We’re always taught that loyalty is something to be encouraged and rewarded. Yet those who stick with their suppliers are likely to be worse off than those who switch. Why is this, and what are the benefits in helping consumers manage their money better?
Many people are paying more than they should for financial products, either because they’ve chosen a product that doesn’t suit their circumstances or needs, or because they could get the same thing cheaper elsewhere. They might have spent years with an insurance provider, accepting the annual premium increases without question. They might not save as much as they could, or put enough by for a pension. The effect of these choices is that of an invisible penalty, which builds in impact over the course of a person’s life.
Those in this group typically fall into one of two categories. Firstly the retired population, who are more likely to carry on doing what they’ve always done, and secondly those who are younger and less affluent, with less experience and fewer accumulated assets. It’s these groups, too, who stand to gain the most from switching to better deals.
Convenience and confusion
The main reason people stick to old financial behaviours? It’s likely to be convenience. People lead busy lives, and it’s easier to carry on as you are than take action. Another factor is the complexity of financial services suppliers’ product offerings, and difficulty understanding their benefits and costs. Combine that with a general lack of trust in the financial industry and it’s easy to see why many people prefer to stick with what they know.
On the flipside, just 40% of households judge that they manage their finances well. These tend to be better off, ranging from established investors to young professionals, and reinforce the theory that affluence goes hand in hand with being well informed and making good financial decisions.
The role of organisations
It’s not just consumers who need to adapt their behaviour: businesses need to ask themselves if they’re contributing to the problem.
Take different types of borrowing. Often younger and less affluent groups, whether through lack of information or because they’re offered fewer alternatives, choose the more expensive ways of borrowing money. And as the Harvard Business Review argues, many financial services providers profit from those “who fail to understand or follow the rules about minimum use, minimum balances, overdrafts, credit limits or payment deadlines”.
Often, companies who profit in this way start out by trying to offer value, with different packages to suit varying needs and budgets. That’s great, but it’s only helpful if they also give people the guidance they need to make the most appropriate choices.
Rather than penalising – and profiting from – consumers’ bad decisions, there’s a huge opportunity for financial service providers to help people make the most of their money by guiding them to the most appropriate products. It’s a more responsible approach that reduces the risks of ill feeling, bad publicity and regulatory breaches, and instead helps breeds trust, loyalty and even advocacy and referrals.
Learn more – download our free report for an overview of current UK consumer trends.