February 3, 2012, by CRBFS Professor James Devlin
Marketing and Innovation in Financial Services
Times are tough in retail financial services (although look through the archives and you might see that times always tend to be tough!). The enduring challenges of increasing competition, changing regulation, new entrants and more demanding customers, combined with a severe financial crisis that is probably now moving into its fifth year make it hard to argue against this statement. And tough times always generate advice and guidance on how businesses might still prosper. Blogs, books and the business press continue to remind us of the importance of innovation and customer centricity as the building blocks for effective value creation. Innovation takes many forms but for those which are market relevant then the importance of grounding the process in a thorough understanding of customers should not be underestimated. Where customers are concerned, there is genuine value in gathering market relevant information, disseminating it throughout the organisation and using it in market related business decisions.
So, it is not surprising that market research – in its broadest sense- has an important role to play for retail financial services organisations which are looking to develop new products, new delivery systems or new ways of serving customers. The peer to peer lending service – ZOPA – is one of the few genuinely innovative retail financial services (most innovations tend to be variations on a theme rather than genuinely new-to-market). The concept arose from market research which identified the existence of an un-served segment of credit-worthy individuals with lumpy income flows and thus a need for short term credit. At the other end of the spectrum, with a more derivative innovation, the launch of Barclays Foundation ISA was underpinned by in-depth consumer research on attitudes to investing. And one of the most high profile initiatives in the sector in recent years – the transfer of the operating model of Commerce Bank from the US in the form of Metro Bank in the UK drew heavily on the founders’ understanding of the retail financial services sector in the UK and the frustrations of customers with the traditional retail branch format.
Indeed the right sort of market research (and the insights it generates) is widely cited as one of the key success factors in new product development processes. But, research by itself cannot guarantee success and it’s still common to see quoted failure rates of 50% for new products. In many cases, such failures are almost invisible – the product that doesn’t reach the market or that reaches the markets and is quietly withdrawn; in others the failure is very visible as was the case with, for example, high income (precipice) bonds. Success in the development of product and delivery innovations in financial services is a complex process. But without customer insight generated from market research and market intelligence, it would be a much more haphazard one.
However, financial services present particular challenges when we come to consider research, innovation and the delivery of value to customers. To begin with, there are obvious questions about how well customers understand or can articulate their specific financial needs or the types of products that might be required to meet those needs. And of course certain financial needs may relate to events that individuals would perhaps rather not think about or discuss. And that’s before we consider the challenges associated with distinguishing and addressing needs and wants.
Of course market researchers have an armoury of techniques to probe discretely the true wants and needs of customers and much can be elicited by more imaginative approaches to gathering information from customers. But there continue to be real concerns about the extent to which the needs and wants of retail customers are understood and the associated dangers of focusing too much attention on giving customers what they want (rather than what they need).
The recent financial crisis has raised very genuine questions about the extent to which attention has focused on developing products to meet expressed consumer wants rather than real customer needs. Have, for example, innovative means of providing mortgages to low income (sub-prime) customers caused more problems that they have solved? Have “too good to be true” investment products tempted some savers away from safer, low risk products? And should the industry have been more responsible in its approach to these markets?
There are undoubtedly problems with the nature of some products offered to certain sectors of the retail market but rarely do these lie with the basic marketing principle of trying to understand customers and respond to their needs. In reality, the explanation lies with the ways in which products are targeted, promoted and delivered to customers.
To address these issues we need to step back and reflect on the role that retail financial services play in society. For those involved in marketing it is a more complex exercise than would be the case if they were simply considering cars, televisions or holidays. Access to financial services is of fundamental importance to individuals if they are to organise consumption patterns, manage risk, find somewhere to live, accumulate assets or, in some cases, lift themselves out of poverty. And increasingly so. Around the world, the past 30 years have seen the progressive withdrawal of the State from welfare provision and the associated expectation that individuals would take increased responsibility for their own economic well-being. With responsibility for welfare increasingly devolved to individuals, the market for retail financial services has assumed even greater social and economic significance.
In this context, those involved in the development and delivery of a whole raft of retail financial services are presented with a particularly broad ranging set of fiduciary responsibilities which may not always sit easily with conventional commercial logic. Providing customers with what they need must take priority over providing them with what they want. But, in an environment which celebrates conspicuous consumption, where individuals are defined not by who they are but by what they consumer, then it is hardly surprising that cheap credit should be attractive to a range of customers or that investment products that ostensibly offer high returns with low risk should attract a ready stream of prospects. As with so many products that have been inappropriately sold, including payment protection insurance, endowment policies and personal pensions, the problem is less with the underlying design of the product or the research that was used in their development and more with the way in which the products were sold and to whom.
Retail financial services has wrestled with the problem of sales and distribution for decades. The industry has a clear responsibility not to sell products that are inappropriate for the target customer and has singularly failed to deliver on this responsibility. Payment Protection Insurance is a perfectly reasonable product; the misselling problem has arisen because it was sold to individuals who didn’t need it but did not understand that they did not need.
The explanation for this enduring problem does not lie with the principle of being customer centric but rather with the problems associated with asymmetric information. Many consumers have limited or partial understanding of financial products (and indeed, many are simply not interested, other than in the contingent outcomes – such as the house they can buy or the pension they receive). Combine this with a distribution system in which commission payments continue to play a central role in marketing strategies for so many different products and the potential for the wrong products to be sold to the wrong customers is considerable. Alongside what is essentially a systemic problem for the industry, are the compounding problems associated with organisational cultures and norms which privilege short term commercial opportunities ahead of longer term responsibility to customers.
It should not be surprising that the scale and scope of the current financial crisis combined with a legacy of financial scandals (including mis-selling, ponzi schemes and rogue trading, Equitable Life) provokes a round of reflections, critiques and re-evaluations of the nature and operation of retail financial services. For those of us who were working in this area in the early 1990s, there is a strange sense of déjà vu, notwithstanding the much greater scale of the current difficulties. Much has been written in recent years about the failings of the retail financial services sector, the failings of commission based distribution, the inadequacies of regulation and the dysfunctional cultures of conspicuous consumption. Past experience suggests that while we may huff and puff now, when the good times return much of the current rhetoric will be forgotten. Perhaps not this time. Perhaps the Retail Distribution Review will genuinely transform the way in which consumers receive advice on and purchase a range of significant financial services. Removing commission based reward systems has to be right but whether the mass market will be willing to engage with a system of direct payments for financial advice is still open to debate. But getting it right is important because we underestimate the broader social and economic significance of the retail financial services sector at our peril.
Christine Ennew (Professor of Marketing, Nottingham University Business School)