LESSON 7

FINANCIAL SERVICES MARKETING AND REGULATIONS

The objective of this lesson is to have an insight into:

Characteristics of financial service marketing

Financial service regulations and legislations
Marketing and competitive environment
Financial service marketing mix

FINANCIAL SERVICES MARKETING

Introduction
The financial services industry in the UK has experienced massive change since the early
19805. Prior to this time, banks and building societies served different customer needs,
often catering to different sets of customers. Regulatory frameworks and traditional
business practices meant that there was virtually no competition between types of
institution. Building satieties offered savings and mortgages while banks provided current
accounts, loans and business finance. Insurance and investments were also largely dealt
with by specialist brokers.
The removal of many barriers to competition has been brought about through.
deregulatory legislation such as the Building Societies Act of 1986, which broadened the
scope of building society business activity. This has -led to intense competition as the
boundaries between banks and building societies have faded. Additionally the size of the
market" continues to grow, as does the range of services available, due to the increased
sophistication of consumers and their willingness to buy or invest in complex financial
'products'.
As well as traditional life insurance and other types of insurance" and savings
policies, higher-risk products such as Personal Equity Plans, shares and Unit Trusts are in
demand from a far greater number of consumers than ever before. The Financial services
Act of 1986 brought in some safeguards to regulate the financial services industry and
protect the consumer. It remains a highly lucrative business area in which financial
institutions compete fiercely.
This chapter reviews some 'Of the special characteristics of financial services
marketing and developments which have taken place. The legislative changes referred to
are also considered together in the light of the competitive environment.

1. SPECIAL CHARACTERISTICS OF FINANCIAL SERVICES MARKETING

Services tend to share four important characteristics which distinguish them from
physical products and impact on marketing programmes, namely:

Intangibility
Inseparability
Heterogeneity / variability
Perishability
Financial services share these characteristics to a degree but also exhibit certain
differences. Some of these similarities and differences are included in the following
discussion:

Intangibility
Financial services are generally intangible, but the service providers go to considerable
lengths .to 'tangibles' the service for customers. A building society passbook, regular
bank statements, 'gold' credit cards and insurance policies are all examples of the way in
which financial services are presented to consumers. They can enhance the image of the
service and the provider and even bestow status or implied benefits upon the user as with
a 'gold' card. Physical reminders of the service product, brand name and value serve to
reassure the consumer and help the organisation's positioning.

Inseparability
The degree of inseparability depends on the type of service and the actual supplier.
Whilst the service will frequently be inseparable from the service provider, such as the
quality of service received by a customer visiting their bank to pay some bills, the
situation is frequently less clear. Many everyday transactions are carried out now via
automated services - the automated teller machines (ATMs) which are now so familiar.
Because access to these systems has broadened to allow use of any particular machine by
customers of other institutions, the customer will often not be dealing directly with their
own provider.
Additionally, many financial services are sold by brokers and agents of various
kinds and this has led to difficulties and dissatisfaction when consumers have been sold
unsuitable products or been wrongly advised. Pensions providers, for example, have been
left to resolve the problems caused by thousands of people being encouraged to leave
company schemes and buy- personal pension plans by commission-hungry agents with
no formal standing in the company. Other services are frequently handled by agents
overseas such as credit card agencies and other currency / traveler’s cheque encashment.
The' good name of the actual service provider, for example the credit or charge card
company, will be wholly contingent upon the efficiency and reliability of these services.

Heterogeneity / variability
In this case, the complexity of the service transaction process will determine the extent of
variability and this can differ to a large extent between institutions and even within one
institution. The greater the degree of automation within any transaction process, the
greater the degree of standardization. Thus, simple transactions may be carried out via
ATMs and completely standardized or via a branch counter where they might be fairly
standardised but subject to some variation in quality.
Total standardisation is not necessarily desirable from the consumer's point.
of view. A friendly greeting or being addressed by name can enhance service delivery
and while an A TM cannot arrange an emergency overdraft facility when funds are low,
branch staff can look at the standing of individual customers and make arrangements
where appropriate, satisfying the customer and profiting from charges applied to the
account. Some customers may want transactions to be handled as speedily and efficiently
as possible while others may prefer a caring approach and a friendly chat. Customer care
is the key for organisations whether engaging with customers in a simple 'free' transaction
such as paying a bill or a long-term commitment such as a mortgage or pension. Tailoring
the approach to the needs of the individual customer as far as possible may be the best
policy.

