FCA Spotlight On How Consumers Deal With Money

Source: Audio Visual Excellence

Consumer Spotlight is the FCA’s view on how UK consumers deal with money and financial services, including the capabilities and potential vulnerabilities. It describes ten consumer segments, and reveals the data the model is built on.

The tool is intended to help the FCA identify the risks consumers face, and the protection required.

Charts show how each segment responded to questions in a survey of over 4000 consumers. Filters reveal characteristics, attitudes and behaviours associated with different group of consumers (e.g. inertia, risk appetite and impulsiveness). This can help firms design products and communications that "work well for different, specific consumers."

The FCA's model is said to differ from firm's models because it incorporates "some data not commonly collected in commercial models, such as vulnerability characteristics and financial capability." However, I wonder if another difference is that some firms treat evidence of vulnerability and financial capability as a reason to target a segment, rather than avoid it...

While firms would be wise to at least consider the data when designing products and communications, the FCA warns that:

"The data is based on consumer recall and self-reported behaviour and attitudes; it is not validated against other sources. Consumers may not know the answers to questions. Other industry data may be gathered in different ways or for different purposes, making direct comparisons difficult... Although it may inform a firm's thinking and planning, the model is not designed for commercial development. We do not intend to enable firms to profile their own customer base using the model for their own commercial benefit."

Caution On Payday Loans Cap: It's A Midata Problem

The government is right to resist automatically capping interest rates for short term or 'payday' loans, and to insist on an evidence-based approach to the market which takes account of unintended consequences. Powers to cap rates, prevent endless renewals and aggressive, unsupportive collections activity are important. But it's critical to understand the real problem confronting the payday borrower before leaping to solutions.

Until now, the popularity of short term loans has been positioned in Parliament as a moral problem (rich for MPs!) for which an interest rate cap is the solution. 

But the annualised percentage rate (APR) for short term loans is misleading and unhelpful for borrowers in context. It only enables comparison of one short term loan against another. And it produces such a strange result against longer term loans that borrowers ignore it - especially, as those loans may not be available to short term borrowers anyway.

Typically, a short term loan is applied for when other debts are due, fees are about to be incurred and other consequences are biting or about to bite. The relevant data points include the cost of unauthorised overdrafts, default fees on card accounts, the consequences of missing the rent, failing to pay a phone or energy bill, and so on. Borrowers react to the worst of the known consequences when borrowing, but may not be aware of them all, let alone take them all into account when assessing the best option.

This is a data problem, not an interest rate problem associated with just one of the options available to the borrower.

What would be helpful is a tool that enables comparison of all the options facing a short term borrower in the borrowing context.

Such applications are evolving, and it's important to note that the government is also playing a role to foster that evolution.

The Midata initiative, for instance, is aimed at producing solutions to meet exactly this kind of challenge. It aims to drive the development of simple applications that will access a person's own transaction data (including fees) to enable that person to make better purchasing decisions. Initially, the government is targeting suppliers in markets for energy, mobile phones, current accounts and credit cards. But it has issued a warning to others. 

If only we could get our MPs to focus on proportionate solutions to the root causes of society's problems rather than embarking on populist moral crusades and fiddling their expenses!

Warning Shot Fired Over Midata

The government is preparing the way for regulations to enable consumers and small businesses to request all their transaction data related to energy, mobile phones, current accounts and credit cards. If considered necessary, regulations could be in place in 2013, and may target other markets where certain factors point to consumer detriment.

The decision follows a consultation in the summer, and the full  response is here.

The proposals should add momentum to the voluntary Midata programme fostered by the Department for Business Innovation and Skills to help industry and consumer representatives resolve some of the key challenges in the 'core' consumer markets.

The Information Commissioner’s Office would take the lead role in enforcing any regulations, while concurrent enforcement powers could be given to sector-specific regulators.

The 'transaction data' at stake are the records of a consumer’s own purchases or consumption from a supplier - what the consumer bought, where and how much they paid for it - not the supplier's subsequent analysis. The data would have to be released in computer-readable format to enable it to be analysed by the consumer or a service provider of his/her choosing. This would help prevent suppliers gaining an unfair pricing advantage over consumers, for example, and make it easier for consumers to figure out the product right for them.

Factors the government might consider when deciding whether to expand the programme to other sectors include: 

• the market is not working well for consumers, e.g. consumers find it difficult to make the right choice or their behaviour affects pricing it's difficult to predict that behaviour;

• there's a one-to-one, long-term relationship between the business and the customer, with a stream of ongoing transactions;

• consumer engagement is limited, e.g. low levels of switching or competition; and

• suppliers don't voluntarily provide transaction/consumption data to customers at their request in portable electronic format.

I should add that I am involved in the Midata programme, as a member of the Interoperability Board, and on working groups considering issues related to data transmission and law/regulation.