Pensions mis-selling, endowment mortgages, with-profits, annuities, “loan shark” credit card interest rates, extended warranties, hidden fees and charges – the list of scandals, controversies and regulatory interventions into financial services marketing seems to grow every day. Yet there are few, if any, signs that the industry is really responding. Why?
We’re witnessing a classic case of institutional myopia and paralysis in the face of the need for radical change. A toxic combination of denial, complacency and vested interest is creating a fleet of financial service brand Titanics, all sailing happily towards the icebergs, apparently unaware of the dangers lurking before them.
Take denial. Trust is a bedrock for financial services brands: their role as secure, stable places for people’s money is all about trust. Yet endless scandals and “rip-off” headlines are gnawing away at consumers’ trust. Organisations’ basic honesty, integrity and commitment to delivering value is in doubt.
This loss of trust is so deep and fundamental, and cuts across so many long-established attitudes and practices, that any credible response requires a fundamental overhaul of many organisations’ cultures, operations, marketing strategies – and yes, business models and profit structures too. Yet the scale of change needed is so huge that, for incumbent executives, the temptation is to set the issue aside for another day.
It’s not in financial services companies’ immediate interests to do much more, anyway. That’s partly because of the peculiar nature of financial services, where consumers are not just end-users, but are the source of the industry’s inputs too. Food companies harvest food from farm and sea, but financial services firms harvest their core raw material (consumers’ cash flows and savings) from their own customers. They are therefore as focused on extracting value from consumers as on providing value for them.
This, coupled with typical short-term pressures for increased profitability, means that an all-pervading “fleece-the-customer” mentality has taken hold in many institutions: “Yes, by all means, talk up the importance of customer service and value. But whatever you do, deliver on targets: sales, margins, commissions and so on. That’s where our bread and butter is.”
The cartel-like nature of the industry doesn’t help. I don’t mean formal cartels, all secret conspiracies and smoke-filled rooms, but the way in which competition sometimes works. When Harvard sociologist Harrison White studied the real behaviour of companies (rather than that suggested by marketing theory) 20 years ago, he found, for instance, that “markets are not defined by a set of buyers, nor are the producers obsessed with speculations on an amorphous demand. [Rather] markets are tangible cliques of producers observing each other. Pressure from the buyer side creates a mirror in which producers see themselves, not consumers.”
Today’s financial services industry fits this bill. If you spend most of your time comparing yourself to your peers, you can have the most ferocious competition without ever really having to ask what customers want or need. Life assurance and pensions providers’ distribution-driven, commission-incentivised selling methods mean that intense competition between them is actually detrimental to consumers, argues Mick McAteer, a senior policy advisor at the Consumers’ Association.
A knock-on effect of this poor service is that customers become fatalistic. What’s the point of shifting from one provider to another if they’re all basically the same? Here we begin to get to the heart of the matter. The real responsibility for today’s sorry state of affairs lies with consumers themselves.
If fatalism is one factor, inertia is another. It positively breeds corporate complacency. Why bother responding to underlying customer disquiet when, day in and day out, no matter what you do, hardly anybody defects?
This is partly a function of size. If you’re as big as the Amazon rainforest, who cares if somebody burns another acre? It’s also a function of the utility-like nature of most modern financial
services providers (They are, in effect, essential infrastructure for day-to-day transactions, or non-discretionary purchases such as insurance). In industries where consumers are “forced” to buy whether they like it or not, companies have a captive market and tend to act accordingly.
In addition, there are barriers to exit: the sheer difficulty of changing a bank account or mortgage; financial penalties imposed for opting for a better deal. The net result is that bad value and bad service routinely go unpunished by consumers.
Now add ignorance to the pot. Most consumers have little or no idea how financial services companies make their money, and have as little interest in finding out. As a result, companies can get away with fees, margins and behaviour that would have other companies under siege. Indeed, ongoing consumer ignorance positively encourages opacity and obfuscation on the part of marketers. The more complicated we make it, goes the thinking, the more confused people get and the fewer penetrating questions they ask.
Given all these barriers to effective change, can the fleet carry on sailing in the same direction forever? Perhaps. But things are beginning to change. New entrants are beginning to make an impact (albeit still on the margins). Endless media exposés are slowly forcing consumers to educate themselves. New technologies are making revolutionary new business models possible.
Together, over time, such factors could provide both companies and consumers with an incentive and a spur to change. A straw in the wind comes from Forrester research in the US. Trust is at an all-time low, it says. Eight out of ten consumers simply do not believe companies’ privacy and personal data promises, for instance.
“Financial firms are bearing the brunt of increasingly mistrustful, insecure, hands-on consumers,” warns Forrester. “Firms hoping to retain and attract clients must focus on customer advocacy – offering products and services that are [drums roll, fanfares blast, get ready for a sharp intake of breath], best for the customer, not just for the firm’s bottom line.”
According to Forrester’s ranking of 36 drivers of retention and customer satisfaction, customer advocacy comes out top “by far”. Customer advocacy versus yet more hard sell: is it time for UK financial services brands to steer a new course?
Alan Mitchell, firstname.lastname@example.org