Consumer behaviour within financial services - Essay Example

Consumer behaviour within financial services I. Introduction The evaluation of consumer behaviour is valuable for all industrial sectors around theworld because it is mainly through the customer preferences (as explained through the consumer behaviour in the long term) that the needs of the market are being estimated. Indeed the study of Kuneva (2007, 2) showed that ‘493 million consumers make the internal market the largest retail market in the world in economic terms; it therefore has the potential to be the most competitive, innovative and dynamic retail market. Instead, today we have 27 national mini-markets; the result is a lack of competitive pressure to reduce price divergence’. In accordance with the above views, the power of consumers to influence the level of production for many products internationally cannot be doubted; however this power is not appropriately used by marketers within the global market. Current paper focuses on the examination of consumer behaviour within a particular industrial sector, this of financial services. The choice can be justified because of the importance of the specific sector for the promotion of the economy globally. On the other hand, this sector has been proved to be one of the most rapidly grown especially the last years through the development of technology and the increase of the use of Internet as a tool of commerce. Moreover, in accordance with the study of Levy et al. (2002) ‘the Consumer Financial Services industry is among the largest and most dynamic sectors in the US economy but the numbers and types of participants offering services in this sector are constantly changing’. Although these findings refer only to the US economy, they could be used to represent the development of financial services industry internationally. The paper is based primarily on the views of the literature regarding the consumer behaviour on several industrial sectors and specifically the financial services industry. However, certain empirical studies are also developed in order to prove the direct relationship between the consumer behaviour and the marketing strategies used by financial services around the world. It should also be noticed, that other aspects of financial services are being explored (like the intervention of technology in the financial transactions) in order to explain the role of consumer behaviour in the formulation of the strategies followed by companies belonging in the financial services industry. II. Literature Review In order to understand the characteristics of consumer behaviour, it is necessary to refer primarily to consumer value as part of modern commercial markets. In this context, Holbrook (1999, 5) stated that consumer value is ‘an interactive relativistic preference experience; typically, such consumer value refers to the evaluation of some object by some subject; by interactive, I mean that consumer value entails an interaction between some subject (a consumer or customer) and some object (a product)’. The relation of consumer value with the consumer behaviour can be represented through the definition given for the latter by Jacoby et al. (1998). More specifically, the above researchers define consumer behaviour as the ‘acquisition, consumption and disposition of products, services, time and ideas by decision making units’ (Jacoby et al., 1998, 319). In the area of financial services, consumer behaviour can be explored using, apart from the definitions given above, a series of theoretical frameworks developed throughout the years by researchers that work on the specific field. One of the most known theories of such kind is that of Veblen who ‘develops an evolutionary framework in which preferences are determined socially in relation to the positions of individuals in the social hierarchy’ (Trigg, 2001, 99). More specifically, in accordance with Veblens theory of conspicuous consumption as presented by Trigg (2001, 108) ‘individuals emulate the consumption patterns of other individuals situated at higher points in the hierarchy’. The theory formulated by Veblen can be used in all industrial sectors under the terms that consumers follow the patterns created by others who are positioned higher in the social hierarchy. In this context, consumer behaviour can be related with culture. Such an interaction could be possibly based on the concept of cultural capital as stated by Bourdieu the views of whom are presented in the study of Trigg (2001). In accordance with this concept individual tastes are interpreted as ‘an accumulated stock of knowledge’ (Trigg, 2001, 99). Moreover, it is supported that ‘individuals adopt strategies that enable them to acquire the required cultural capital to secure particular positions in the social hierarchy’ (Trigg, 2001, 99). From a different point of view Krueger (2002, 17) came to conclusion that ‘perceptions of desirability (personal and social) and perceptions of feasibility (personal and organizational) are critical to the construction of intentions toward important behaviours while an organizations cognitive infrastructure should enhance, not impede, these critical perceptions’. In other words, consumer behaviour as explained through consumer preferences is strongly influenced by cultural and social trends within a particular country or region. These consumer preferences can be identified using many different methods. In accordance with Zamir (1998, 377) consumer preferences ‘are evoked not only through the interaction of individuals in the private market but also when the government uses economic techniques--like cost-benefit analysis or contingent valuation studies--to assess public policies and to determine the level of production of public goods’. If accepting the above explanation regarding the identification of consumer preferences we could came to the conclusion that these preferences are mainly formulated in accordance with market trends; however such an assumption would not be valid. This view can be supported by the study of Ackerman (1997, 660) who stated that ‘consumers rarely want specific marketed goods per se; rather, they want characteristics, experiences, or services obtainable from goods, some of which are based on technical performance of the goods (transportation, from a car), and others based on the social meanings ascribed to goods (status, perhaps from the