Finding the Hidden Purse Strings

When it comes to money, we all have our own “feel for the game”. Banks that learn and adapt to these hidden rules will retain more customers, suggests Ipsos research.

When it comes to personal finances, evidence of rational decision-making can be surprisingly scarce. Rather, we find that people have an array of routines, rituals, beliefs and social norms that can make it difficult to predict behaviours.

These behaviours can be so engrained and automatic they are hard for people to put into words; people often follow an internal logic that can appear to make no sense - they hold their own narratives to justify their behaviour and struggle to look past this. This means that the only way to understand what’s actually going on is to spend time with people and find out two things: what they say they do, and what they actually do. Both are important, and they rarely match up.

This is what we have done, and our research has highlighted a surprising idea: many customers don’t want more choice and flexibility, but rather help and support navigating the choices they do have. This might help “nudge” them towards better money management. Banks that meet this need can inspire greater customer loyalty. But first they need to understand the financial habits, desires and discipline (or lack of it) of these customers.

David: a 21st century Micawber

David’s story is far from new. Indeed Charles Dickens told us about a Mr Micawber in 1850, with his theory that “something would turn up”.

David is an investment advisor who works as a self-employed contractor. He tells us he is a high earner, a rich person. His earnings have been high over the years, sometimes £12k a month. When a contract ended he would sometimes go a couple of months without work, then things would pick up again. David has a wife and two children - one at university. He says they have “we have one scale of living for when we have the money and a second scale of living for when we don’t” - feast or famine.

Then one day the cycle got stuck on famine, with no work for two years. “In the past I would spend for nine months of the year," he says, “then in the final three months I worked for the tax man” This time there was no work for the last three months of the year. His £80k tax bill remained unpaid and grew into £90k, and he still struggled to find work. He began claiming benefits and even struggled to pay £30 to travel to London for a job interview. Eventually, David got another job. But his conceptualisation of finances still does not seem to have shifted: “When I’m paid weekly, I don’t budget at all,” he says, “because then you’ve always got the money coming in.” David does not understand why, but the banks don’t respond well to this attitude of feast or famine.

David believes this period was a blip and that he remains a man of means. Yet this contrasts with his sadness when he tells us he is in his 50s but is nowhere near retirement.

When David visited his original bank to warn them he would be having financial difficulties, the bank advisor told him that if he had had scissors, he would have cut up David’s card there and then. So David moved to another bank, who he reported were better at first, but still didn’t cater for his irregular income. The relationship is now on the decline again. The way David sees things, he’s been a loyal, dedicated customer, but when there’s a blip, the bank dumps him. What he wants is a relationship with the bank whereby someone understands him and works out a way of helping him (or helps him to help himself).

So let’s imagine that instead of offering to cut up his card, David's bank offers him this: an account linked to a second account. Payments into the first account are automatically “taxed” at a standard PAYE rate, with this “tax” going into the second account. Assuming David makes no withdrawals from the second account until 31st January each year, he is given normal credit facilities linked to the first account and some sort of reward in the form of interest payments on the second account. If David wants to make withdrawals from the second account before 31st January, he can, but only following a discussion about his credit with the bank. As he is self-employed, David’s tax bill after deductions will almost certainly be less than the amount accrued in the second account. So he will end up with a surplus. At which point the bank can offer David savings or investment options, or David can “feast”.

Tom: a prudent defaulter

Then there is Tom, who lives in a council flat outside Manchester. He would identify himself as low income. Tom is on various benefits, some of which are paid weekly and some of which are paid fortnightly. He uses his credit card to bridge gaps. He has been out of work for a long time. He knows that he isn’t going to get a job or buy a house in the near future.

“If I was working it would be more important to have good credit, but with not working there’s no need to bother,” he says.

Tom has developed alternative methods to help him with his money. He has a friend, Sally, whose main benefits are paid every fortnight too, but her benefits are out of sync with his. He is paid in the first week, while she is paid in the second week. To stop him spending all his money at once, he gives Sally a portion of his money when he receives his benefits. She pays it back to him when she gets hers, and this continues. This way they stop each other over-spending, spreading their cash flow.

Tom’s relationship with the credit card company is not as efficient. He has walked away from debts before, from phone companies and credit cards. These debts are totally different in his mind to borrowings from his dad or Sally, which have to be repaid within a proper timeframe, due to their emotional connection. Sometimes Tom pays his credit card bill late on a Friday so that his debt doesn’t clear for the weekend and he doesn’t have available credit to spend. Then when it clears on Monday he has enough for the week after. He knows his own weaknesses and that having access to money on a weekend isn’t good for him.

Tom’s attitude is typical of a trend that may seem irrational to the financial services industry - especially his lack of response when he is threatened with bad credit. But Tom’s choices are a rational prioritisation based on proximity, emotional fears and personal relationships. Family, friends, local people, shopkeepers and local authorities are all placed before debts to credit card companies.

At the moment, what is really making Tom nervous isn’t repayment demands from his credit card company – which ultimately he feels he has no relationship with or responsibility for - but rather the implementation of universal credits and a switch to monthly payments. This will destroy his current cash flow management system involving Sally and his credit card.

One solution for Tom and others like him is fairly obvious – offer an account which hold funds back until each Monday. An overdraft could be available, but only up to half the amount of these weekly amounts. This account should be managed by a named individual (or a small team of named individuals) within the financial institution to foster more a more personalised relationship and therefore greater engagement.

Both of these customers are “switchers”. David switched banks because he felt it didn’t understand him. Unfortunately for him, his new bank is proving no better. Meanwhile, Tom has worked his way through a number of lenders, each one as anonymous to him as the next.

What these two stories illustrate is an opportunity for the financial services industry to develop a more personalised approach, tailored to the individual - the offer of robust cash flow management, rather than making it all about choice and flexibility. Tom’s case, particularly, needs a human relationship at its core, helping to increase his loyalty to the bank and moving it up on his scale of repayment priorities. David feels that his current relationship with the bank is a one-way street, and he cannot comprehend how he is considered a risk. He needs someone at the bank not to threaten to cut up his credit card, but to help him with his financial behaviour and plan for the future.

Our research suggests Tom and David are not unique, that there are large numbers of people who want their bank to support them to manage their money in a way that suits their behaviours and needs, rather than have to create their own workarounds and solutions. Perhaps choice, convenience and flexibility in banking have reached their limits, and a competitive advantage for some banks lies in helping customers with their financial discipline and focusing on loyalty and relationship building?

The article was published in https://www.thefsforum.co.uk