Why Financial Services Companies are Vulnerable to Disruptive Change
Editor’s Note: Download “A Matter of Trust: State of the Financial Services Industry in 2016” to learn how to improve customer trust and keep disruptors at bay.
Recent media coverage surrounding the Department of Labor’s fiduciary rule and the market upheaval following the Brexit vote prompted us to consider just how many US consumers trust their current financial services providers. How many of us trust the promises being made by the same firms we pay to help manage our investment accounts, protect our savings or insure our cars and homes? We were surprised to discover in our recent survey that 31 percent of American households feel obliged to do business with at least one financial services company they distrust. Such a marketplace is highly attractive to disruptors and therefore represents a very significant risk to traditional companies relying on high renewal rates to sustain profitability.
Market Strategies’ national omnibus study explored trust in a variety of financial services product categories, including banking, credit cards, home mortgage, investment services, auto, home and life insurance. Additionally, trust levels among consumers for numerous services outside of the financial category (healthcare, electric utility, religious institutions, courts, police, federal government, neighbors and strangers) were also included in the study to provide a broad perspective on trust among American households in companies, individuals and institutions they deal with every day.
Consumers are ripe for the picking
The proportion of customers who distrust their current provider varies by category, with only 12 percent of customers indicating they distrust their bank, compared to 24 percent of all homeowners who distrust their mortgage lender. As a frame of reference, 61 percent of Americans indicate they generally distrust the federal government. Yet while many may feel they have little ability to choose or change the US government’s direction, this is not the case when it comes to choosing or making changes in personal finances and insurance: Most households are presented with more choices today than ever before.
The fact that so many consumers currently work with a financial services institution they don’t trust has significant financial implications. It creates greater opportunity for disruptive change, and with financial technology solutions rapidly emerging, this is a pool of consumers who are ripe for the picking. Customers who don’t trust their service providers represent a significant risk to the profitability of those businesses, whether through risk of attrition, added service expense or potentially as a brand saboteur.
Our survey results reveal that the overwhelming majority of distrusters are significantly more likely to dissuade friends and colleagues from doing business with a company they use. This is critical because personal recommendations are one of the most trusted information sources cited by consumers when shopping for a new bank, insurer or investment firm1.
The factors that improve trust
When it comes to trust, we see significant variation by age. On average, consumers over age 55 tend to be more trusting of their financial services providers than customers under age 35. For a financial services firm, correctly identifying those customers who lack trust in their brand or service representatives can often be challenging because it’s not accurate to say all Millennials are distrusting. Indeed, the data show that 69 percent of Millennials say they trust all of their financial services providers. However, a number of factors can influence a customer’s level of trust; among these are service consistency and quality. Customer-perceived service failures are often likely to seed distrust, such as a mortgage servicer’s year-end escrow statement which often causes client confusion.
As another example, an auto insurance company that only communicates with its customers in the form a bill or a renewal notice can miss out on opportunities to help clients make informed decisions and adjust coverage as a household’s needs change over time. Ultimately, this can undermine trust. Among auto insurance customers, those who recall receiving even just one non-bill related communication are, on average, 12 percentage points more likely to be very trusting than those recalling no such interaction with their carrier. A similar pattern exists for banking, life insurance, mortgage lending, credit cards and even investment firms.
Meeting expectations is just part of the trust equation. Whereas service failures will quickly cause customers to lose confidence in a service provider, it takes extra effort to build a meaningful relationship with each customer. Going beyond transactional business as usual and seeking to really understand the customer needs are tactics many successful brokers, agents and companies have utilized to build trust.
For the personal insurance industry, the very product is a promise—to help restore your car or home in the event of an accident or loss. Since the average American household only files an auto insurance claim once every seven years—and a homeowner’s claim once every 10-15 years—many have never had the experience of filing a claim with their current insurer. So while the level of trust consumers feel toward their personal insurance providers may be stronger than that for a mortgage lender, the insurance industry has reason to be concerned at the proportion of policyholders who question whether their carrier will live up to its promises.
Understanding the level of trust in an existing customer book is foundational for any company seeking to determine exposure to competition and new market entrants/disruptors. Being able to pinpoint which customers are more prone to distrust and quickly identify root causes are also vital in order to build long-term, trusting relationships. Download “A Matter of Trust: State of the Financial Services Industry in 2016” for detailed findings from our omnibus study, and then email me to discuss how your company can improve customer trust and keep disruptors at bay.