Perishability
Again, the degree of perishability depends on the type of service. If a cheque needs to be
cleared by a certain date and the system causes a delay then the benefits to the consumer
are lost so the service could be said to be perishable. By and large, however, money and
financial services are enduring in nature. If a bank's reserves are not fully utilized
profitably through lending or investment they will still retain their worth and may be
utilised again at a later date. A bank branch which does not have any customers at all on a
particular 4ay may actually gain rather than lose profit as staff may be able to use the
peace and quiet to catch up on other work.
Similarly customers perceive many financial products to be enduring or long-term
commitments. An insurance policy becomes perishable the minute it expires, but for the
whole of its active duration it represents an ongoing service. Production and consumption
is frequently not simultaneous with financial services. Whilst a customer ordering a meal
in a restaurant does so on the understanding that their needs will be satisfied the same
evening, a customer signing for a savings plan may expect benefits in five or ten years, or
even longer. There may be no immediate benefit - on the contrary having to make regular
payments may easily be seen as a disadvantage or a cause of worry. Even financial
services which offer a benefit such as a loan or mortgage which enables the customer to
'purchase something which they otherwise could not afford are not usually produced and
consumed simultaneously, although very fast or 'instant' decisions on loan facilities
within certain limits are increasingly offered as a benefit by finance companies.
A key task in financial services marketing is to create awareness of long-term
benefits and helping customers to recognize the need for financial services such as
pensions which they may not see themselves needing for many years, or needs which
they play not want even to consider at all such as life insurance. Financial service
'providers also need to reduce cognitive dissonance in consumers who might 'back put of
a commitment due to second thoughts Regulations decree nowadays that most financial
services are sold on the basis that customers have a short cooling off period, 'in case the
customer changes their mind or to offer them protection if heavy-handed sales pressure
has been used. Everything which can be done to tangibles the services by offering clear
and attractive documentation, for example, and offering reassurance and confidence to
the consumer should be looked at by the service provider.

Other characteristics
There are other characteristics which apply to many types of financial services and which
must be taken into consideration by marketers. These vary between type of service and
type of service provider but the following examples illustrate key ideas:
High involvement purchases/complex products Many financial services are high
involvement purchases. This will mean that the customer will shop around for the best
advice or the best offer and will generally take a long time to plan the purchase, for
example with a mortgage or a pension. Information will be sought about competing
brands and products, usually from a variety of sources including advertising, the press,
informal advice from colleagues or family, perhaps, and formal advice from the bank
manager or a financial consultant.
The process can be likened to buying a car or any other major purchase, except
that the customer often perceives greater risk as financial services are frequently highly
complex and it is difficult for the layperson to assess their value / potential. Someone
buying a car is usually happy to rely on the supplier's guarantee that any faults will be put
right but a customer looking for a good investment has no such guarantee - often a
warning instead that investment products may go down as well as up in value.

High levels of brand loyalty Customers tend to stay with financial service providers and
use them to satisfy their different needs at different stages of their life. Banks recognise
this well and are keen to provide student overdrafts in the hope of retaining a professional
salaried account holder for many years. Many people choose the same bank or building
society as their parents because the parents open an account for them. Children and
teenagers are a key target market for banks and building societies because of the
possibilities of future business. Insurance companies emphasize in their advertising that
they offer services to meet a whole lifetime of needs from a first-time mortgage, life
insurance and household insurance for family protection, savings and pensions for old
age and even funeral costs cover. Customer retention is the aim for financial service
providers. Customers will, and increasingly do, change providers if they are very
dissatisfied, however, or if they perceive better value elsewhere, thus increasing the
competitive pressure between institutions.
Financial services also tend to be joint purchases, very often, with decisions made
by more than one person. The nature of many products mean that repeat purchase is very
low or infrequent so the service provider needs to maintain contact with the customer
over time whenever possible through annual statements, sales follow-ups and so on.
Service providers need to keep abreast of significant changes in their customers'
circumstances as far as possible so that they can offer new services as required and
safeguard both their own and the customer's interests in case of financial difficulty.
Many areas identified above are not unique to financial services but must be taken
into consideration when planning effective marketing programmes. Other similar
characteristics include the following:

The importance of advertising in creating strong brand image-and positioning.

