Making lemonade out of Consumer Duty

The Consumer Duty wasn’t necessarily what anyone in the finance sector asked for, but it’s what we’ve got. The industry has had to shift its compliance approach towards outcomes instead of inputs, understand vulnerable customers and learn about behavioural biases in customer decisions.

But one of the great things about the British finance sector is how entrepreneurial it is (stop laughing at the back. Just go to Italy and see what it’s like there.) When the FCA bombards you with lemons, you task an agile team with developing a lemon-catching process, get your quanties working on a lemon juice optimization algorithm and securitise it all into lemonade.

Each of the three main innovations of the Consumer Duty can be turned into lemonade. Here’s how:

Consumer Outcomes

Your compliance team now has to care about whether customers get good results from your products, not just whether they ticked the right boxes in the rulebook. This is a big culture change for them. But it’s not a culture change for your customer service, marketing and insights teams. In fact, it’s what they have been waiting for all these many years.

A customer outcome focus means the organisation is now aligned on the data to know whether it’s doing its job right – and whether it has a role in the industry of the future. Only good customer outcomes will ensure the long-term success of a firm. Outcomes enhance brand reputation, making customer acquisition and employee retention easier.

You know who doesn’t like a focus on outcomes? Scammers. Not just literal scammers, but the bottom-feeding segment of the industry. Firms who sell products that sound good but are overpriced, and don’t actually pay out when the customer needs them to. Remember PPI? Today’s equivalent might be GAP insurance or commissions on car finance or some other scandal yet to emerge. But if you’re a company who cares about its customers, its reputation and long-term (not short-term) profits, you will welcome the focus on outcomes and the consequent elimination of the dodgy competitors from the shoddy end of the market.

Vulnerable customers

It is always easier to assume that everyone is average and tailor your products to the average person. It would certainly be an easier life for product designers and marketers if they could continue to treat everyone as a 45-year-old Coronation Street viewer from the Midlands earning £40k.

But it’s not good for business. In fact, the more personalised and tailored your service, the more money you can make. The more unique needs you identify and serve, the higher a proportion of the market will find your products to be a good fit.

Vulnerable customers are not some tiny group of niche clients that you can afford to ignore. The FCA’s figures show that over 40% of people have characteristics of vulnerability at any one time. It might cost a little more and require a little more care to service those customers, but many of them are asset-rich and potentially lucrative.

Once again, the requirement to be inclusive of vulnerabilities removes a loophole for bottom-feeders to exclude them and sell cheaper products. Three years ago, a firm could have deliberately made life difficult for vulnerable customers, driving them and their expensive servicing requirements away and into the arms of a high street bank or insurance company. Now they can’t. And that means they also can’t undercut you on price or premiums by focusing only on the cheapest, least risky customers.

Taking care of vulnerable customers is a moral imperative for society as a whole, but it can also be a business opportunity.

Behavioural bias

This is perhaps the biggest area of opportunity. The FCA won’t let you take advantage of customer decision-making biases any more: but in our experience, good firms were wary of doing that anyway. Very few respectable brands want to manipulate their customers into spending more money; once again, it’s those with no brand reputation who are more willing to resort to that.

But now that firms are required to have behavioural expertise, they can use it – not for evil but for good.

Richard Thaler, author of Nudge and one of the most famous behavioural economists, always signs his books “Nudge for good.” It’s a reminder that nudges, heuristics and behavioural biases are intrinsic to the human mind and environment, but they aren’t intrinsically good or bad.

Using behavioural expertise responsibly, you can help customers get a better experience, create more value in your products, and even invent whole new product categories. Some examples:

• Understanding when customers might sign up for something without knowing it, and slowing them down with “friction” nudges. This is good for customers and protects you from future claims of mis-selling.
• Building new features to provide emotional benefits. Customers don’t only get financial outcomes from financial products, they also get emotional fulfilment. One customer told us “I had a valuable piece of art on my wall – but I was always anxious something would happen to it. It had turned from an asset into a liability. Then I got the right insurance policy and I was able to enjoy it for the first time.” That emotional benefit is arguably more valuable than the financial value if the customer ever has to claim on the policy.
• Designing customer journeys to be easy and natural. Finance does not have the best reputation as an industry that is easy to buy from or understand. If service providers could learn a little from supermarkets or cinemas or car manufacturers, they might design both product and customer journey in a way that fits with natural human thinking, instead of forcing people into unnatural “System 2” logic that suits the firm better than the customer.
• Help customers to imagine the product and outcomes they are going to get. By using “System 3”, the power of imagination, you can help customers understand their financial lives better. For instance, how will this amount of pension saving enable you to live in retirement? What will this insurance policy protect from you, and what will it not? Sophisticated consumers can work this out already, but the majority could use your help. By doing that, you’ll make your products easier to buy and often help people see that they need to invest or spend more.
  
  

You’ve probably invested a lot in setting up new governance, measuring comprehension and other customer outcomes, and identifying vulnerable customers. Don’t let that investment stop at the compliance department. Use it to make your products better, win more customers and make more money.

One of the top behavioural-science based companies in the American finance industry has named itself Lemonade. By understanding your customers’ irrationalities and building on the platform the regulator has created, you too can make profitable lemonade.