Designing banking products can be a bit like trying to solve a Rubik’s Cube, except at times there can be more than six “sides” to getting the puzzle of deposit or credit products solved. And, frustratingly, what solves the puzzle for one generation doesn’t necessarily solve it for every generation.
“What do consumers want from their financial products and services? The answer is simple: everything. Unfortunately, financial institutions can’t deliver everything, so their challenge is to come up with a tradeoff.”
— Raddon Research
Beyond that, cool doesn’t necessarily sell. Much as many bankers and credit union executives, up on the latest technologies, like to add them to the mix, those digital wrinkles don’t always boost consumers’ response to account offerings.
“Some of the technology is a nice-to-have, but doesn’t really connect with consumers, doesn’t move the needle, to the degree that a significant difference in price or convenience might have,” says Andrew Vahrenkamp, Senior Research Analyst and Program Manager at Raddon Research. He produced the firm’s report, “Building a Better Product: Tradeoffs in Designing for Consumer Preferences.” (When Vahrenkamp refers to technology, he isn’t counting mobile banking, as that is more like a channel than a feature.)
For example, consider “tap and go” payments for debit cards. Entire ad campaigns have been devoted to promoting this way to pay and save time, in stores, in transit, in taxicabs, at the gas pump. Yet when Raddon included this feature among those it asked about in the study’s section on checking account design, it hardly stirred consumers at all.
In fact, the elements in banking product design that moved consumers the most in the five areas studied — savings, checking, certificates, credit cards, and home equity products — were some of the most basic. Branches ranked more importantly than some might have expected — though not always for anticipated reasons.
“One of the big takeaways from the study is that consumers are pretty fee averse,” says Vahrenkamp. “Having an annual fee on a credit card or facing a minimum balance to avoid a fee on a checking account — consumers were really, really negative about such things.”
Providing banking services comes at a multiple costs, so why such resistance? The impossibility of devising packages that will please all the people all the time is driven home by the study’s own opening:
“What do consumers want from their financial products and services? The answer is simple: everything. Unfortunately, financial institutions can’t deliver everything, so their challenge is to come up with a tradeoff. They must figure out what their customer base wants most in a product.”
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Why Consumers Balk at Banking Fees but Pay Fees for Everything Else
Vahrenkamp adds that this doesn’t mean banks and credit unions can’t assess such fees but they must probe what will work. “The benefits and the rewards have to outweigh the negative reaction to the fee.”
“Giving a bank the privilege of holding their money doesn’t feel like something they should be paying for, for most Americans.”
— Andrew Vahrenkamp, Raddon
We live in a world where more and more people pay fees for a wider and wider range of goods and services. Even cable cutters pay for much of their “television,” paying monthly or annual fees for all or certain levels of service from Netflix, Amazon Prime, Hulu, Spotify, Pandora, and other streaming services. Toys, clothing, meals to cook, pet supplies, razor blades, and even the bacon of the month can all be had by subscription. Research by West Monroe indicates that Americans spend an average of $237 monthly on subscriptions. One of the first places many consumers begin trimming when they go on a budget is their subscriptions and usually they aren’t talking about magazines.
Why does such willingness to pay stop at an essential like banking services? Vahrenkamp says it’s because financial institutions typically don’t position their offerings in a way that promotes their value.
“With those other services, you’re getting something tangible,” explains Vahrenkamp. “If you pay a monthly fee to Netflix you get content. If you’re a member of Amazon Prime, you’re getting better pricing, faster delivery, and access to movies and music. People budget for these services and they know what to expect.”
By contrast, traditional financial services don’t feel like anything.
“Giving a bank the privilege of holding their money doesn’t feel like something they should be paying for, for most Americans,” says Vahrenkamp. In part, institutions have themselves to blame because their own pricing philosophies and marketing techniques eroded the value of banking services in the public’s mind.
“In the past decade or two, many institutions offered free checking in some form,” he continues. “They remain very comfortable with not paying for checking accounts and similarly for credit cards. They see the value and convenience of a credit card, but they don’t feel it is something that you should pay for.”
Perceptions are Subtle, yet Critical, to Justify Fees
There’s a sort of irony in the fact that the ease of getting credit cards makes charging for all the subscription service mentioned earlier so painless, and forgettable. A reporter for The Wall Street Journal, writing about the invisible cost of subscriptions, noted that she’d paid over $600 in a year for an internet-based fax service that she’d used a few times and forgotten about. But the subscription fees kept on hitting her account.
Hoping to suddenly have America see the value of basic banking services is futile. Vahrenkamp says marketers need to focus on things that will make value tangible. Rewards programs continue to work, if they are perceived as generous enough.
