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 16^th of every month, rather than the 6^th, 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. Retrieved from http://ezproxy.liberty.edu:2048/login?url=http://search.proquest.com/docview/847540953?accountid=12085

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 of Organizational Leadership 4, 86-99. Retrieved from www.aimijournal.com

Lenders listen to satisfy dealers: finance companies keep communication open, see survey results improve. (2014, August 4). Automotive News, 88(6632), 0010. Retrieved from http://ezproxy.liberty.edu:2048/login?url=http://ic.galegroup.com/ic/bic1/MagazinesDetailsPage/MagazinesDetailsWindow?failOverType=&query=&prodId=&windowstate=normal&contentModules=&display-query=&mode=view&displayGroupName=Magazines&dviSelectedPage=&limiter=&currPage=&disableHighlighting=&displayGroups=&sortBy=&zid=&search_within_results=&p=BIC1&action=e&catId=&activityType=&scanId=&documentId=GALE%7CA377652009&source=Bookmark&u=vic_liberty&jsid=d04d1e72084f3ba7150f8841d3362685

Paulet, E. (2011). Banking ethics. Corporate Governance, 11(3), 293-300. doi: http://dx.doi.org/10.1108/14720701111138715

 

Ramaraju, S, MA, MP. (2012). Psychological perspectives on interpersonal communication. Researchers World, 3(4), 68-73. Retrieved from http://ezproxy.liberty.edu:2048/login?url=http://search.proquest.com/docview/1284725619?accountid=12085

Satterlee, A. (2013). Organizational management & leadership: A Christian perspective (2nd ed.). Raleigh, NC: Synergistics International Inc.

Saurabh, S., & Chattopadhyay, T. (2013). Auditing communication satisfaction among banking professionals: An approach to managing workplace communication. International Journal of Marketing & Business Communication, 2(2), 1-9. Retrieved from http://ezproxy.liberty.edu:2048/login?url=http://search.proquest.com/docview/1478016779?accountid=12085

Tchana, F. T. (June 2014). The empirics of banking regulation. Emerging Markets Review. Published by Elsevier. Retrieved from http://rx9vh3hy4r.search.serialssolutions.com/?ctx_ver=Z39.88-2004&ctx_enc=info%3Aofi%2Fenc%3AUTF-8&rfr_id=info:sid/summon.serialssolutions.com&rft_val_fmt=info:ofi/fmt:kev:mtx:journal&rft.genre=article&rft.atitle=The+empirics+of+banking+regulation&rft.jtitle=Emerging+Markets+Review&rft.au=Fulbert+Tchana+Tchana&rft.date=2014-06-01&rft.pub=Elsevier+BV&rft.issn=1566-0141&rft.eissn=1873-6173&rft.volume=19&rft.spage=49&rft_id=info:doi/10.1016%2Fj.ememar.2014.04.003&rft.externalDocID=3392660711&paramdict=en-US

Vertino, K. A., DNP,P.M.H.N.P.-B.C., C.A.R.N.-A.P. (2014). Effective interpersonal   communication: A practical guide to improve your life. Online Journal of Issues in Nursing, 19(3), 19-30. Retrieved from http://ezproxy.liberty.edu:2048/login?url=http://search.proquest.com/docview/1710043963?accountid=12085