan committee for
approval. Clearly it is important for the lender and the borrower to communicate
with one another through every step of this process in order to ensure that it
proceeds smoothly.
The steps of interpersonal
communication that can be applied to the lender/borrower relationship are the
same as those applied to any relationship – sending, encoding, receiving,
decoding, and feedback. As Satterlee states, the sender of the message has to
be aware of their desired meaning and also of their target audience, in order
to encode their message into a meaningful language that the receiver will
understand (2013, p.134). In the context of banking, the loan officer must be
careful to ensure that they are not using banking terms that would confuse
their customer, or complicated financial formulas that their client would not
understand. On the other hand, lenders must also be careful not to make the
mistake of underestimating their customer’s intelligence and knowledge, and thus
patronizing them in a way that makes them feel condescended to. The loan
officer can use his previous experience with and knowledge of the customer’s
background in order to determine the best way to encode his message, and the perfect
channel for sending that message (Satterlee, 2013, p.135). This balancing act of
encoding their message simply yet intelligently is important to maintaining
good customer relations.
However, if the lender is
appropriately encoding his message, but the borrower is not, there will still
be problems in communication. The borrower also has a responsibility to
communicate with his banker in such a way that his needs are clearly understood.
Just as the loan officer must know how to ask the right questions, the customer
must know how to anticipate those questions and answer them succinctly. This
does not apply exclusively to the realm of oral communication, but applies to
written communication as well. Usually the lender will ask for documents and
paperwork to back up the borrower’s oral story, such as tax returns, income
statements, receipts, balance sheets, credit reports, and bank statements. It
is up to the borrower to ensure that he has these documents in hand or readily
available for the banker. This is part of the borrower’s responsibility to
encode his or her message appropriately so that the lender can understand
exactly what is being asked of them.
Listening is another key part of
interpersonal communication between lenders and borrowers. Listening is the act
of decoding the message, interpreting it, and then providing feedback. Once the
receiver gets the message, they will use their personal mental model to interpret
what the sender was trying to say, and respond accordingly. In a recent study
conducted on the relations between auto lenders and dealers, Automotive News states: “As auto lenders
seek to do a better job of serving dealers, there's no single solution, said
Mark Kaczyn-ski, CEO of captive finance company Nissan Motor Acceptance Corp… ‘It's
not just one silver bullet,’ Kaczynski told Automotive
News. But his experience shows that listening to dealers’ suggestions is a
good place to start” (2014). Just as encoding a message appropriately is an
essential part of smooth communication, so is listening appropriately. Thus the
lender has a responsibility to give careful consideration to his target
audience, in this case, the customer seeking financing. The customer also has a
responsibility to listen to his banker as he explains the lending options
available and communicates the terms of the loan.
Once the lender has decoded his
customer’s message, he will provide feedback, and the process of carrying on a
business conversation has begun. While feedback is the last step in the
communication process, it is the first step in the two-sided process of
dialogue. When the sender hears feedback from his receiver, he is able to
determine how effective he was encoding his message (Satterlee, 2013, p.135). For
example, the potential borrower might have approached his banker about a
$150,000 loan for a prospective construction project. The customer stated his
request for a loan, outlined the details of the project, and summarized his plan
for repayment. Then he supported his oral presentation with written
communication in the form of two previous years’ tax returns and a blueprint
for his construction plan. He has encoded and sent his message to the receiver,
and it is up to the receiver, in this case the loan officer, to provide
feedback.
As Vertino states in her article on
interpersonal communication, “Because human beings are complex and each
individual brings his or her own set of internal variables to every situation,
the possibilities of interactional outcomes of any given communication can be
exponential” (2014). In other words, there is no way to anticipate the outcome
of the communication process. From the borrower’s perspective, after they have
encoded and sent their message, all they can do is wait for feedback from their
receiver. Depending on the circumstances of the proposal, the loan officer
might respond positively or negatively – but in most cases, his feedback will
take the form of more questions in order to better clarify the situation. He
might ask the customer what types of collateral he is able to offer up in the
event he defaults on the loan. He might ask if any other builders or homeowners
are included in the construction project, and the extent of their financial
involvement. He also might ask if the customer has any other outstanding debt
elsewhere, and to provide documentation for these liabilities. When the
customer begins to answer these questions, a two-sided dialogue, and thus
interpersonal communication, has begun.