Distinct market segments and the use of target marketing, especially in growing
markets (for example career women, the over 55's).
Increasing price sensitivity and heavy price competition (for example car and
home insurance, bank and credit card charges).
Growth in the importance of customer care in service differentiation.

2. FINANCIAL SERVICES REGULATION AND LEGISLATION

The 1986 Financial Services Act

The Financial Services Act of 1986 was largely brought about to prevent some of the
difficulties already highlighted within this chapter and to protect consumers. Recognition
that the financial marketplace would become increasingly competitive following the de-
regulation of building societies led to change in the way the entire investment industry
was monitored and allowed to operate. The most fundamental shift lay in moving the
industry from its former self-regulating status to legislative regulation industry-wide.
Banks, building societies and other financial organisations including insurance companies
have to abide by the regulations set down.
Investment advisers or financial consultants have to make it clear whether they
operate on an independent basis, offering a variety of services from a range of
organisations or whether they are tied to one provider, such as a leading bank. The
Bradford and Bingley Building Society makes a feature of its independent financial
advice in its advertising stressing that its 'advisers are not tied to any single organisation;
the implication being that independent advice will match the most appropriate offering to
the customers needs, regardless of who the actual provider is.
There has been concern however that some sources of independent advice (and this does
not relate to the example cited above) have actually been less than independent in nature
but quite biased in fact - in favour of the organisations offering the highest commission
levels. This has meant that customers may not have received the most suitable advice or
financial product and may have actually been duped into buying more expensive or
inferior products. Further legislation has been sought to implement full disclosure
whereby advisers are obliged to reveal sources and rates of commission when selling
services and this will apply to both tied agents and independents.

De-regulation and building societies

Traditionally, building societies' business activities were constrained by legislative and
regulatory measures dating back to the late nineteenth century and they operated solely
within the savings and mortgage business. Pressure for change was brought by the
societies themselves in the light of increased competition from banks, affecting mortgage
lending especially, during the early 1980s. The 1986 Building Societies Act brought
about vast changes to the entire organisation of their business operations.

The Act brought about the following changes:

Expansion of the product/service range offered
current accounts
investments
insurance
Expansion of business areas
foreign currency exchange
estate agency
financial service subsidiaries
Organisation and structural change
assets and liabilities
funding sources
public limited company status potential
The Building Societies response to the 1986 Act was prompt and resulted in swift moves
into new areas of business:
Services previously dominated by banks - current accounts
Services previously dominated by banks and otherfinancial institutions – credit
cards, insurance, personal loans.
Diversification - estate agency networks

The rationale for moving into the estate agency business appeared very sound as it
provided a means to tie in new mortgage and insurance business at the point of sale, as
customers of the estate agency would be ideal prospects for new business. Additionally,
the housing market was very buoyant at the time and highly profitable for agents. Other
types of financial institutions also ventured into the estate .agency business, including
banks (for example Lloyds Black Horse) and insurance companies such as Prudential and
General Accident. The end of the property boom, however; and the ensuing slump in the
market led to many companies facing financial difficulties and, ill some cases, major
losses such as the £80 million loss experienced by Nationwide prior to selling its estate
agency chain to Hambro Countrywide. Rationalization, closure of branches and eyen
complete withdrawal from the business has been the result in the 1990s.
The Building Societies Act of 1986 did not clear the way for the societies to enjoy
complete business freedom within the competitive environment, however. A major
constraint is the restriction on the amount of funds which they can raise in wholesale
markets - a restriction which does not apply to banks. The Building Society recognize
that this reduces their competitiveness alongside banks and continue to campaign for new
legislation to go beyond the 1986 Act and broaden the scope of their strategic business
activity. The Abbey National has relinquished its building society roots by becoming a
Public Limited Company and acquiring bank status.

