New Players need to Improve Service Levels to win against Incumbents

This is not an opinion; this is actual data and actual insights. We looked at more than 300,000 rows of data of consumer complaints over last three years (Raw Data: Consumer Financial Protection Bureau). When it comes to financial services, hard factual data is sometimes contrary to popular beliefs. Empirical Praxis is important to take decisions. Tech press has written much about cool startups, disruptive apps and how large banks are left behind. It has also been written that how consumers love new payment methods while they despise old banks. While it is true that financial services sector is looking for a major reform, it is still debatable who is going to deliver it? The transformation has to be holistic in nature that brings improvement in service levels, reduction in consumer complaints, easy of use, simplicity and other value enhancements.

While a lot has been said and opinions have been made and written, we thought of bringing the hard factual data from the government agencies into play. Let's see an excerpt of the results that came out. The following data talks about one of the findings based on consumer complaints by companies over 2012 to 2014.

  • Top 10 banks contribute 47% of total complaints in 2014, down from 66% in 2012
  • Bank of America and Wells Fargo faced highest number of complaints due to the size of their operations but also saw a decrease over last 3 years. Bank of America saw a sharp decrease of 37% in complaints compared to 2012
  • There is sharp increase in total number of complaints over the years, which have risen by 200% from 2012 to 2014

As you can see from the chart below:

Top 4 largest banks have shown a decrease in consumer complaints or have seen an equilibrium. While at the same time, the other players like Experian, Equifax, Ocwen, TransUnion, etc., have shown considerable increase in consumer complaints over past three years. With an exception of Capital One.

It indicates that disruption is good and that is what new players are bringing but consumers still don’t trust them much. And that brings me to my favourite topic of 'Service Level Improvements'. Bringing the consumer complaints down by improving the products and services and the way they are delivered.

Service levels are a very important value proposition. Innovative technology and business models disruption alone cannot help in long term without improving service levels. You can't just win based on cool disruptive sounding technology unless you make transformational improvement in experiences.

Service Levels are highly correlated with trust levels. When a consumer trusts a brand, she believes in the product/service and complains less. Considering trust levels, there are numerous surveys which show that consumers trust incumbents (banks in this case) more when it comes to payments.

The chart below represents a survey for which data was collected from over 6,200 online shoppers who made purchases between Oct. 23 and Oct. 28 this year. All generations of shoppers placed most of their trust in the banks.

Source: BizRate Insight

The chart below represents analysis of KPMG’s 5th Annual Global Consumer & Convergence Survey. The survey highlights that only a small proportion of the those surveyed believe that the disruptive startups do have a chance in defining the mobile payments and commerce space. Majority of those surveyed still trust banks and other core financial institutions for shaping the future of mobile payments and commerce space. The survey clearly shows that there is a wide difference in trust levels when comparing banks and financial institutions against new startups.

Source: KPMG’s 5th Annual Global Consumer & Convergence Survey

These surveys clearly show that startups will have to face trust issues when competing against banks.

Where is the opportunity for startups then?

Startups have a huge opportunity to deliver experiences and service levels that are previously unmatched. Making financial services easy to access, simple to use and that cost less. If the startups focus on service levels rather than being just cool and disruptive, it will go a long way towards their success. This is the reason that lot of Fintech startups have struggled to scale and be successful in the long term. If you see the examples of startups that became category defining successes, you will see that there is one thing in common. They provided never seen before experiences and set the expectations for everybody in the industry. This has been witnessed in other sectors with examples like Uber in city transportation and Evernote in productivity. In Fintech this has been seen in lending by players such as Lending Club. They focused on improving service levels, while banks gave loans to people whom they tested (credentials check) required them the least.

About Exhibit 1

The first chart in this article has been taken from a series of content prepared by Knowledgefaber Analytics team. In this particular case, the analytics team worked on a dataset of more than 300,000 lines of data on consumer complaints (US Consumer Finance Protection Bureau) to come up with insights and charts that will be shared in the form of reports and articles as we go. If you have a customized requirement to understand consumer complaints insights in financial services, at a Macro/Industry or Micro/Company level, please use this form.