Nostrum is well versed in consumer research having independently commissioned an annual report into consumers’ changing attitudes to digital finance for the past 4 years. The research was originally commissioned to address a gap where we felt that no single report was observing the dramatic disruption happening in the FinTech lending market. Fast forward to 2017 and Nostrum’s analysis has now evolved into a highly valued resource for providing insight into the consumer’s changing behaviour, relationship and outlook on their financial environment.
When we first embarked on our research in 2013, our reporting was focused on the adoption of smartphone technology and the affect this was having on consumers’ financial attitudes and behaviour. The market was in a different place to that of today, and arguably it was the year that saw a turning point as consumer lending begin to rise for the first time since the financial crisis, demonstrating a noticeable improvement in consumers’ financial confidence and economic stability.
The Government’s Help-to-Buy scheme was introduced to encourage an improved state of mortgage lending, whilst the newly formed Financial Conduct Authority (FCA) replaced the Financial Service Authority, to create a new robust regulatory framework. The cost of consumer credit received a cap through government intervention and the rise of pay day lending was beginning to highlight consumers’ growing desire for alternative access to credit.
Now, in 2017 with our next report due in the summer, we are in a new world with mainstream use of AI, biometrics and machine learning, and we’ve witnessed the FCA take a firm grip on regulation; reshaping the changing industry, to one that is more transparent and fair to the customer. We’re more open to alternative options to traditional financial providers, and our most recent report’; ‘The Borrower is Gaining Control’ highlighted a new type of market where the consumer is firmly in the driving seat.
As the financial environment moves increasingly online, the struggle for lenders to connect with their audience becomes ever more challenging. When exploring consumers’ relationships with their loan providers in 2013, we found only 11% were loyal to a lender they had used in the past, preferring to put their trust (44%) in well-known brands instead.
The financial experience has become more than a transactional one, with the quality of service and brand reputation becoming increasingly important to the consumer. Maintaining loyalty in this environment is tough, and throughout the years we’ve seen a consistent struggle for sustainable growth in this area.
Our most recent report saw lender loyalty still disappointingly low with the majority of those questioned comparing 5+ lenders at a time and only 13% willing to use a lender they’ve previously borrowed from as their first choice. With only 67% prepared to consider taking out a loan without ever speaking to the provider, relationship building is a huge task. This new era of the independent, market savvy borrower makes today’s lending environment the most challenging it has ever been to retain existing customers, whist attracting new ones.
From face time to FaceTime
We see the customer experience existing more and more in an online environment, with users looking for a lending functionality that fits with the way they live their lives. Recent research by TSB, demonstrated our growing desire to make our financial management part of our daily lives, revealing 45% of mobile or internet banking was carried out while the customers were in front of a TV; about 18% was done at work, 17% in bed and 11% while commuting.
Our 2015 report highlighted a need for a growing personalisation in digital lending as the UK embraces the digital revolution, people are placing ever more demands on the capabilities of both lenders and their technology.
Understandably, consumers aren’t willing to reject the branch environment completely, but we have seen a decline in those who require a face-to-face approach when they have a query about their loan. In fact, research from the BBA reports a 32% decline in branch visits since 2011. Only a year ago we reported that 31% of those surveyed hadn’t been into their branch for at least year, preferring to switch to online methods of managing money, and only 1% felt their lender needed a local branch.
Technological innovation has transformed the customer experience, and success stories like Uber and Netflix have elevated customer expectations of speed and quality of service.
In 2014, our results showed consumers were increasingly demanding, with 91% expecting to wait no longer than 24 hours for a response to a loan query. That trend has continued to evolve into 2016, as 58% of consumers now expect funds from an approved loan to be received in a day or less.
As our online financial activity grows, it’s logical that our concerns about its security correlates. In four years we’ve seen a consistent 10% rise in concerns about data security. But unfortunately the more financial data collected on consumers, the more attractive this is to cyber-criminals, and big data means big business. This rise in consumer concern could be in part attributed to the highly publicised hacks in recent years, of Tesco, Yahoo and TalkTalk, making consumers acutely aware of the sophisticated level of cyber-crime considering even trusted brands can be targeted. Last year 2,356,000 cases of UK bank account fraud were reported in the year to June.
A cautious consumer is no bad thing, as the risk of losing their confidence in a product or service can drive competition and change. In 2015 we found 66% of those asked felt that biometrics would make authentication safer, a year later that figure had risen to 80%.
The growth in fingerprint authentication for mobile payments is actively highlighting the benefits of biometric authentication for security. Recent research from Visa found that 80% of those asked were most comfortable with fingerprint biometrics, and felt it was more secure than password protection.
It was perhaps expected that we would see millennials with an inherent trust over the internet and all things online, but similarly we’ve seen a rise in older generations’ growing confidence in technology and its capabilities. Millennials are still most likely to use a smartphone to research a loan, with a rise to 34% in 2016 from 6% in 2014. Whilst only to 9% of baby boomers researched on smartphones, our report shows 82% of baby boomers, equal to millennials, are going digital and using a laptop over offline methods. Compared to last year where only 56% were laptop savvy, this is a positive leap for the older generations.
Interestingly, we have seen a slow, cautious rise, across all demographics as to attitudes around the use of social media in credit decisions. Whilst new forms of credit decisioning can prove more inclusive, and especially benefit those with thin credit files, users are still cautious as to how much they expose of their virtual self.
A decline in short-term high-cost credit is a notable difference in today’s lending market when compared to 2013. The Consumer Finance Association (CFA) recently reported a 40% decrease in payday lending, over the last three years, this in part can be attributed to a tightening of regulation from the FCA and an increasing consumer awareness over the very publicised downfall of previous well-known lenders, but also an loosening of credit from other lenders.
The introduction of PSD2, will undoubtedly have a profound change the market, increasing disruption and competition available. We should also see this new access to big data drive innovation forward in existing lenders. We’ve written more about this specific PSD2 topic in a dedicated blog.
We know from our research that although the bank is still the most popular choice for a loan, consumers value trusted well-known brands, leaving an opportunity for non-bank lenders or ‘alternative lenders’ to flourish. With this in mind, we adjusted our 2016 questioning to monitor this and found 69% of those surveyed would consider an alternative lender next time they look for a loan. We look forward to observing this attitude in our future research.
Richard Carter, The Nostrum Group, Chief Executive