Some features carry enough value in the right context to support fees, when they are part of a package providing enough value overall. One that’s meaningful for checking accounts, according to Raddon’s research, is the ability to lock a debit card remotely. Yet the survey found that credit card holders were much less likely to place monetary value on card lock service for credit cards.
Why the difference? Vahrenkamp suggests it’s a matter of consumer perception. Being able to lock a debit card can be seen as safeguarding the consumer’s own funds. The ability to lock a credit card, on the other hand, isn’t considered as important because that’s perceived as playing with the issuer’s chips.
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A Surprising Inter-Generational Wrinkle Arises on Branching
The report points out that a key element of designing product features is understanding the target market’s priorities. It’s critical that the marketer and product designer consider that, and not overlay their own preferences over what they know about the target’s.
“Millennials have nearly always been doing their transactions online, and now on mobile. So they still value the branch, but as a sales and service location.”
— Andrew Vahrenkamp, Raddon
Case in point are branches, perhaps the most debated subject in retail banking circles and likely to remain so. Listen to enough of the views of pundits and branches just seem like a collection of costly millstones. On the other hand, Chase Bank and others have ambitious plans for new branches in new markets. Chase officials like to explain this by insisting that branches are where growth really engages.
Something in the research that surprised Vahrenkamp was how much Millennials valued the convenience factor in checking accounts — actually more than did Generation X consumers.
The survey had found that convenience was not much of a factor for consumers looking for savings accounts, but proximity to a branch mattered a good deal for all consumers. But the intergenerational twist came in the reasons behind the preference, some of which Vahrenkamp verified by cross referencing earlier Raddon studies.
“Generation X has been using branches transactionally, for the most part, and as they migrated to mobile banking, they didn’t have to use branches much anymore,” says Vahrenkamp.
With that cause and effect, one might expect more of the same from Millennials. Not so.
“Millennials have nearly always been doing their transactions online, and now on mobile,” Vahrenkamp continues. “So they still value the branch, but as a sales and service location. It’s a place where they can go to ask questions, perform more complex transactions, find guidance, and more. Their view of the branch wasn’t colored by the transaction concept.”
In other words, Millennials won’t be coming in to cash a check, but they still want a branch to be nearby. Raddon’s study found that for all consumers, having a branch within five minutes of the consumer was the most important factor in checking account design bar one — having no monthly fee. The latter was far and away the strongest factor, coming in about twice the level of branches.
Also beyond the study is a teaser from Vahrenkamp regarding a major study the firm will be bringing out in late 2019 concerning Gen Z’s banking preferences.
“We found the same sort of behavior among them as among Millennials,” says Vahrenkamp. “For moving money around Gen Z wants their phone, but they absolutely want a face-to-face conversation if they have more complex questions.”
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Same Product, Same Features, But Different Messages
Vahrenkamp has held marketing and managerial positions in financial institutions and based on that experience one thing he stresses is knowing your organization’s own consumers. Nationally conducted research helps, but it’s essential marketers apply the same types of analyses to their own markets, which don’t necessarily conform to national trends.
“There were definite differences in how upscale consumers, those affluent and over 35, viewed home equity credit versus affluent consumers under 35.”
This impacts not only product design, but how the same product may be marketed to different generations.
The study provides a good illustration in the area of home equity credit.
Vahrenkamp points out that all consumers would prefer a lower rate. But there were definite differences in how upscale consumers, those Raddon defines as affluent and over 35, viewed home equity credit versus affluent consumers under 35.
The younger group’s key focus was the loan-to-value ratios that lenders would offer. “They wanted to know how much they could borrow on their homes, so they could max it out,” says Vahrenkamp. “The older affluent group did not care at all about that.”
What the older affluent consumers really cared most about was flexibility. They wanted home equity credit in the form of a line of credit, not a fixed second mortgage. This flexibility to borrow and pay down as you go mattered to them, and the younger consumers didn’t care.
Today many institutions offer home equity accounts that can provide either or both forms of credit in one place. While such offerings would fit both sub-markets, smart marketers will tailor their message to each group.
“It’s the same product, but the focus should be based on their desires,” says Vahrenkamp.
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What About Fintech Competition?
Banks and credit unions face multiple forms of fintech players now, some home-grown ones like Aspiration that offer banking-like products and which in that case let you name your own fees. Others are new and coming arrivals from Europe that bring fresh takes on traditional products.
Vahrenkamp believes the chief appeal of many of these new entrants lies not so much in product features directly, but in convenience factors. (Branching is typically not a factor for fintech offerings, notably.)
“The value that fintechs have brought to the table has primarily been in the way of making things easier and simpler,” says Vahrenkamp. “There is value to that, particularly with younger segments and segments typically served by midsized banks.”