Opportunities for Action in Financial Services. The New Consumer

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1 new consumer final 12/10/01 3:36 PM Page 1 Opportunities for Action in Financial Services The New Consumer

2 The New Consumer In 1999 a woman stood up at the annual general meeting of Marks & Spencer and complained that her underwear had become too boring. In fact, it was not just the underwear at the U.K. retailer that lacked flair and imagination. The whole store had become somewhat tired. The shopping environment was unappealing. Customers had deserted in droves. The core of the problem: M&S had lost the hearts and minds of its customers. This can happen all too easily. Customer behavior changes slowly. M&S missed the signs. The company may have ignored the strident cries of the fashion aficionados; it also failed to hear the voices of its regular customers the silent majority who quietly abandoned the dated stores. But understanding the changing behavior of massmarket consumers and what motivates them goes to the heart of how retailers and financial institutions should compete. Clearly, demographics are changing. Populations are aging, the traditional family is being redefined, and people are getting married later in life if ever. Demographics, though, are not even half the story. Although factors such as age, wealth, and family status can partly explain people s needs and buying behaviors, we can learn much more by understanding what makes us individuals: emotions. And the emotions that drive today s consumer have evolved in ways that have surprising consequences for financial institutions.

3 Meet the New Consumer The new consumer is not driven by price. What modern consumers demand is better value for their money. Price is just one early filter. Other product characteristics then gain greater relevance and provide a basis for real differentiation. Take mutual funds. Some consumers look at initial charges while others look at performance. Some may care most about ease of purchase while others may care most about the availability of advice. Consumers have varying views of what constitutes value for money. Consumers are growing more skeptical and cynical. That is why demonstrable value is so important. In a recent survey of U.S. consumers, 80 percent of respondents said that marketing, in general, was unreliable. Trust is becoming a defining issue, and absolute clarity (rather than headline-grabbing offers) is required to earn it. For example, in the United Kingdom, The Co-operative Bank had enormous success with a credit card that promised no annual fees ever. Consumers feel increasingly overloaded with information. Bombarded by news, messages, advertising, and advice, people claim they can t find the right information. And what they can find is in the wrong form and lacks value. So how do institutions respond? They add thousands of new products and a myriad of new information sources, and they shower consumers with endless messages. In the United Kingdom, it is no accident that the proliferation of mortgage offerings, coupled with obscure pricing, has driven 60 percent of prospective customers into the hands of independent advisers. Information overload and consumer skepticism are having financial consequences for the industry.

4 Consumers want to have more control. Increasingly, companies are looking to capitalize on this demand. In the United Kingdom, The Woolwich, Virgin One, and Intelligent Finance all have offerings designed to allow customers to offset their borrowings and savings, thereby minimizing the customers banking costs. Such services give individuals more control over their financial position and, for some, provide the perfect solution to their need to be in charge. For others, control means carefully segregated accounts. So proposition design should address segment needs. Responding to emotional need is rarely a case of one size fits all. Working consumers feel increasingly short of time. They have less leisure time than they want. They postpone housecleaning chores, eat takeout food, shop in higher-priced convenience stores, and use the phone, mail, and Internet to pay bills. Financial institutions have taken steps to address this feeling. For example, some have cut waiting times on phones and have installed more automated-teller machines (ATMs). But many institutions deal with this emotion in isolation. The consequence of saving time for the customer and typically cutting costs for the bank can be that other emotional needs are compromised. When an institution helps people use the ATM, it breaks their relationship with branch tellers. When it drives them online, it can be adding to their burden: with no one to guide them, they struggle to find their way through overwhelming amounts of information. What s required is a proper understanding of the tradeoffs that banks force on their customers. Consumers are more demanding and are willing to vote with their feet. People today are acutely aware of

5 alternative products and therefore better able to satisfy their own needs. They have also become accustomed to instant gratification from such services as immediate credit decisions and 24-hour banking. They are becoming used to greater levels of service and a far better purchasing experience as well. When consumers go to a supermarket, for example, they want more than just a place to buy groceries. They expect restrooms, child care, coffee bars, and other facilities and services that help make shopping a social event. So when they shop at their bank, they want to be recognized by the staff. They also want channel choice and fault-free service at no extra charge. More demanding, however, does not mean more sophisticated. Because today s consumers are pressed for time, they want uncomplicated products and ways to simplify their lives. More consumers than ever believe they can achieve their aspirations. This is a result of growing wealth and increased social mobility. It is no accident that we see a proliferation of wealth management offerings. For many institutions, these offerings are just a straightforward issue of economics and service. But leaving it at that would be to ignore the emotional dimension. Private banking, like a premium credit card, is a designer label for some people a public declaration of who they are and what they aspire to. Institutions need to ask themselves what it is about their offering that most helps consumers achieve their dreams. Consumers seek relationships. People want to be understood. They want personal connections. As the great social institutions of our countries prove less rel-

