Misunderstandings About Bank Customer Rationality

Sixxtep Analytics wrote in a blog post titled Irrational banking customer (hat tip to @BankInnovation):

“One of the hard set, and many times hidden premise of customer analytics is that customers are rational. Well, they are not, and it is especially tangible in banking customer analysis. There are many underpinning data to this, yet data scientist still tend to believe that customers are making decision based on math. KYC – know your customer, and realize that majority of them are irrational.

We have done a small study with one of our client in banking, we tried to 1) segment and 2) scale the irrationality of the customers. Part of the job was to test their belief about their banking usage and reality, looking at the results, we were somewhat surprised to learn the incredible hiatus between their memories and reality: 1) Majority of the customers recalled their general ATM-usage wrong; 2) Vast majority of the customers had not even a general idea about the fees applicable to wire transfer; 3) A large part of the customers has not chosen the optimal package for them.”

My take: These assumptions, and the study’s findings, underscore the confusion that many marketers have regarding the concepts of rational/irrational and logical/emotional decision making.

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First, there is no “hidden premise of customer analytics is that customers are rational.” In fact, the overt premise is that observable factors–like past behaviors, demographic factors, and stated attitudes–can predict future behavior. It has nothing to do with rationality or irrationality.

Second, Sixxtep’s study may confirm the fact that consumers have poor recall, but it doesn’t confirm that consumers’ decision making is irrational. Inability to remember specific ATM usage, and the lack of knowledge regarding wire transfer fees can be the result of many factors, many of which have nothing to do with rational/irrational decision-making.

The purported fact that a majority of customers don’t choose the optimal package for them may be the result of poor information being provided in the decision making process, pressure from sales people, or any number of factors which we (as observers) don’t realize come into play. Sixxtep is implying that consumers who don’t have the optimal package intentionally selected the un-optimal package. That’s not a good assumption.

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Underlying these assumptions is confusion regarding terms like rationality, irrationality, logic, and emotion.

I think–unlike Sixxtep–that it is common among financial services marketers to believe that consumers make decisions based on emotion (just look at bank advertising on TV). The problem is that emotion is commonly thought of as being the opposite of logic, and that’s not true.

Example: Remember those old TV ads with Sally Struthers where they would show pictures of little baby seals getting clubbed? Those ads played to your emotions in order to get you contribute, right? You probably felt sad, maybe even angry. That’s what they wanted you to feel. That’s what they expected you to feel. Dictionary.com (OK, I’m lazy–sue me) defines logical as “reasonable, to be expected.” In other words, your response to the commercials–even though it was an emotional response–made it the logical response.

So logic is not the opposite of emotion.

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Now let’s consider the concept of rationality, and making rational decisions. The definitions (yeah, same source) of rational include “sensible,” “having or exercising reason,” and “endowed with the faculty of reason.”

When consumers are criticized for (or accused of) being irrational in their decisions, it’s usually because a decision violates the “sensibility” of what is accepted as normal, or accepted, behavior–from the researcher’s perspective. Or a decision is considered irrational because it deviates from the norm.

Example: Although I can’t remember what my wife told me to do 26 minutes ago, I remember something that happened when we first went house-hunting 26 years ago. We drove to Norwalk, CT on a nice Saturday morning in the spring to meet a realtor. After we got to the office and made introductions, the realtor said “it was such a nice day today, I decided to wear purple!”

Was this a rational decision? Deviating from the norm does not make a decision irrational. One of the variations of the word rational is rationalize. And if a consumer can rationalize a decision, then it makes it a rational decision. The problem we researchers have in studying consumers is that we aren’t privy (often because we don’t ask good questions) to what all the factors were considered when a consumer made–or rationalized–a decision.

Going back to my example, I have no clue what experiences this woman had that led her to connect sunny days and the color purple. But if she did have reasons, then the decision was rational to her. Who are you (or me) to say someone’s decision is irrational without having all the facts?

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The decisions that customers make regarding what bank (or any other type of business) to do business with can be both emotional and logical. And trying to categorize those decisions as rational or irrational is fraught with problems.

What we (as marketers) need to do is reorient our thinking about the factors that influence bank customers’ decisions towards two categories of factors: quantitative and qualitative.

Factors like rates and fees are quantitative. Factors like service quality and branch location are qualitative factors.

Any one consumer’s decision about who to bank with comes down to some combination of quantitative and qualitative factors.

Not necessarily one or the other (although it could be, but unlikely to be).

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But it’s not that easy. After all, if service quality can be measured and scored, then it could be quantitative, right? Isn’t that customer satisfaction scores imply? When a company advertises that it has 97% customer satisfaction, it’s trying to quantify its service quality, and turn a qualitative factor into a quantitative factor.

Is that a smart move? Are prospects swayed by those numbers, or do they need to experience a qualitative factor like service for themselves?

Marketers also tend to ignore other qualitative factors that influence consumers, like risk and importance of the decision. Your credit union might have the best rates in town, the best service (how ever you may define it), and convenient branch locations. Then why don’t you have 100% market share?

For sure, there will be some consumers who don’t know about you (that doesn’t make you the “best kept secret” in town, it makes you the worse marketer). But that won’t account for all of the market share you don’t have.

Some consumers will perceive there to be a risk in doing business with you. Maybe their parents always did business with a particular bank, and were perfectly happy with that bank, so they do business with the bank.

Or maybe they’re not willing to give you their business because the choice of what FI to do business isn’t very important to them, and, as a result, they didn’t make a very considered decision. Is that an emotional or irrational decision?

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It’s all very confusing, no? On one hand, there’s one camp that just wants to simplify this down to: Consumers make emotional, not logical, decisions. Then there’s the camp that comes up with something like this:

It’s not wrong. Just unusable, and unhelpful to marketers trying to figure out what to do.

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Bottom line: We throw around terms like logic, emotion, and rational too loosely. Don’t buy into the conventional wisdom.

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