From the lender’s perspective, why
is it so important that the elements of interpersonal communication – sending,
encoding, messaging, decoding, receiving, interpreting, and feedback – be
present? To answer this question, the process of lending must be examined a
little more carefully. A case study by Professor Koloor in the International Journal of Organization
Leadership has found that in order to achieve the overall goal of
successful banking, attracting and keeping customers and guaranteeing their
loyalty are important drivers (Koloor, 2015). He points out that in today’s
world, customers are viewed as the core and main structures of marketing
activities, and thus the level of customer satisfaction is the service
providers’ center of attention. “Success and survival of each industry and
providing high level services for customers depend on evaluation of customers' demands
and their expectations” (Koloor, 2015). In banking it is essential that not
only loan officers, but customer service representatives, tellers, operations managers,
cashiers, couriers, and credit officers keep the customers happy. They do so by
answering customer inquiries, going above and beyond to meet their requests and
needs, and ensuring that operations and communications run smoothly in all
aspects.
Many people think that banks are
simply for cashing checks and keeping their deposits safe. However banks make
their money mainly through service fees and interest on loans. A loan, which is
a liability to a customer, is an asset to a bank. Thus it is easy to see why
banks are in the business of lending funds to customers at interest, and seek
to ensure that it is as simple as possible for their customer to take out a
loan. They also seek to maintain good relations with their clients. “Credibility,”
points out an article on workplace communication, “is a perception that people
have on the believability of information,” and if the
audience values the communicator and respects the information given, the
communication can be said to have high credibility (Saurabh &
Chattopadhyay, 2013). Moreover, their case study shows that there is a
significant positive relationship between communication credibility and
communication satisfaction (Saurabh & Chattopadhyay, 2013). It is important
for a bank to have credibility with its borrowers, because if the borrowers do
not trust their bank to provide them with the best possible financing options,
they will take their business elsewhere. And as the above case study argues, good
credibility is symbiotically related to good communication.
Yet another reason why smooth
interpersonal communication is essential from a banker’s perspective is that,
due to the major financial crisis in 2008 that led to the failure of numerous
banks, it has become increasingly more difficult for banks to earn their
customers’ trust. Chamley, Kotlikoff, and Polemarchakis describe the effects of
this crisis on the banking industry, stating that “trust in financial companies
took a holiday,” and “those who knew the system best, the bankers, were the
first to panic,” because they understood what everyone else soon learned –
“that no one, not even the heads of the banks, including their own, owed and
owned, and that, when push came to shove, no bank could trust any other bank”
(2012). Many of the causes of bank failure are legitimately out of their control,
as Haldane points out: “Events external to the banking system, such as
recessions, major wars, civil unrest or environmental catastrophes, clearly
have the potential to depress the value of a bank's assets so severely that the
system fails” (2011). But banks mainly fail when customers react in fear and no
longer trust their financial institutions. Now, with that crisis still fresh in
everyone’s memory, lenders must work extra hard to earn back their borrowers’
faith in them. However, if lenders can effectively communicate to their
customer that they are truly looking out for their best interest, that faith
will be restored.
From the lender’s point of view, it
is also essential that they maintain good communications with their customer
for purely financial reasons. If there was a snag somewhere along the
communication process, caused either by the sender, the receiver, or an
external communication barrier, the consequences for both parties could be
disastrous. For example, if the loan officer neglected to communicate that the loan’s
interest rate was 4.5%, the borrower might mistakenly assume that their rate
was much lower. When their monthly loan payment comes due, they will be
surprised and probably angry that the balance they owe is higher than they
anticipated. Or if the lender mistakenly told his client that his payment was
due on the 16th of every month, rather than the 6th, the
client’s payment would consequently be ten days late, the client would incur
late fees, and his credit score would suffer. Since the miscommunication was
the lender’s fault, the bank would seek to make up these losses to the
customer, and this in turn would lead to a loss for the bank.
