The biases behind customer inertia
Our last post on Open Finance captured the headlines from the fascinating round table we held in July.
That event was called Breaking Inertia, and our experts explored the consumer dynamics of the finance sector. We asked why, with better products and information available, people are not switching in greater numbers. Fintech’s promise is yet to be fulfilled, it seems.
And the headlines? First, few people crave financial products in the way they do brands in other sectors. It’s just not very exciting. Second, the complexity of many products can be difficult to grasp for many people. We feel alienated by things we don’t understand and few of us take the time to understand them. And third, taking control of one’s finances involves a lot of effort, and the win doesn’t always stack up. Effort and reward are out of whack. Perhaps if the industry played more on the cost of doing nothing, we might see a little less inertia and a bit more action.
Dig beneath these headlines and you soon find this tech-driven sector is at the mercy of very human traits. Emotions and some universal cognitive biases colour our thinking. It’s impossible to understand our relationship to money, and therefore to financial products and brands, without them.
Take the endowment effect’. This is the tendency for people to demand much more to give up an object than they would be willing to pay to acquire it. It’s the reason why someone selling a car thinks it’s worth more than the person buying it. It’s why you were disappointed when that Ebay listing didn’t catch fire.
‘Hyperbolic discounting’ is another good one. This is the tendency for us to prefer immediate payoffs over later ones. We make choices for how well they benefit us now, not our future selves. It’s the reason we spend windfalls rather than invest them. It’s the reason so few of us have decent pensions.
Apply these two principles to financial products and you soon see why inertia rules. Loans, for example, seem brilliant, because we get the money now and the negatives (ie paying it back) are a long way off, and small enough to seem invisible. But investments, which would benefit us more and for which our future selves would thank us profusely, take our money from us now and promise relatively little in return.
Another helpful bias is ‘availability bias’. This little beauty is the tendency to overestimate the likelihood of events that have happened more recently, or are more emotionally charged, than others. It’s why no one saw the crash coming back in 2008 but now everyone thinks the banks are out to screw us. Not that much has changed, materially (insert FCA-friendly caveat here), but when all we hear in the press are scare stories and threats of systemic failings it becomes harder to feel positive about making a bold decision.
It’s easy to understand in this context why so many people self select OUT of the market. The more advanced or complex a product, the more pronounced the sense of risk. Investments, for example, start to seem the preserve of the wealthy because we assume you have to be prepared to lose money. So they’re seen as for people who work in the City, or enjoy a six figure salary. For those with an average income doing nothing can seem the smartest thing to do.
And yet money is such a central part of our lives. Financial products enable our progress. Student loans help us go to University. Pensions help us enjoy later life. In some cases we even celebrate them as an achievement – we mark the biggest loan we’ll ever take out by telling ourselves we’ve bought a house.
Perhaps if we can reconnect people to the value of money, and what it can do, we’d invest in the financial sector with a renewed emotional resonance. It would be lovely to think we could help people feel less alienated from the products that can make their lives better. Whatever the best way to do that, addressing the emotional factors at work in people’s financial decisions would be a good start. Maybe it would help to break the large scale consumer inertia we see in the category.
To do that, maybe brands need help overcoming their own cognitive bias, though it’s one we can all recognise. It’s the tendency to ignore an obvious negative situation. Psychologists call it the ‘ostrich effect’.
If you’d like to know more about breaking inertia, get in touch.