The Single Market

A number of European directives have had an impact on UK banking institutions and
there will be further changes. The main development brought about by the single market
is the establishment of a means by which banks and other financial institutions can offer a
whole range of services to customers throughout the European community. This offers
substantial opportunities to UK organisations, many of who already operate within other
member countries. Specific directives governing capital structure and aspects of funding
and solvency are in place but changes are likely to be ongoing especially in those areas
where there is considerable difference in existing national regulation.

3. THE MARKETING AND COMPETITIVE ENVIRONMENT

Environmental analysis and monitoring is of critical importance in any industry
especially in the dynamic financial services industry with its proliferation of products and
services and changing industry structure. External environmental analysis usually
involves assessing influences on the organization’s business activity under the following
main headings:

Political/legal
Economic
Socio-cultural
Technological

Some key influences in each of these categories and the competitive environment will be
reviewed here:
Political / legal Some major political and legal developments have been, reviewed in the
preceding section which have highlighted the radical changes which have been brought
about by these influences. Other influences which can have an impact on financial
services and consumer confidence" include the following:
Government attitude towards home ownership
State provision of pensions
Government encouragement of savings and investment (via tax benefits, for
example)
Regulatory-control and protection (to prevent the collapse of financial institutions
and protect investors' money)

Economic Economic factor are-key variables which will impact on activity in the
financial services sector. The level6f consumer activity is governed almost entirely by
income levels and personal wealth. As income levels grow, more discretionary income is
available to spend on financial services. Consumer confidence in the economy and in job
security also has a major impact; if lean times are foreseen ahead/, savings will take
priority over loans and other forms of expenditure. Consumers may also seek easy access
savings and be unwilling to tie up their money for longer periods with potentially more
attractive investments.
The main economic factors which should be monitored with regard to financial
services marketing are as follows:
Personal and household disposable income
Discretionary income levels
Employment levels
The rate of inflation
Income tax levels and taxation structures
Savings and investment levels and trends
Stock market performance
Consumer spending
Consumer credit

Socio-cultural Many demographic factors have an important bearing on financial services

markets. Certain factors have been particularly noticeable in recent years such as the
growth of inherited wealth through property ownership and changing attitudes towards
consumer credit and debt. Key influences include:
Changing employment patterns
Numbers of working women
The ageing population
Number of first-time house buyers
Changes in the number of households
Marriage/ divorce/birth rates
 Consumption trends

Technological Technology has had a major impact in many industries including financial
services and banking in particular. ATM services which not only provide cash but allow
for bill payments, deposits and instant statements are widely used. EFTPOS (electronic
funds transfer at point of sale), where cards such as Switch and Delta are' debited
automatically when payment is made for goods and services without the need for
cheques, is a clear example. From the customer’s viewpoint, technology has played a
major role in the development not of the financial product. Itself but of the process
whereby the service is delivered. Automated queuing systems have made visits to the
bank easier and more convenient. Telephone banking and insurance services such as First
Direct and Direct Line are examples of telecommunications technology being used to
innovate in place of a traditional branch based service process.-
Technology has also played a major role within organizations, bringing about far
greater efficiency through computerized records and transaction systems and also in
business development, through the setting up of detailed customer databases for effective
segmentation and targeting. The Bristol and West Building Society has implemented a
highly sophisticated customer database which provides staff with customer profiles so
that cross-selling opportunities across a range of services can be maximized when staff
are in contact with customers, or later, via direct mail for example.
The main technological developments fall within these categories, therefore:
Process developments
Information storage and handling
Database systems
Product technology is of relatively minor importance within the financial services
marketplace as product innovations are usually in the form of a change in the terms of
services offered or slightly different services at lower charges or higher rates of interest.
It is easy for competitors to follow suit or make other changes and, once the decision has
been made, promotion and advertising the new or revised. Service will help to make it
successful rather than any kind of technological refinements. Some physical
developments relating to technology in the production of credit cards have taken place
such as the imprinting of a hologram on cards to help prevent forgery.