same car)’. In other words, social and cultural trends equally influence the formulation and development of consumer preferences while personal attitudes have also a strong influence on these preferences in all industrial sectors. Consumer preferences are analytically studied because of their influence on consumer behaviour. In this way, the interaction of culture and consumer behaviour can be easily explained (culture has a primary role on the development of specific consumer preferences as already stated above). In this context, Conway (2000) found that culture and consumer behaviour can interact in many ways. For this reason a series of methods have been developed in order to identify the main characteristics of this interaction. In accordance with Conway (2000, 527) ‘two paths for investigating the above relationship have emerged: (1) the empiricist approach, which examines the validity of present consumer behavior theories and knowledge when applied to other cultures and (2) the interpretive approach, which attempts to interpret motives and meanings of consumer actions in other cultures’. It should be noticed that this relationship can be observed in all industrial sectors; however it is formulated in accordance with the social and cultural characteristics of the particular region. Because of the above relationship, in order to identify the specific aspects of consumer behaviour within a particular market, it is necessary to explore primarily the orientation of the specific market as it can be formulated under the influence of the following three behavioural components: ‘(1) customer orientation, which involves understanding target buyers now and over time in order to create superior value for them; (2) competitor orientation, which involves acquiring information on existing and potential competitors and (3) inter-functional coordination, which is the coordinated use of resources in creating superior value for target customers’ (Farrell et al., 2000, 224). In other words, consumer behaviour can be identified and evaluated only through the study of the characteristics of a particular market and the cultural and social trends of the specific region. On the other hand, it should be noticed that despite the variability of the methods available for measuring the customer satisfaction (as an aspect of consumer behaviour) and the practices followed by marketers within a specific market, the practices followed by marketers within most commercial markets around the world present severe failures. These failures can be identified by consumers who have the right to use the appropriate measures in order to be protected from any relevant damage. Regarding this issue, it has been found by Treise et al. (1994, 59) that ‘consumer opinion that a specific advertising practice is unethical or immoral can lead to a number of unwanted outcomes, ranging from consumer indifference toward the advertised product to more serious actions such as boycotts or demands for government regulation’. All the above issues should be normally examined by the relevant authorities; however in most cases the stated avoids intervening and simply states the rules that governs the particular market without controlling effectively their application in daily commercial transactions. Moreover, consumer behaviour tends to be differentiated in accordance with the general aspects of the market under examination (under the influence of social and cultural characteristics as already developed above) but also in accordance with the industrial sector in which consumer behaviour is involved. Towards this direction, Higgins and Shanklin (1992) after examining the relationship between consumer preferences and lifestyle characteristics specifically regarding the residents of a large city found that ‘22 percent could be classified as "consumer product innovators," another 65 percent as "early and late majority adopters," and 13 percent as "laggards" based on the number of high tech consumer products they owned or used’ (in Rosen et al., 1995, 55). In this context, the role of media becomes significant. Media control the messages given to consumers regarding a series of products and services and in this way media control the development of consumer behaviour as it is mainly expressed by consumer preferences on products and services in all industrial sectors. Indeed, the study of Starr (2004, 299) showed that ‘product messages figure prominently in the process of connecting identity to preferences and so to consumption not because they dictate to consumers what to think or feel, but rather because they are precisely the vehicles that relate what companies want consumers to think and feel, with what resonates to them; this suggests that media messages and imagery can become engaged in broad shifts in values in ways that affect production, consumption, distribution, employment, incomes, and profits’. In other words, consumer behaviour is influenced by media and for this reason the messages offered to the public on products and services in all industries should be carefully monitored by the relevant authorities in terms of validity of their content. In practice, this control is limited and companies around the world have the power to influence consumer behaviour through media either in the short and the long term. III. Consumer behaviour within financial services – aspects and characteristics In order to understand the characteristics of consumer behaviour within the Financial Services Industry, it is useful to refer primarily to the products/ services that are characterized as ‘Consumer Financial Services’. These Services in fact can be consisted of the following parts: ‘a) Banking products (e.g. checking and savings accounts); b) Investment products (e.g. mutual funds, retirement accounts); c) Credit products (e.g. credit cards, home mortgages, auto loans) and d) Insurance products (e.g., life, auto, casualty)’ (Levy et al., 2002). At a next level, the development of consumer behaviour within financial services has to follow specific rules mostly because the specific industrial sector has many particular characteristics and issues which should be all addressed by any potential marketer. In fact, Kuneva (2007, 2) stated that ‘financial services can be complex, and difficult to understand; with some financial products, such as a mortgage loan or a private pension, consumers may only take them