6 evant to their lives, consumers seek to fill the void. Brands, along with sports teams, have become great sources of modern affiliation. That s why people can connect with a company such as Nike. The just do it ethos, reinforced by endorsements from popular sports heroes, represents shared values. Because Nike running shoes offer most consumers a greater emotional benefit than financial services, the consumers connect better with Nike than with a bank. In the drive for cost and efficiency, many banks forget that relationships are based on customers emotional experience of interacting with the institution. The new consumer cannot be pigeonholed. People no longer sit comfortably in a single segment. Instead, they exhibit many different buying characteristics depending on the product category. This variability makes today s consumer far harder to understand, anticipate, and serve on the basis of historic product use alone. Take the splurge-and-save customer. He or she might buy a very expensive refrigerator yet spend nothing on clothes. And the interest-rate-sensitive mortgage customer may be a service-sensitive current-account holder. Indeed, one size will not fit all not even a single customer. Using Your Understanding of Consumers Do what it takes to win the share-of-wallet game. The economics of delivering what the customer wants are challenging, and the only way to succeed in financial services is to win a greater share of each customer s business. Although winning the share-of-wallet game has long been the Holy Grail of financial services,

7 there has been little sign of progress. But with competition intensifying and prices declining in the face of consumer demands and regulatory pressures, institutions can earn a decent return on equity only if they sell more products to their existing customers. For the first time, we may see winners and losers in the crosssell stakes assuming that the winners are prepared to take the actions laid out below. Deliver emotional benefit. Financial services are a low-involvement category. For many consumers, they simply represent a means to an end. People don t want a loan; they want a car or a vacation. But in the most effective consumer offerings, the product also delivers a significant emotional benefit a lifestyle affiliation. Most financial-services offerings fail to deliver real emotional benefit. There are, however, some exceptions. For example, consumers who bank with First Direct, a U.K. institution that specializes in online and mobile banking, are making a statement about themselves: modern, smart with money, technophile, leader, winner. Now ask yourself: What does your institution do to connect with individual customers? When they tell friends that they are your customers, what are they saying about themselves? Build a great experience for customers. No one ever used to talk about supermarkets. Yet today consumer involvement is much greater, driven by a broad management focus on delivering a better shopping experience. Supermarkets have addressed their customers needs in many ways: from fixing squeaky shopping carts and opening more checkout counters to introducing coffee shops and hiring staff to bag groceries. Supermarkets have concentrated on what matters to shoppers.

8 What do your customers really say about the experience of banking with you? Do not be afraid to separate distribution from product. Responding effectively to changes in customers emotions will take the financial services industry in new directions. We already have another type of supermarket the mutual funds supermarket. It combines a wide choice of products and brands with tools that allow consumers to narrow their choices and avoid being overwhelmed by information. The relationship and trustworthiness lie with the distribution brand; the credibility and expertise sit with the product brand. In time this phenomenon may extend further and lead to the fundamental separation of product and distribution brands across more of the industry. After all, it may be that supermarkets of any type are more trusted than banks precisely because banks are vertically integrated. A supermarket s credibility rests partly on the fact that it offers brand choice, as well as its own label. Develop a compelling product offering. Take advantage of consumers deeply felt emotions to improve product offerings. Recent successes in the United Kingdom such as The Woolwich Open Plan, Egg s fund supermarket, Lloyds TSB s added-value accounts, and the Halifax Current Account show that differentiation is possible even in an apparently commoditized product set. Don t Let It Happen to You We all think we know about the consumer. So did the managers at Marks & Spencer. But they failed to realize that where you shop had become shorthand for

9 who you are. They didn t see their competitors experimenting with shops within shops. They persevered with the store s venerable St. Michael label while brands proliferated in competing stores. They experimented with incremental changes none of them wrong, yet none of them enough. They were juggling, preserving what they had while trying to move with the times. M&S is still struggling despite some recent signs of improvement. The challenge is no different in financial services. And not just in Western Europe, but all over the world. As institutions try to preserve what they already have, they limit innovation. The need to improve numbers in the short term reinforces the long-term problem. We all know that the silent majority of consumers in our midst have a whole new set of needs. But we fear that changing our business models and investing for the future might mean damaging the business today. The danger is that by the time we wake up to the challenge of meeting those new needs, the silent majority may just as silently have slipped away. David Rhodes David Rhodes is a senior vice president in the London office of The Boston Consulting Group and head of the firm s U.K. Financial Services practice. You may contact the author by at: rhodes.david@bcg.com The Boston Consulting Group, Inc All rights reserved.

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