The competitive environment

The financial services industry has undergone major changes, as discussed earlier. During
the 1980s the industry expanded considerably and the number of financial products
available proliferated. The trend since the early 1990s, however, is towards more
streamlined business structures through rationalization to produce greater efficiency and
higher profitability in a market suffering from the setbacks of the recession.
The gap between banks and building societies has narrowed, leading to more intense
competition in a saturated market. The only gains to .be made are via product and service
differentiation, building brand loyalty and customer retention. De-regulation has had the
dual effect of widening the scope of building society business to include new products
and activities and also increasing the levels of competition, placing -building societies
under competitive pressure, which previously did not exist. This pressure is especially
strong in the mortgage market but the increased range of savings and investment products
available from a wide number of sources has also hit the building society passbooks.

The retail banking industry has been dominated by four major clearing banks for a
number of years: Midland, Lloyds, Barclays and National Westminster. The number of
smaller banks had reduced dramatically by the early 1970s as larger institutions. emerged
through mergers and acquisitions. A similar pattern seems to be developing within the
building society market as the total numbers of societies has been falling while the largest
organisations have grown. Indications show a strong possibility that the market will be
dominated by as few as five or six main mortgage-lenders by the end of the 1990s.
Several major mergers have taken place including the Halifax and the Leeds acquisition
of Town and Country by the Woolwich and, in another direction, the Cheltenham and
Gloucester Building Society has been acquired by Lloyds Bank, while the Abbey
National has acquired bank status in its own right.

4. THE FINANCIAL SERVICES MARKETING MIX

The challenges facing the financial services industry mean that greater emphasis than
ever before must be placed on developing and implementing successful marketing
programmers to create and foster a customer orientation. True differentiation of financial
products is virtually impossible to achieve because they are intrinsically the same,
offering similar benefits and services to consumers. The degree of substitutability
between brands is correspondingly very high at the outset (for example, at the supplier or
product selection stage). Once a financial product has been sold, however, the customer is
frequently tied in over a long period and may even face penalties if they wish to change
supplier (as in the case of fixed rate mortgages) or if they wish to discontinue the service
(terminating endowment or insurance agreements before the full term has expired for
example).
The key objectives for financial services providers are:
attracting customers in the first place
retaining customers through high levels of client satisfaction and by providing a
portfolio of financial services to meet their .changing needs overtime.
Some key issues, which must be taken into consideration in designing, the most effective
financial services marketing mix are as follows:

Product
As mentioned previously, there is little or no room for innovation in product design due
to the ease by which competitors can make similar offerings, for example by altering
charges or interest rates to meet those of competitors. Additionally, many financial
services are affected by other restrictions, such as government directives relating to
income tax and investments or constraints on the amounts, which can be invested.
Differentiation, therefore" can best be achieved through the other elements of the
marketing mix. Current accounts are dominated by banks, although the building societies'
share of this market in which they could not compete until recently is growing. They hold
the majority of mortgage accounts, however, but this stronghold is increasingly under
pressure from banks.
Price
The price in financial services terms relates to the costs involved to the customer in, say,
bank charges or credit card interest rates. These prices seem to evoke low levels of
customer sensitivity as many customers enjoy I free' banking, by maintaining their
current accounts in credit, for example, or paying their credit card balances off each
month. The introduction of new charges, however, such as the annual credit card fee had
a noticeable effect initially, however, and sparked off competitive reaction from lenders
prepared to offer cards with no annual charge.
Price also relates to the value of the product to the customer and, as such, can be
highly sensitive. This can be in terms of interest rates charged on a mortgage, where
reductions in interest for first time buyers or preferential rates for existing customers of
other services (for example current account holders) are standard promotional tools in the
industry, representing a form of discounting. The rates of return offered to investors are
another element of the price and different products within the range are frequently priced
at differential rates, to attract long-term savers or large lump sum investors, for example.
Pricing can therefore be used to differentiate the offering and is likely to be used by
customers in selecting a service.

