Understanding Choice in Financial Services
Background
Volterra Consulting recently conducted a theoretical piece of work commissioned by the FSA that considered the circumstances in which more choice may not be a good thing for consumers. This work, suggested that beyond a rather small number of competing choices, greater choice is more likely to reduce satisfaction than it is to increase it.
The Future Foundation and Volterra Consulting took this research further, and for the first time put the FSA model into practice to better understand the implications of choice for consumers and companies.
Our research concluded that the potential implications for financial service providers is wide reaching.
We set out to determine how consumers go through the decision-making process using a stage-by-stage process – to give us a better understanding of how choices when purchasing financial services are made and ultimately, to determine how exactly the proliferation of choice in financial markets affects consumer behaviour.
How long does it take consumers to reach a decision on different financial products? Does increased choice make consumers unhappy? Do they typically encounter regret after consumption as a result of the inflated choice available to them?
Introduction
The explosion of choice we have seen in consumer markets in recent decades is often feted as a good thing, a sign of the success, even, of modern day markets; that today’s consumers have unbridled choice at their fingertips is for many one of the best indications that consumers now find themselves in a veritable consumer ‘utopia’, where every possible need can be satisfied with the perfect product and almost every consumer itch becomes easily scratch-able.
Rational economic theory is of the opinion that through encountering inflated choice, consumers are more likely to find a product that best suits their needs and are therefore more likely to make a ‘perfect’ decision. Of course, several assumptions are made in the theory; namely that the consumer incurs no costs during the decision-making process, has all of possible information at their fingertips and has the ability to disseminate all of the available information. It is for these assumptions that the model comes under sustained attack from critics.
We turn our attention in this report specifically to the issue of choice in financial markets and explore whether the increased availability of financial products and services is understood by consumers as positively as the rational choice model would suggest. Using previous Future Foundation research on the topic of consumer choice and consumption behaviour as a base, we are aware of compelling counter-arguments that suggest inflated choice can in fact confuse and distress consumers in the consumption process, leading not to greater happiness but in fact a fall in the level of consumer utility. We will cover such counter-arguments and an introduction to the general issue of consumer choice in the desk research section of this report.
We will go on to explain the primary research methods used by the Future Foundation, and the modelling work carried out by Volterra, to explore in detail the financial decision-making process from the moment the consumer identifies the need for a financial product or service to the consumer’s post-decision assessment. We will approach the issue of choice within each stage of the decision-making process, highlighting interesting product comparisons (and differences) where necessary.
Before concluding with the report’s observations and suggestions for further research, we will broadly explore consumers’ thoughts on the issue of choice in financial services, highlighting some interesting approaches to dealing with an ever-expanding marketplace.
Types of Research
Desk Research
Desk research on consumer attitudes and psychology in relation to choice and consumption was conducted to gain a broader understanding of current research on the issue and to inform the qualitative and quantitative research elements of the project that would follow.
The desk research drew from a number of sources, which included relevant data from the Future Foundation’s nVision service, re-analysis of existing Future Foundation research and a wider search through academic journals, relevant literature and other previous research undertaken on the topic.
Primary Research
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Qualitative research carried out involved in-depth, in-home, face-to-face interviews in 12 homes across the South East and the Midlands.
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Quantitative research carried out consisting of an online survey with a sample of 1002 respondents.
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Modelling carried out by Volterra.
Quantitative research covered the following products:
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Current Account
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Mortgage
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Private Medical Insurance
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Investment
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Savings
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Motor Insurance
The Choice Model
The choice model developed by Volterra Consulting provides a useful framework for understanding the pay off between the positive and negative aspect of increased choice.
The models sets up an artificial market in which consumers are able to choose between different products. The consumers and the products are all different o one another, so that typically more choice means that everyone is more able to pick something they like more, and are therefore better off.
We then introduce different aspects of decision-making. These range from the hassle of having to gather information, to worry that the wrong decision may have been made, through to misunderstanding the attributes of products. Each of these factors can severely impact on the benefit that consumers gain from increased choice, and that they may even mean that consumers would have feared better with less choice.
Finally we allow for different types of consumers. Some consumers ‘maximise’ by looking through all available products in order to try to make the best decision while some ‘satisfice’. These consumers do not look at all available products, but instead only look at a very limited number.
