Revealed: Banks And Insurers Trick Customers

New research by financial consumer watchdogs rips apart the marketing strategies of banks and insurers to reveal the tricks they use to lure customers.

The study by the Financial Services Consumer Panel looks at the psychology behind marketing financial products from payday loans to pensions.

The watchdogs are a statutory body that offers research to the financial services regulator, the Financial Conduct Authority.

The report Consumers and Competition pulls no punches, and although no specific financial firms are named, the way they manipulate customers is explained in detail.

Firms exploit their customers

“Financial services firms exploit their customers’ inertia and misplaced loyalty. Simply telling people this and encouraging them to go elsewhere is not going to work for most consumers. Firms will only change their behaviour when they have an incentive to do so,” said the panel chair Sue Lewis.

“Competition authorities need to analyse what works: what needs to happen for people to know they can switch to a better product or service? What remedies should be put in place to protect those who, perfectly rationally, do not want to switch? The fiction that consumers can and will drive competition has persisted too long. We need tough action now.”

The panel looks at the 12 marketing tricks employed by financial firms and how they impact financial services customers.

The outcome is the panel wants the FCA to stop financial firms offering marketing wrapped up as guidance to confuse customers so they can make more profits.

Marketing strategies of financial firms

What the firm doesImpact on firmImpact on customersExample
Pricing strategyRaise the priceHigher profit on each unit sold, but volume sold generally fallsConsumers who stay with the firm pay more. Consumers may be able to switch to another firm or decide to buy less or nothingBanks cut interest on savings accounts
Price discriminationFirst-degree: every consumer pays the maximum they are willing to payHigher profit on nearly every unit sold; volume sold may be lessNearly all consumers pay more. Consumers may be able to switch to another firm or decide to buy less or nothingRarely found
 Second degree: different price-quantity packages (incentivises consumers to self-select)Higher profit from consumers willing to pay extra, while retaining customers who are only prepared to pay lessSome consumers choose to pay more, for example, for extra features, better quality or greater convenienceHigher interest rate on internet-based savings products compared with branch-based products
 Third degree: different price for different consumer groups (relies on identifying groups or consumers providing identification)Higher profit from some consumers; volume sold to them may be lessSome consumers are charged more than others. These consumers may be able to switch to another firm or decide to buy less or nothingCharging higher insurance premiums to loyal customers than new customers
 Price confusion with complicated and hidden chargesCompete on just one dimension of price while charging extra through other ancillary charges. Refuse to supply information to price comparison websites. May aid brand loyalty. Impose switching costs.Unaware of true cost: overlook some costs, ultimately pay more than expected. Confused, hard to make comparisons: may decide shopping around too difficult. May stay with current provider to avoid paying switching costsFree-if-in-credit current accounts with complex overdraft charges. Extra fees for basic administrative changes to insurance policies. Pension products with multiplicity of charges. Mortgage and insurance early redemption charges. Variable rate mortgages and loans where future price changes cannot be predicted
 ‘Bait and switch’ (prominently advertising tempting offer that soon reverts to less good terms)Initially compete on price but quickly increase profit marginConsumers pays more than expected if stay with the provider. Consumers may be able to switch to another firm or decide to buy less or nothingCredit cards competing on length of credit-free period. Teaser rates on savings accounts
 Opportunism (taking advantage of an external event or requirement to charge higher prices)Charge some customers extra. Refuse unprofitable customersConsumer pays over the odds. Consumer may be unable to switchMortgage ‘prisoners’ trapped on high standard variable interest rates.
Product feature strategiesProduct bundling and add-onsHide true price of each element, enabling higher price for some. May also create a degree of production differentiation. May aid brand loyaltyUnaware of true cost, so pay more than realise. Confused, hard to make comparisons: may decide shopping around too difficultPackaged bank accounts GAP insurance Payment protection insurance
 Product complexity (e.g. many characteristics or technically complex; many similar but slightly different products)Hide true value for money, enabling higher price. May also create a degree of production differentiation (real or spurious). May aid brand loyaltyUnaware of true value for money, so pay more than would otherwise. Confused, hard to make comparisons: may decide shopping around too difficultStructured investment products Personal pensions Variable annuities Investment funds
 Product differentiation (genuine or spurious)Charge higher price for a distinctive product and/or create brand loyalty to increase or protect market shareBelief that no other product is as goodParticular brands of payday loans promoted on speed and ease of access
 Brand and advertisingCreate loyal customer base. Increase or protect market share, even if price must be lower. May enable higher price. May create barrier to entry for new firms because of cost of establishing a competing brandLess likely to switch to another providerBanks and insurance companies that advertise their caring attitude and empathy with customers
 ‘Hollowing out’ (reducing core features or services)Can compete on low prices without reducing profitMay be unaware of loss of product features and quality, especially if overall the products terms are complexGeneral insurance sold through price comparison websites

Source: Financial Services Consumer Panel

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