Information Overload

Choice, at least in financial services, isn’t necessarily a good thing – or at least it’s a poorly understood thing, because too much choice usually means consumers become paralysed.

The fast moving consumer goods and the internet search industry understand this concept very well.

Supermarkets know very well that where something is placed in an aisle, what colour the packing is and what the product appears next too is as important as price in determining product choice and through years of dedicated research have product placement down to a fine science – even introducing smells as driver of choice.

Companies that sell on the internet too, know that it’s worth the money that Google charge to appear first on the list of products in search rankings.

None of this is new – 52 years ago an American called Vance Packard wrote a book called the Hidden Persuaders, which is still a relevant read, about the keys of creating a choice set in the minds of consumers.

Unfortunately however, it seems this notion has somehow eluded the financial services industry.

There is a pervasive argument that with four large banks and a string of second tier providers – Australians are starved for choice in financial services.

In fact nothing could be further from the truth – even a casual glance would inform the laziest observer that Australians are swamped by financial services choice.

While there are a relatively small number of companies in the market place, consumers are faced with a veritable blizzard of product and channel choices.

The problem then becomes how consumers determine the utility – the value of what they are buying?

Which bank should they chose? And which product? Which insurance company? Which product? Which Mortgage? Which product? What represents the best deal? The product with the lowest price or the one with the best features?

Let’s take a relatively simple example – a mortgage – not an investment mortgage – but a mortgage for a home to live in.

In a recent piece of research undertaken at CoreData-brandmanagement we noted that the bank we were working for had on offer no fewer than 51 discrete mortgage products – each of which had an average of three permutations – leading to a total of 157 different mortgage offerings.

Implicit in that somewhere is the expectation that a consumer could reasonably wade through all 157 mortgages on offer and make an assessment of which mortgage was right for them, or expect someone at the bank to do that job for them.

But it gets even more complex. Within the same bank there were four different channels competing for the same consumer – not to mention that many of the products they offered were available directly to consumers, via either the internet or their phone channel – and via a mortgage broker channel.

You can see the logic that lead to 157 different products and six different channels – the bank is offering consumers the greatest possible choice – of the type mortgage and method of purchase that suits them best, the choice of what they buy and how they buy it is clearly up to them.

It’s a kind of Caveat Emptor – buy whatever you like – but the risk that you are buying the right product is up to you not us (the bank) – we fulfilled our obligations by offering you choice.

Extrapolate this for all of financial services – especially retirement planning and personal investment and its clear that a great deal of choice is a completely false promise and may even allow real fraud to occur because consumers are essentially blinded by choice and can’t actually see the utility of what they are buying.

Which one of the 180 superannuation funds running in Australia is right for you? Which one of the products they sell is right for you? How should you pay for it?

It’s clear that the idea of choice is an attractive one – it’s also clear that it’s based on a blatant misconception – that people when left to chose for themselves will make choices that are good for them, or even better choices than those made by someone else.

It’s not just that individuals regularly make bad choices in simple things like food and alcohol consumption; in something as complex as financial services it would be almost technically impossible, given then incredible variety of choice for them to choose well.

Retirement planning it seems, at least without expert advice is a complete lottery.

The most common outcome of this blizzard of choice is inertia – consumers accept the default employment superannuation fund and the default investment option more often than not to the long term detriment of their savings.

It becomes the role of the financial services industry to break through the paralysis of choice and start to provide a series of clues and nudges to allow people to either make the decisions that are right for them – or to outsource the decision making to a company or individual that has their long term financial health in their best interest.

There are a couple of caveats to this – there are essentially two types of humans – those who use their cauliflower shaped prefrontal cortex to make logical decisions (controllers) and those who use their limbic system, the old lizard part of the brain to make emotional decisions (externalisers and worriers).

Controllers – which represent between 20 and 30% of the population by number (but about 50% of the wealth) make rational data-based decisions and to get them to make a choice – you need to provide them with clues about what they should be choosing – they are seeking utility based on price, scarcity and return.

Worriers and externalisers who use their limbic systems – need to be nudged – because, not only are they prone to inertia, they also need to be lead into making a choice.

And this is the critical part of the research – the financial services industry in Australia has become extremely good at helping people make logical data based decisions which suits about 20%, but very poor at helping the rest of the people who tend to by on impulse.

Here’s where the lessons from the fast moving consumer good industry come in, the latter has become terrific at providing a series of nudges to consumers which allow them to bridge the gap between an emotional decision and a logical decision on everything from toothpaste to cat food.

Just why this isn’t happening or why it hasn’t happened yet is curious, but all of the work that CoreData-brandmanagement is doing is making it clear that the problems of inertia and choice are a long way from being solved.

The study we mentioned earlier – where we shadow shopped a bank with 157 mortgage offers, across 51 different products – how many did the staff talk about in the shadow shop events?

Two – they offered the mystery shoppers only two of the 157 products they have.

And that’s were the idea of choice falls over.