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)
Very interesting article, Consumers are becoming more autonomous and sophisticated, there is so much information available now that people’s brains are not microchips, they have limited ability to process this volume of information. So they are looking more and more for advice about which financial products and services to buy. They are increasingly looking for this information from independent sources such as the Internet and Media. Confidence has decreased in the traditional ‘independent’ financial advice process due in large part to the issues mentioned above. I think many younger consumers don’t know where to turn if they cannot gather the information for themselves. With so much information available for free, I think it’s a very relevant question of whether the mass market will engage in direct payment for advice?
Simon, many thanks for taking the time to comment on our post. I don’t think there is much prospect of the mass market being willing to pay a significant amount for advice. Related to this, there may well be shortages of those offering genuine personalised independent financial advice to the mass market. Comparison sites may provide the answer for simple, largely commoditised products, but that still leaves a large advice gap for savings, investments and pensions. I think this is one reason why policymakers are showing so much interest in behavioural economics, as the focus with BE is steering people towards suitable choices without them having to think too much/take advice etc.
James, I think you’re right the mass market will be more interested in looking for information, that’s provided for free or at a very low cost, to help them make decisions independently. I think this is a very valid area where people are currently forced into taking advice with regard to simple products that could quite easily be explained without going through the traditional process of meetings with a financial advisor.
Christine, well done for producing such an interesting article. It touches on one of my main concerns about protection insurance – ie Personal Accident, Disability & sickness cover PPI,MPPI, STIP, IP etc.
I fear that the FSA’s intention to pursue a product intervention approach is going to decimate any future protection insurance product innovation. If you read their Guidance Consultation (jointly with the OFT to capture the non insurance products) on payment protection products and the product risk report it contains I believe you will see what I mean.
Discussing this with an FSA offical during the very brief consultation period, he spoke of allowing “sufficient innovation”. That did frighten me, what might he or his colleagues consider to be “sufficient innovation”?
It also states that PPI was not a valuable product that was missold. A view the FSA has published previously. The product itself has now been called to question.
I fear that existing cover such as PA and disabilty schemes will be caught up in this as will all products that include elements of PPI type products (accident, sickness, and unemployment plus other un-named risks)
Short Term Income Protection products, designed for the standalone market that the FSA and Competition Commission helped fashion, also look like they will be undermined by the FSA before the market has established itself and grown to any size.
Which, when you consider that the Treasury has a task force looking at simple protection products for the mass market and less affluent, I find quite puzzling and frustrating too.
Great article. I’d like to pick up on the point in the article about the misselling problem that had ‘arisen because PPI was sold to individuals who didn’t need it but did not understand that they did not need it’. I worked closely to this industry pre ICOB and regularly saw evidence that many consumers were buying it without even knowing they had it – signing away the different forms when taking out point of sale finance without appreciating the extras they were signing up to. Very different from being persuaded to buy something they might not need. With 90+% sales penetration, something was clearly amiss at these intermediaries, but many of my colleagues celebrated these figures.
What sickens most now is that it is some of the same people that were misselling then (if you can call it that) that have set up the misselling claims operations that we see now! Badgering consumers with automated texts and phone calls, as well as exasperating the damage to the industry they have already done. Do you know who is, or should be, regulating these businesses?
It strikes me that ICOB stamped out much of the immoral practises around PPI but the burgeoning misselling claims industry will only damage what should always have been an important insurance product – for those that need it.
Be interested to know who is watching over the misselling claims operators?
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