Context

There is believed to be a growing concern among consumer organisations that most regulatory market studies and reviews of retail financial services recommend that consumers must become more engaged if competition is to function effectively. Typically, recommendations will include: more and better information for consumers; greater use of price comparison websites; and faster and more efficient switching services.

The study

This project aims to consider what is reasonable and realistic to expect of consumers in retail financial services. It asks particular questions about current levels of switching and shopping around in order to raise the question of whether alternative approaches need to be taken by financial service firms to ensure markets work in the best interests of those consumers.

More specifically, the aims of the research are to:

• Consider possibilities to deliver more effective ‘consumer power’
• Generate a set of real-world metrics that can measure how well markets work for consumers, based at least in part on the features and attributes that are valued by consumers, and
• Influence FCA thinking on competition and consumer responsibility.It achieves this through the following methods:
• A panel survey of 2,084 consumers assessing their attitudes and behaviours in the retail financial markets
• A literature review of research and policy relating to competition in the retail financial services markets, and to consumer behaviour.

Key findings

Through a scoping of the market and an analysis of relevant literatures, this research makes a series of observations and conclusions based on what they perceive to be unrealistic expectations placed on consumers. They are the following:

• Perfect competition seldom, if ever, exists in reality. In most retail financial services markets, firms maintain market power through strategies such as price discrimination, price obfuscation, product bundling and complexity and promotion of brands. The result is markets that are overly complicated and products that are difficult or impossible to compare.
• Price comparison websites are designed to help consumers make product comparisons, but often focus too heavily on headline price, ignoring other essential factors, such as product features and quality of service.
• Consumers are prone to behavioural traits that get in the way of their ability to drive competition and may be deliberately exploited by firms.
• Competition regulators may be misinterpreting widespread consumer decisions not to engage with shopping around as behavioural barriers, when in reality they may be rational choices based on consumers’ preferences about how they wish to spend their time and mental effort.

The research includes a panel survey of 2,084 customers relating to their experiences, attitudes, and behaviours towards retail financial services. From an analysis of this data the authors are able to create a typology of typical consumers of retail financial services.

• • Aged 25-44
  • May be singles or couples, and a third of this group has children
  • Middling income
  • Have a bank account
  • Have savings, typically in one account
  • Around a quarter have a mortgage
  • Other credit take-up tends to be low
• • 35-54
  • Well off
  • Most are couples and around half have children
  • Renting is low, two-third are buying their home with a mortgage
  • All have a current account
  • All have savings accounts, typically three or more
  • Over a third have investments
  • Nearly half have multiple credit cards
• • Mostly retired
  • Two-thirds aged 65 or over
  • Tend to be couples without children
  • Nearly two-thirds own their own home
  • All have current accounts and most have savings accounts, often three or more types
  • Over a quarter have investments
  • Only one in eight still has a mortgage
• • Tends to be younger, 18-44
  • Most often in C1 or DE social groups
  • Many single and three-quarters have no children
  • Half in full-time work, but one in 11 unemployed
  • 97% have a current account
  • A third has no savings at all
  • One in eight has investments
  • Over half of this group have no non-mortgage credit products and, for those that do, one or sometimes two credit cards are most likely.

The research also discusses at length how complexity might arise for consumers as a consequence of strategies used by firms to create and sustain market power. This raises a number of issues around the presentation of information for consumers. The research addresses the possibilities for there to be a power and information imbalance between providers and consumers by way of some examples.

Points to consider

• • This report will be particularly relevant to those interested in consumer engagement into particular financial services. It will also be useful for those interested in how behavioural insights can explain particular consumer behaviours.
• • Fieldwork for the Panel survey was undertaken by Populus in December 2016 using its online omnibus survey. Results were obtained for 2,084 consumers and weighted to be representative of the UK population.

Full report

Consumers and competition: Delivering more effective consumer power in retail financial markets - full report