CSAM Seminar - Institutional Mechanisms: Re-Building Trust in Financial Services


Speaker:Laura Phillips, Lecturer in Management
Date: Thursday 1 March 2018
Time: 09:30-10:30
Location: Building One: Syndicate Room B

Further details

Ten years after the beginning of the financial crisis media coverage continues to focus on a lack of consumer trust in financial services. Restoring that trust and public confidence is crucial to creating a flourishing financial services industry that can fulfil its role at the centre of the UK economy. In situations where trust based on prior, or expected, exchange relationships has been eroded, theory on organisational trust suggests that, to some extent, it can be supplemented or replaced by institutional-based trust (Zucker, 1986). That is, mechanisms to safeguard transaction success can be created and implemented by third party structures to create customer confidence in the exchange transaction (Pavlou and Gefen 2004). Examples of these mechanisms include escrows, certification and assurance services.

Essentially, the effect of a customer’s trust in a financial adviser on their intention to purchase is not independent from the context of the exchange. Despite this, existing literature has largely ignored the conditions under which trust has a varying effect on behavioural intentions (Gefen et al., 2008; Fang et al., 2014). In response, the objective of this study is to investigate the moderating effect of institutional mechanisms and the conditions under which that effect holds. In particular, we explore propositions in literature that institutional mechanisms will have a stronger effect in early stages of a relationship, in online channels and in transactions with a low level of complexity. In so doing, specifying circumstances under which a market for third party assurance might exist in the financial advice market.

To explore this objective a survey of 1433 first-time and returning customers of financial advice services is conducted and analysed. Partial least squares (PLS), a component based structural equation modelling technique regarded as appropriate for theory exploration (Jorskog and Wold, 1982), is applied to investigate the relationships between: (1) dimensions of trustworthiness; (2) trust; (3) perceived effectiveness of institutional mechanisms (PEIM); and (4) intention to purchase financial advice in the future. Building on this, a parametric multi-group analysis (PLS-MGA) is applied to compare the model across sub-groups of data to test the effect of a set of conditions –channel, stage of relationship and level of complexity.

First and foremost, the study confirms that overall PEIM negatively moderates the relationship between trust in an adviser and purchase intention. In other words, it decreases the importance of trust on behavioural intention. Initial stages of PLS-MGA analysis indicates that the moderating effect of PEIM is stronger online but is not effected by stage of relationship. Further analysis is to be carried out to explore transaction complexity as a condition.

The findings advance understanding of the conditional effect of trust by explicitly specifying channel as an important boundary condition to assess how trust influences purchase intention. Furthermore, they provide counter evidence to the proposition that institutional mechanisms will have a stronger effect in early stages of a relationship.

Practical implications
This study encourages public policy makers and financial service providers to continue to improve and/or develop institutional structures that create a transaction environment which feels safe and secure. In particular, evidencing a market for third-party assurance mechanisms in the financial services market such as independent assurance.

Trust, Institutional Mechanisms, Financial Services, PLS-SEM

Paper type
Research paper

Fang, Y., Qureshi, I., Sun, H., McCole, P., Ramsey, E., & Lim, K. H. (2014). Trust, Satisfaction, and Online Repurchase Intention: The Moderating Role of Perceived Effectiveness of E-Commerce Institutional Mechanisms. Mis Quarterly, 38(2), 407-427.
Gefen, D., Benbasat, I., and Pavlou, P. 2008. “A Research Agenda for Trust in Online Environments,” Journal of Management Information Systems (24:4), pp. 275-286.
Jöreskog, K. G., and Wold, H. 1982. “The ML and PLS Techniques for Modeling with Latent Variables: Historical and Comparative Aspects,” in Systems Under Indirect Observation: Causality, Structure, Prediction, K. G. Jöreskog and H. Wold (eds.), Amsterdam: North Holland, pp. 263-270
Pavlou, P. A., and Gefen, D. 2004. “Building Effective Online Marketplaces with Institution-Based Trust,” Information Systems Research (15:1), pp. 37-59.
Zucker, L. G. 1986. “Production of Trust: Institutional Sources of Economic Structure: 1840-1920,” in Research in Organizational Behavior, B. M. Staw and L. L. Cummings (eds.), Greenwich, CT: JAI Press, pp. 53-111.