I have been reviewing the situation – in Fagin’s famous words. We have worked on lots of marketing projects in retail financial services, not just in customer management, but also in areas such as new product launch and channel development. When I compare these projects with those we’ve undertaken in similar sectors, like telecommunications and utilities, there seems to be something different about the financial services ones. I’m not sure if I can put my finger on it, but let me try.
One difference is that in many areas, customers aren’t really sure what they want or need, and are sometimes completely wrong. For example, they may decide to make investments whose risk profile is very wrong for them. They may decide to insure against risk they don’t run, or vice versa. They may be hopelessly optimistic – or pessimistic – about their ability to earn or save, or about their likely need for money. They may not understand the nature of the product they are buying. If the family is involved, there may be big differences in perceptions and opinions within the family about what is needed. The list is endless. The result is that the onus is on the supplier to get it right – buyer beware is not an acceptable slogan. So regulators weigh in with lots of requirements designed to ensure that customers will be offered the right product at the right time, and this may lead to a complex diagnostic requirement that pushes up the cost of sale, leading to disenfranchisement of the very customers who need advice the most – those who find it hardest to save. The low cost solution available in many other sectors – self-service – is not considered satisfactory, by regulators and many providers, mainly because of customers’ propensity to get that wrong too!
A second difference is exposure to risk, fraud and worse. A small error in setting insurance premium levels or loan acceptance criteria can lead to very large losses. A customer whose expected profitability is just a few pounds, dollars or euros can create losses of thousands of times that amount. And where the profit from a customer depends upon third parties, through reinsurance or borrowed funds, the loss can be even greater if the calculations are wrong. This (correctly) leads to quite deep involvement in the customer management process roles for those, such as actuaries, who do the product calculations, and this generally makes life complicated for the customer, and customer-facing staff.
A third problem is that those financial services which are less complicated to manage (though none are easy to manage) e.g. credit cards, motor insurance, short term loans, often set customer expectations for more complex products e.g. pensions. This “lumping together” of financial services is understandable. After all, for many years Marks & Spencer was a benchmark for customer service for all retailers, whatever they sold, as Amazon is today for all web selling. But the products are very different e.g. in terms of transparency, likely outcomes, and should not be treated the same.
A fourth problem is regulation. Regulatory experts classify regulators on two main dimensions, light/heavy and good/bad. In my view, in some countries (such as the UK and to some extent Europe), financial services regulation has been heavy and bad, not resulting in better performance for customers. This contrasts with telecommunications regulation, which has been moderately heavy and good, resulting in much better deals for customers. For example, if a regulator tries to set detailed cost parameters, as has happened in some financial services, this can result in withdrawal of supply rather than more efficient supply.
A fifth problem is the need for exactitude in systems and data. A small error in your telephone bill can be corrected, and the consumers’ feelings calmed by a freebee of some kind. A small error in a bank account raises issues of prudence and competence and (with regulatory help) can be escalated very quickly. Consumers expect immediate access to their money at all times, and absolute accuracy in all their dealings with banks and insurers. If they don’t get it, they can suffer real damage, as a friend of mine did recently when her car was towed away and she was fined because her insurance company had wrongly failed to register her as insured on the Motor insurance Database.
A sixth problem is that technological change is making it much easier for consumers to get and use information, increasingly on their smartphone, and many want to manage their finances in this way. However, this has additional risks (though also the possibility of additional security), and also brings problems of uncertainty about which approach is the best. The tussle between Near Field Communications and cloud-based approaches in mobile payments is a recent example.
Finally (and only finally because I could go on much longer but want here to focus on the most important points), government disingenuity (a polite word which includes lying) has not helped. In many countries (including the UK) , governments enjoyed electoral successes by encouraging credit booms and telling their citizens that all was well with their economy, when it was not. Exhortations to borrow, disregard of very low savings levels, and (worst of all) increasing stealth taxation which was effectively partly funded by increased consumer borrowing, led to imprudence on a massive scale, by consumers as well as governments. The banks were necessarily involved in this, and some were of course complicit, multiplying rather than reducing the risk by investing in the “assets” created by imprudent behaviour e.g. junk mortgages. Given that consumers generally don’t make good decisions, encouraging them to make worse decision was unwise. The resulting debacle led to a dramatic decline in trust in banks, exaggerated by politicians’ haste to pin the blame on banks rather than themselves and pretend to “save the world” – you all know whom I’m referring to. Trust is an essential requirement of good customer management.
So, my conclusion is that it is more difficult to manage customers well in financial services, compared with other sectors. It demands concentrated effort over a long period, while taking care not to try to achieve unrealistic standards, based on consumer expectations generated in other sectors.