Again, due to the financial crisis
of 2008, disclosure regulations on banks have continued to pile up. “Market
failures such as incomplete markets, moral hazard between banks' owners and
depositors, and negative externalities (like contagion) have been used to
explain this fragility. This has motivated government regulatory agencies or
central banks to introduce several types of regulatory measures” (Tchana,
2014). Moreover, systemic risk has increased during the last thirty years,
which had led regulators to formulate rules for analyzing information more
efficiently (Paulet, 2011). From the banker’s point of view, this means that
they have increasing amounts of paperwork to deal with when negotiating the
terms of a loan. A good deal of that paperwork falls under the category of
disclosure, which is a synonym for communication. Due to federal regulations,
bankers are required by law to disclose and communicate every detail of the
loan’s terms to the borrower. These disclosures also communicate to the
customer what the bank will do with the customer’s personal financial
statements, and that customer information will be kept completely private. If
these disclosures are not properly explained to the client, or if the loan
officer fails to adhere to them, the consequences would be serious. At that
point, the bank would be violating federal law.
Why is interpersonal communication
so important from the borrower’s point of view? Because from his perspective,
he needs the bank to make an investment, essentially in him and in his ability
to repay the loan – he comes to the bank looking for financing. Just as the
bank has to earn the trust and faith of their clientele, the customer in turn
must earn the bank’s faith in him. Koloor observes that, “Nowadays, just having
relationship with customers to have loyal customers is not enough. The quality
of this relationship is also of great importance” (2015). Building a
relationship between lender and borrower cannot be a one-sided endeavor, as
both must put effort into clearly communicating their needs and expectations to
one another. In the borrower’s circumstance, he is responsible for making a
case for himself, and communicating to the lender just why the bank should invest in him. He needs to effectively
communicate to the banker that, not only does he need the money for a worthy
project, but that he is also able to repay it in a timely manner with interest.
Moreover, when making his case, full disclosure is just as important to the
borrower as it is to the lender. The borrower might not have federal agents swooping
in on him if he leaves out a key piece of financial information during the
lending process, but this lack of transparency will cause him nothing but
disaster in the long run.
Once the borrower has made his
case, he waits for feedback from the receiver, in this instance, the loan
officer. At this point it is vitally important that the borrower listen to the
lender, just as the lender listened to him. There are five elements of active
listening implemented by effective communicators; paying attention, showing
that they are listening, providing feedback, deferring judgment, and responding
appropriately (Satterlee, 2013). If the borrower neglects to carry out any one
of these steps and listen actively, he has the potential to miss out on
something important the lender has to say about his loan, such as the exact
interest rate, required forms of collateral, payment due dates, payment
amounts, credit check procedures, and privacy disclosure details.
In conclusion, interpersonal communication
is a vital aspect of maintaining smooth relations and operations between
lenders and borrowers in the banking industry. As Vertino insightfully points
out:
Communication is an integral part
of life; without it, we would not survive. Verbal and non-verbal communication
begins at birth and ends at death. We need communication not only to transmit
information and knowledge to one another, but more importantly, to relate to
one another as human beings around the world in the context of relationships, families,
organizations, and nations. The how, what, why, and wherefore of communication
can either edify or harm us, as individuals, cultures, religions, and
governments of countries… What we say, how we say it, and what we mean by it
are extremely important, and can be life-changing. (2014)
Clearly in the banking realm, as well as in every
aspect of the business world, interpersonal communication is important. Good
communication is conducted with honesty, intelligence, patience, and clarity. If
both lenders and borrowers bring these attributes to the negotiating table,
along with understanding and an open mindset, the lending process will be that
much smoother, simpler, and rewarding.
References:
Chamley, C., Kotlikoff, L.J., &
Polemarchakis, H. (May 2012). Limited-purpose banking – moving from “trust me”
to “show me” banking. The American
Economic Review. Vol. 102, No. 3. pp. 113-119. Published by the American
Economic Association. Stable URL: http://www.jstor.org/stable/23245514
Haldane, A. G., & May, R. M.
(2011). Systemic risk in banking ecosystems. Nature, 469(7330), 351-5.
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Koloor, H.R. (2015). Developing a communication model between
banking services quality via mediating variables of quality of relationship
with customers and satisfaction
with
customer loyalty: A case study of Tejarat Bank. International Journal
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Paulet, E.
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Satterlee,
A. (2013). Organizational management
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S., & Chattopadhyay, T. (2013). Auditing communication satisfaction among
banking professionals: An approach to managing workplace communication.
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Tchana, F. T. (June 2014). The
empirics of banking regulation. Emerging
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