out once in a lifetime, yet they have a great economic importance; therefore consumers cannot afford to make the wrong decision’. In accordance with the above researcher, the differentiation of financial services towards the other industrial sectors can be based on the importance of this part of the market for the daily life of consumers around the world. On the other hand, technology can have a significant role in the development of specific spending patterns in consumers internationally. For this reason, Beckett et al. (2000, 15) supported that ‘deregulation and the emergence of new forms of technology have created highly competitive market conditions which have had a critical impact upon consumer behaviour; bank providers must, therefore, attempt to better understand their customers in an attempt not only to anticipate but also to influence and determine consumer buying behaviour’. In a similar study, Fain et al. (1999) found that despite the fact that the competition is growing in the financial services industry, the respond of marketers in commercial markets around the world has not been the appropriate one. It seems that consumer preferences in financial services industry have not been appropriately interpreted and evaluated towards the development of profitability of firms operating in the specific field. Indeed the research made by Fain et al. (1999, 44) showed that ‘battles for the consumers financial services dollar are taking place constantly, usually based on single-step direct marketing programs; but consumer resistance appears to be growing, especially resistance to new, high-tech alternatives to existing products consumers already use and understand’. In order to understand the formulation of consumer preferences within the financial services industry, Black et al. (2002) made a research in which the development of specific consumer preferences regarding the products and the services offered in the financial services industry is explored. The above research led to conclusion that ‘channel choice in financial service can usefully be conceptualised as being determined by consumer, product channel and organisational characteristics, with product-channel interactions and consumer-channel interactions being particularly important’ (Black et al., 2002, 161). Under these terms, the role of marketing becomes of primary importance. More specifically, it is mainly through marketing that consumer preferences in financial services industry (like in all other industries) can be evaluated and developed in accordance with the consumers’ needs and the potentials of the particular market. For this reason, in a relevant research made by Knights et al. (1994, 42) it was revealed that ‘marketing has traditionally deployed the rhetoric of consumer sovereignty and the efficiency of market relations to legitimize its role as an academic discipline and as a management practice; however it is only in recent years that, as a result of dramatic changes in the regulation and structuring of the industry, financial services has begun to subscribe to marketing as a basis for distribution and sales’. In accordance with the above study, marketing in financial services – like in most industrial sectors around the world – can be used in order to identify and evaluated the consumer behaviour regarding specific products and services offered to the public. However, it is necessary that marketing in this case follows specific rules in order to protect the interests of people and ensure the validity of the transactions made. For this reason, the development of appropriate legal framework is necessary even at a primary level. In this context, it is necessary in some cases to proceed to the segmentation of the particular market in order to understand better the needs of consumers and formulate the appropriate patterns of behaviour that would be acceptable within the specific market. During a relevant effort – market segmentation – Harrison (1994) found that in market segmentation ‘four segments can be identified (Apathetic Minimalists, Capital Accumulators, Cautious Investors, and Financially Confused) - which differ in terms of their financial services usage while consumer-perceived knowledge and confidence have an impact on the level of potential profitability which can be expected from the segments identified’ (Harrison, 1994, 17). Because of the importance of market structure for the formulation of specific patterns of consumer behaviour within the financial services industry, the above issue has been thoroughly examined by researchers in most financial markets internationally. A series of theoretical and empirical tests have been also used in order to ensure the validity of the results of the relevant studies. Towards this direction, the study of Buttle et al. (2001) led to a series of significant assumptions. In the above study many aspects of financial services have been investigated: ‘the use of a cheque book, overdraft facility, the use of Switch services, the use of a cash machine, savings account, investment services, mortgage services, and personal loan’ (2001, 232) in order to identify the appropriate theoretical framework (having to choose between Zaichkowsky’s personal involve-ment inventory (PII) and Kapferer and Laurent’s consumer involve-ment profile (CIP)) for the evaluation of consumer behaviour patterns as they are developed through the above activities. In accordance with the results of the above study the above two ‘scales’ present different aspects of consumer preferences in financial services industry. More specifically, ‘mortgage, investment and cash machine use are high involvement services while the use of savings account, personal loan, a chequebook, overdraft facility, and Switch services are found to be medium involvement services’ (Buttle et al., 2001, 232). In accordance with this study, the development of specific patterns of consumer behaviour within the financial services industry is highly depended on the structure of the particular market, the response of the authorities towards the protection of the rights of the public and the needs of consumers as they are formulated under the influence of specific social and cultural trends related with the market under examination. Another issue that should be highlighted is the fact that consumer behaviour can be influenced by a series of elements within modern commercial markets. The