Promotion
Major advertising campaigns are undertaken continuously by banks, building societies
and other major financial institutions such as insurance companies. The main purpose of
the advertising is to strengthen awareness of the brand and company image and to inform
the market about the services available. The Midland's 'listening bank' campaign and the
TSB's 'yes' campaign are successful examples. The trend has also been towards
developing more below the line promotional activities using highly sophisticated
databases to target direct mail campaigns at distinct market segments and using publicity,
sponsorship and other promotional means. Successful advertising campaigns have
contributed to the growth of First Directs market share although advertising has been
used creatively to attract interest but not to sell the service. That has been done through
personal selling over the telephone once the initial enquiry has been made and, staff skills
and customer care have been developed to enable a strong personal selling strategy to
work.
Another area where personal selling is a strong tool is in the area of insurance
products and the emergence of 1Jancassurance' - the product offered through lines
between banks and insurers, commonly with banks' as the controlling partner. The
insurance organization’s expertise in personal selling and the strong customer loyalty and
extensive customer base of the banks make for synergy in business development. The'
importance of personal selling is now widely recognized and many institutions offer
home visits by financial advisers.

Place
Place or location has always been regarded as critical in retail financial services where
high street positions are maintained by most of the large institutions. For transaction
services where regular and frequent branch contact is required this can be important. First
Direct, however, the telephone banking service, has proved that a bank without branches
is possible though its customers still need access to convenient ATM outlets. Some
consumers prefer personal, face-to-face contact within a branch and may be more likely
to use a local branch or building society. Direct Line and other telephone insurance
services are also moving away from the traditional large networks of branches and
brokers or agents. Changes in distribution systems, technology and consumer demands
are all key influences on the evolution of the 'place' component of the marketing mix.

People
Customer care is at the forefront of both quality and differentiation in the financial
services industry. Staff needs to be highly trained not only in customer care but also in
how to respond to the rapidly changing market environment. Personnel can be used to
develop competitive advantage in the marketplace and to build and maintain relationships
with customers.

Process
This is the main area where technological advances have led to major change.
Improvements in the process stem not only from the automation of many transactions and
data handling within organizations but also from process re-engineering to reduce delays
in processing mortgage applications, for example, or the installation of automated
queuing systems to cut down on waiting time. North West Securities, a finance company
specializing in consumer lending, offer existing and previous customers same-day
acceptance of loan applications and will also arrange for courier delivery of a personal
cheque, for the loan amount to the customer's home if required.

Physical evidence
The environment in banks is changing, moving away from austerity and formality to a
more friendly approach reflected in more attractive branch layouts and decor. Other
physical evidence plays an important part in financial transactions such as the
documentation, which must be presented by salespeople to prove that they are authorized
to offer investment advice This creates confidence and helps to build the relationship
between customer and provider. Physical evidence is also widely used tangibles the
service. Attractive brochures and policy documents, presented in glossy folders, cheque
book and credit card holders, 'gold' credit cards, children’s 'collectable' money boxes are
all examples of physical evidence being used in this way.

TUTORIALS

1. What factors led to the dramatic changes in the financial services Industry?
2. Outline the main characteristics financial services share.
3. Why was the 1986 Financial Services Act brought about?
4. Which new areas of business did building societies move into following de-regulation?
5. How might the single European market affect (or how has it already affected) the UK
financial services industry?
6. List the main economic arid socio-cultural factors which are likely to influence the
financial service market.
7. What trends are evident within the competitive environment? What are the indications
for the future?

Discussion

1. Think about how you selected the financial services you have bought or currently
use. What factors most influenced your decision? How satisfied or dissatisfied are
you with your choice in terms of value and service quality?

2 Design a brief for a customer care and relationship marketing programme for:1)
a bank2) a building society. Highlight the most important factors in each case and discuss
the possible differences between the two.