Consumer outcomes: the holy grail. If you think about it, consumer protection is the ultimate raison d’être of all financial sector regulation. But what is “success” in consumer protection? The approach to financial consumer protection regulation has evolved over time. In recent years, more regulators have started to shift from a compliance-based approach to a principles-based approach. The next frontier is to move to an outcomes-based approach, where it is the actual outcomes for consumers that are the ultimate measure of success.

The measurement dilemma. In achieving an outcomes-based approach, regulators are faced with a measurement problem. They rely on the data financial institutions report, and their audit of such institutions’ policies, procedures and practices during onsite supervision, to gauge performance. But taking a tally of compliance outputs and tracking high-level indicators such as complaints incidence, alone, fail to capture the asymmetry between how providers say they’re treating customers, and how customers experience treatment by their financial service provider. This leaves a blind spot for regulators trying to piece together a holistic picture.

A broader perspective. Drawing on alternative data points for gauging consumer perspectives, like insights from financial inclusion surveys, social media, and provider-led customer satisfaction surveys, enables a better appreciation of outcomes. There are valuable resources, examples and tools available for regulators to do so. CGAP’s market monitoring toolkit provides practical guidance on, among others, implementing phone surveys, social media monitoring or mystery shopping to complement regulatory reporting analyses.

Looking at it through a behavioural lens. Informed by a recent study we undertook in South Africa, we know there is even more to be unearthed if you look at the question from a behavioural science perspective. The South African Financial Sector Conduct Authority (FSCA) recognises the importance of understanding consumers and their behaviours to assess how providers fare on actual outcomes. Over the last decade, the FSCA has been on a journey to implement a customer-centric approach, which includes implementing a market conduct framework based on the Treating Customers Fairly (TCF) principles.

While the FSCA regularly tracks the national financial inclusion survey to complement the insights from submitted industry returns, and has implemented a pilot with financial institutions to derive proxy indicators for consumer outcomes from the data that financial institutions hold, they wanted a more comprehensive view of consumer behaviour and sentiment that underlies the observed transaction patterns and perceptions of consumers.

To meet this brief, we worked with the FSCA and behavioural science specialist firm Behave to design a nationally representative survey and conduct in-depth qualitative interviews to find out how customers engage with and view the financial sector in South Africa, and whether their use of financial products and services indicates that financial institutions are upholding the TCF outcomes. We compared this to regression analysis done on the national FinScope survey, as well as an analysis of social media sentiment data.

Through the research, the FSCA gained a deeper and more nuanced understanding of the underlying drivers that are at play behind the behaviours and sentiments of consumers in their engagement with financial institutions. The research also showed where more work is required to improve customer outcomes. A few insights stood out:

• Overwhelmed customers reach for the first-best option. At the beginning of their engagement journey, financial customers find it emotionally and cognitively taxing and overwhelming to look for and take up a financial product. In response, they tend to turn to the first available product, or to whatever is recommended by a peer. Hence, they do not necessarily exercise choice based on an informed weighing up of alternatives. This renders the suitability of the suite of products on offer academic – actual decisions are often made on only a limited subset of salient products.
• Disclosure does not mean understanding. Information disclosure is central to compliance and, ensuring that customers understand the financial products that they sign up for, is a priority for both regulators and financial institutions. Yet the research showed that customers often don’t understand the financial products that they sign up for, even when they do read their documents. It is only when they progress along their usage journey (e.g. when they need to claim on an insurance policy or fall behind on a repayment on a loan product), that they start to engage with the details – and then it’s often too late.
• Staying put can be a misleading indicator. No fewer than half of the sample indicated that they have a financial product that they regret taking up. Many also say that they have been warned by others against a financial product in the past. Yet they experience inertia. This means that even when customers want or intend to discontinue or replace their financial product with a better or more suitable one, they don’t, because they perceive switching as difficult. When considering the cognitive exhaustion at take-up, it’s unsurprising that customers aren’t willing to go through it all over again. More vulnerable customer segments experience this far more significantly than others.
• Polite survey responses belie underlying suspicions. When asked outright whether they trust their providers or are satisfied that their providers treat them fairly (and other TCF-related questions), responses are on the whole positive. It is also heartening that we found a statistically significant positive correlation between the extent of financial service usage and positive reported experiences on TCF outcomes. But when qualitative techniques are used to probe further, we see that below the surface-level satisfaction lies the belief that financial institutions primarily serve their own interests. Few people yet have access to advice, financial institutions are often viewed as hard to reach, and marginalised customer groups are less likely to feel that their provider has their best interest at heart.

From insight to action. Understanding behaviours like these as well as the underlying drivers can assist regulators in formulating appropriate policy and regulatory responses to key market challenges. The FSCA is now drawing on these insights to help inform its work on developing outcome indicators for its supervision framework and is actively engaging the market and consumer representatives on the journey towards positive customer outcomes.