technology used by entrepreneurs around the world for the promotion of their products and services is the most common of these elements. In a study made by Pikkarainen et al. (2004, 224) it was revealed that ‘the acceptance of online banking services has been rapid in many parts of the world, and in the leading e-banking countries the number of e-banking contracts has exceeded 50 percent; moreover, perceived usefulness and information on online banking on the Web site were found to be the main factors influencing online-banking acceptance’. Indeed, in accordance with Wright (2001, 71) ‘the Internet and e-commerce have changed the competitive landscape of retail banking by eroding the barriers to entry created by physical branch networks and by increasing the commoditization of banking products and services; for this reason banks around the world now face competition from Internet-only banks, branded non-financial firms, multinationals such as universal bancassurers, and other specialist technology providers’. However, it should be noticed that Internet – based financial services have been expanding in most countries internationally so that banks that do not use Internet banking are few today. The expansion of the Internet – based financial services offered to people around the world cannot lead to the assumption that the quality of financial services available globally has been improved. In fact, there are many failures in daily transactions taking place within or through financial institutions. This outcome could be possibly explained because of the volume of the transactions taking place on a daily basis, but the development of technology should not allow such an argument to be verified. From another point of view, technology has helped banks internationally to communicate more effectively with their customers and to develop their activities within the global market. However, there are certain issues that should be taken into account by any firm operating in the financial services industry. As an example, loyalty is considered to be one of the most significant characteristics of consumer behaviour within the particular industry. Towards this direction, the study of Lewis et al. (2006, 15) showed that ‘loyalty is the outcome of a cognitive rather than an affective process; the main antecedents of bank loyalty were found to be perceived value, service quality, service attributes, satisfaction, image and trust: constructs that are inter-related and form a network of loyalty antecedents’. In other words, the relationship between the banks (or other financial institutions) and their customers is a rather challenging issue for any marketer around the world. Any possible failure in the marketing plan followed by a particular financial institution can cause to the specific institution severe damages. The weakness of marketers to understand the signs given through the daily consumer behaviour within a particular region can be considered as the main reason for the above described outcome. IV. Conclusion The development of consumer behaviour in modern financial markets can be influenced by a series of parameters including the structure of the particular market, the needs of consumers and the local cultural and social trends. UK can be considered as an indicative example of the interaction between consumer behaviour and the strategies followed by firms in the financial services industry. More specifically, the study of Nairn (2005, 375) revealed that ‘the Sandler report of 2002 found a £27bn shortfall in the UK nations savings; the report highlights the industry changes necessary for citizens to increase investment for their future and thus reduce this deficit’. The above report is mentioned by Nairn because of its importance for the development of a specific mode of consumer behaviour in the financial services industry. Moreover, the examination of all issues related with commercial activity in financial services industry showed that ‘the marketing departments in financial services organisations can go beyond this and harness risk tolerance as a segmentation variable to alter behaviour on a more targeted, micro level; it is suggested that this practice could have an even more profound effect than that envisaged by Sandler’ (Nairn, 2005, 376). On the other hand, there are many issues that should be taken into account when examining the quality and the safety of services offered by a specific financial institution. The existence of a high percentage of loyal customers can be an indicator for the development of the specific institution; however other parameters – like the local social and political conditions – could be possibly taken into account when designing the plan of control over a particular financial institution. Moreover, O’Loughlin (2006, 117) found that ‘key customer factors such as low involvement, apathy and dissatisfaction have resulted in much apparent customer loyalty actually being spurious; at the same time, the concepts of relationship and loyalty need to be fundamentally re-examined and their role and relevance within current retail financial services re-appraised’. At a next level, practices applied by firms operating in the particular industry should be frequently examined as of their validity and their effectiveness regarding the target set both by the participants (firms, consumers) but also by the state. In fact, the control made over the acts, the initiatives and the services/ products offered by financial institutions internationally is hard and extensive but not quite effective. However, personal interests can in many cases influence the validity of the control imposed over financial institutions of a particular region. It should also be noticed that even if all appropriate measures for the protection of consumers are taken by the relevant authorities, the chances for failure in daily financial transactions are high. However, even under this risk, consumers continue to trust the financial institutions operating across the world especially those which are ‘accredited’ by the state. Moreover, the consumer preferences in the particular industry seem to follow a specific way of development promoting certain financial products and services. In this context, the study of Easingwood (2001) referred to the factors of success within a particular financial institution. 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