Consumer duty: getting into the customer's shoes

Introduction

In today’s world, we've made it pretty complicated to borrow a buck.

Innovation and technology have birthed a new generation of financial products - many of these are complex for consumers to navigate and self-serving in nature.

Where in past years consumers have relied on banks and financial institutions for the financial products they need, such as loans and mortgages, there’s a pressure to understand a world filled with new tech products - the likes of crypto-currency and non-fungible token financing.

While technology is here to make life simpler, we often find additional complexity in the products we create.

Interacting with customers through a fully digital journey has removed the opportunity for conversation. Consumers are often left confused and struggling to fully understanding the potential outcomes and dynamics of financial products.

Digital journey optimisation often focuses on optimising a process for conversion increase instead of providing the consumer all the information they need to know. With the gold rush to digitisation and optimisations, it's no surprise the FCA demands higher standards to keep the pace with technology.

If there’s one certainty, the world of digital services is here to stay. According to McKinsey, 10 years of online adoption was compressed into just three months due to the pandemic. This has created a seismic shift in consumer behaviour that would usually take decades.

The Consumer Duty

This is one of the key reasons the FCA has consulted on the Consumer Duty, set to be introduced from April 2023.

Lenders will be tasked to ensure transparency across a remote process and act to deliver the right outcome for the customer. Not an easy task considering the continuous information required - and for this to be served in a consumer engaging manner.

Sheldon Mills, Executive Director of Consumers and Competition at the FCA, says the new duty is needed because consumers are too often “not given the information they need to make good decisions and are sold products or services that do not offer the benefits they might expect”. 

The onset of the Consumer Duty shifts away from a principle-based approach to one based on outcomes. It aims to put lenders “into a customers’ shoes”.

The duty has a central consumer principle that a business "must act to deliver good outcomes and to be able to evidence it”. Reviewing complaint MI is no longer sufficient. Achieving ‘good outcomes’ is the FCA raising standards from treating customers fairly and making lenders more accountable for their customers financial wellbeing. A complex matter when considering the current backdrop of inflation plus the cost of living and business crises.

The only way to achieve this is by increasing engagement and getting to know the customer better. A difficult challenge in the remote world.

In a recent survey undertaken by EY, "Forty-two per cent of UK financial services firms intend to use a combination of data, testing, and enhanced monitoring to evidence ‘good outcomes’ for customers"

Pro-activity V’s Reactivity

Is monitoring enough when the regulator is asking lenders to act? Consumers are susceptible to a variety of independent forces that can positively and negatively impact their financial wellbeing. Lenders need to understand financial trajectory to act and evidence good outcomes.

The use of open banking by both lenders and consumers is going to be critical to help. The FCA has already praised the use of spending data to identify customers at risk of problem gambling during their work on the Fair Treatment of Customers. How can the use of a relatively new rich insight go even further and help lenders be even more customer centric?

Bureau credit data

Traditional credit information such as bureau data has enabled a vibrant economy but does not have all the answers needed today. It provides insight on the customer’s previous credit performance but does not include expenditure. How can you act to ensure the right outcomes when it is already too late?

Bureau data is also not typically used for marketing purposes to provide more relevant products and services to existing customers. This prevents lenders helping customers by providing more appropriate products and services.

Historically, so much emphasis and focus has been put on the initial customer acquisition decision. Little thought has been given about the continued management of the customer destined to blindly weave down the credit lifecycle. This was satisfactory during the backdrop of stability but may not be sufficient to the regulator in the current unprecedented climate.

As inflation bites, it’s going to be more important that lenders keep informed of their customers financial wellbeing and nudge them away from any un-intended harms. It’s difficult to envisage any other way to monitor a consumer’s real expenditure without access to their banking data.

Open banking data

Open banking data provides a much richer insight into a consumer’s behaviour both at acquisition and across customer management. It can strengthen decisions alongside bureau data to provide a much more customer centric view and enables lenders to easily slip on those customer’s shoes.

It provides a real-time view, over time, to track and measure positive or negative financial trajectory. It creates new opportunities through insight which would enable lenders to offer more suitable products to the customer. Ultimately, based on previous regulator praise, it provides the capability and evidences you are willing to act to put your customers first.

Whilst open banking adoption is young and there is doubt whether it can really offer benefits across the credit lifecycle. Hypothesis can only be based on prior precedents and adjacent services. The difficulty is finding similar ground-breaking innovation that provided a consensual richer insight into a consumer’s behaviour.

Putting the customer first

The closest to conceive would be the introduction of supermarket store cards such as the infamous Tesco Club Card – now with over 19 million customers. Whilst this is admittedly far away from a credit product, the benefits, insights and outcomes are exceptionally similar.

The programme has delivered massive value, built customer engagement and saved huge costs in customer acquisition. It enables Tesco to understand their customer’s behaviour, make smarter decisions and push offers which are relevant. The clubcard programme has driven customer retention and delivered better outcomes - backed by Tesco CEO Dave Lewis’s biggest mantra of “putting the customer first”.

The adoption was founded on transparency and a clear value exchange between Tesco and their customer. In exchange for better deals, customers were willing to share their spending patterns with Tesco, which in turn provided better deals.

What does this look like in financial services?

Currently, customers have become fickle to lenders and there is little loyalty with widespread competition throughout the market. Credit card and loan surfers move between products - mortgages are easily switched, and a competitive auto finance market makes customer retention tough.

Transparency by its very nature is a two-way process. Customers are more likely to share their bank transaction data if they believe they will get a better outcome. Some examples could be;

The use of banking data at the point of acquisition would strengthen insight and enable lenders to offer customers, including those with a limited credit footprint, better APRs and more suitable products

An auto lender could identify customers on a negative financial trajectory, spending a large % of disposable income on fuel, a cheaper more economical vehicle, preventing the customer from rolling into default and losing their mobility

Credit card providers could identify customers displaying characteristics of vulnerability earlier and offer payment holidays or interest free periods to retain them longer term and avoiding default

This is a significant mindset and business model change. Whilst this sounds great for customers there are also clear benefits for the lender. Risk strategies can be sharpened, revenue optimised and most importantly customers retained.

Retention holds increasing value. Simply put, acquiring customers costs money, and the longer they stay with you, the better the investment

This is, as well as positively impacting business metrics such as profit, Net promoter scores and Trustpilot ratings etc. Customer centricity has been demonstrated as a valuable mantra to embrace.

Where’s the data?

The value of this mantra in financial services is yet to be fully discovered. Fortune favours the brave, there is no doubt that lenders with the ability to test and learn will gain the competitive advantage.

How lenders implement the duty will be something to monitor over the next few years however embracing new technology has to be one of the answers. New technology and consumer adoption have created these challenges, it is logical to believe they can also resolve them.