Get in with a Foreigner: Consumer Trust in Domestic and Foreign Banks

Prior research suggests that trust plays an important role in an individual¡¯s decision to participate in financial markets. This paper focuses on potential customers in retail banking markets and empirically investigates their trust in foreign banks and domestic banks. We argue that differences in customer trust can be related to three factors, namely bank-specific characteristics, individual characteristics of the potential customer and characteristics of the institutional environment. Using a large survey on the savings patterns of Indian households, we find that potential retail banking customers in India are less likely to trust foreign banks with their money than private Indian banks. However, our results also suggest that highly educated Indians using information sources such as the Internet, radio or newspaper, tend to have more confidence in foreign banks than in private Indian banks. Moreover, in regions with either more foreign bank branches or higher corruption levels the likelihood of consumers trusting Indian private banks more than foreign banks is lower than in other regions.