Applying Psychological Models to Commercial Problems

The digital transformation of financial services has a dark side that was formed in the crucible of economics but now needs psychology to avoid a significant social detriment to an increasingly diverse pool of customers - including millions now formally classed as vulnerable.

Vulnerable customers risk becoming collateral damage in the drive to digitise products that used to be sold and serviced face-to-face where people can pick up other people's potential vulnerabilities quickly and intuitively. Without appropriate digital journeys to guide, signpost and respond appropriately to those at risk of harm by their circumstances or health are in jeopardy of exclusion, confusion, poor service or - worst of all - ending up with products inappropriate to their needs.

Digital marketing and digital services are super-efficient simply because they remove human interaction. People are expensive, so insourcing jobs to web pages yields huge financial gains. Unfortunately, in the process, such services fall prey to performance marketing and inevitably become optimised funnels that only work well for un-exceptional customers.

New thinking and psychology is investigating new ways to avoid optimisation detriment for vulnerable customers. Notably, the development of digital environments that absorb some of the cues that we naturally process in human-to-human transactions. In effect, digital ways to spot discomfort, anxiety, confusion and impulsivity through the subtle medium of kinetic interactions.

The Financial Conduct Authority’s (FCA) quantification of the 10million+ vulnerable customers in the UK (pre-COVID!) includes people whose needs range from transient vulnerability to those with low financial competence to those suffering a range of psychiatric conditions. People who suddenly find themselves as carers; those with poor numeracy and low reading ages through to people with bipolar disorder or suicidality.

The economics of transactional finance has produced a situation where such people - who need extra help and support - are poorly served as an unintended consequence of competition. It is the ultimate manifestation of an economic problem that began well before e-commerce.

In 1990, every real person employed in financial customer transactions costs companies significantly; £15,000+ per year. Each person could serve perhaps 12 customers properly per day or 20 on the phone. By contrast, electricity, CPU processing and memory are cheap. They don’t get sick or need holidays, appraisals, bonuses, parking spaces or desks. Each new transaction completed online instead of face-to-face has zero incremental transactional cost, so companies can spend more on acquiring customers and boost scale. They can reduce margins because even the thinnest of margins online can yield profit. Incremental revenue and profit rely only on the acquisition of traffic, not the human cost of servicing it.

The logic is compelling and, as a result, digital has become the new prince.

Financial services in the UK is a super-competitive, cut-throat sector. Companies pursue market share aspirations etched into their business projections and in the pursuit of scale – which will allow them to cope with thinner margins - they must stumble around blindfolded in the dark rooms of acquisition with equally motivated competitors who have their own, market share aspirations to satisfy.

The market, however, is not big enough to satisfy all such aspirations simultaneously. Unless companies can expand their markets, it’s a zero-sum game where (in the absence of new market-expanding products) each winner is balanced by a loser.

Optimisation is, therefore, the new kingmaker... but as the optimisation dial is turned towards 11, the likelihood of identifying, signposting and serving a vulnerable customer reduces dramatically.

In 2018, LAB Group in London started to look for digital techniques being used in practice to help vulnerable customers within the UK financial services market. It was a miserable search. Monzo has made a credible effort with its introduction of positive friction for gambling, but most providers exhibit meagre attempts to identify and differentiate journeys appropriately when humans are not involved.

Good efforts abound where people are involved, and this is where the majority of the PR output from companies has focused. Initiatives such as the BRUCE protocol from the Money Advice Trust show how appropriate care is being taken very seriously during transactions that involve a human mediator.

When no such mediator is involved, the problems arise and become even worse when full scale optimisation is underway because the process inevitably removes questions that might point towards the presence of vulnerability.

In January 2019, LAB Group proposed that a psychological model used previously as an e-commerce optimisation tool could be turned on its head to better identify and serve vulnerable customers. The richest results came by bridging the 'observation gap': those tics and biases of human behaviour that a human can assess face-to-face, but a digital journey can’t.

A huge academic study involving qualitative and quantitative tests run through machine learning kicked off, funded by a UKRI grant. LAB set a challenge to its psychologists and neuroscientists to make the browser ‘see’ the customer. If we can reliably detect vulnerability based on kinetic patterns using machine learning, then we can also deliver hyper-personalised digital interventions (e.g. subtle UX changes), in real time, to help protect different types of vulnerable customers going through financial journeys online.

Early results show huge promise, but digital vulnerability requires not only scientific rigour but a willingness to sacrifice small degrees of optimisation efficiency in order to prioritise the needs of vulnerable customers.

A variation of the lightbulb class of jokes goes: How many psychologists does it take to change a light bulb? The answer: Only one... but the light bulb has to really want to change. We must ask if financial services firms really want to change.

The economics of pure competition - red in tooth and claw - are not in favour of vulnerable customers. That won’t change and some companies may view the prospect of future regulatory fines as collateral damage outweighed by the raw efficiency of optimised digital journeys where detecting vulnerability is near impossible.

A win:win situation can occur if vulnerability is detectable very early in user journeys - well before the prejudice of big data look-ups - and journeys adapted accordingly. The vulnerable customer appropriately guided and served with the right information and signposts. The non-vulnerable customer served the standard journey.

The next five years is the time for firms to find this courage and embrace the opportunity that vulnerable customers could present to them as well as understanding the risks.

In the near future, they may be forced but with appropriate science and technology, there is a potential premium if they take these steps willingly. It is one that millions will thank them for.