Ben Thomas, Chief of Strategy & Service Design at CACI Digital Experience, discusses the positive role friction can play in financial services.
It’s easy to think faster is better when it comes to financial services. The sector has been shaken up by fintechs offering frictionless, brilliant customer experience (CX) and speedy onboarding tackling many of legacy finance’s CX pain points.
Gone are services only open during work hours in the work week, the month to get a loan discussion appointment or bank managers and brokers’ potentially biased personal recommendations.
Instead, digital and data-led, automated decision-making has seen firms’ product and marketing teams ruthlessly focused on online. Reducing the number of clicks to purchase, on-boarding times and drop-out rates, resulting in extreme streamlining of processes to achieve high conversion rates.
But does designing products and services to be frictionless lead to the ‘good outcomes for retail customers’ and the prevention of harm including to vulnerable customers required by the FCA’s Consumer Duty?
I’d strongly argue no. And firms should give serious thought about adding in friction to their service and product design to achieve sustainable business outcomes, as well as Consumer Duty compliance.
The customer harms from ‘friction-free’ finance
Low-friction finance has caused devastating preventable customer harms. In the US, a 20-year-old committed suicide after the gamified Robinhood trading app indicated he was (erroneously) $730k in the red after being approved to freely trade high-risk Options. The FCA Financial Lives Survey looked at five investing apps: in three of them nearly a quarter of customers were demonstrating ‘at-risk’ behaviours such as borrowing money to make investments.
In previous business settings, I’ve also witnessed cases of vulnerable borrowers receiving unaffordable loans in just a few clicks. Potentially ensnaring them in cycles of spiralling fees and penalties, causing severe financial and emotional damage.
So, even if customers enjoy friction-free, innovative financial products or services, if the outcome is they can’t pursue their financial objectives or are harmed in a way the firm could reasonably have anticipated, it’s just not Consumer Duty compliant.
The risks of friction-free finance to firms
Authorised Push Payments (APP) – worsened by ‘one or two clicks and done’ online payments – now make up around 50% of the UK’s £1.17bn financial fraud losses. The Payments Systems Regulator making reimbursement mandatory for APP fraud victims from October 2024; the sending and receiving institution equally responsible. Similarly, weighty FCA fines are mounting up due to Anti-Money Laundering (AML) breaches due to failures in fast onboarding in KYC, AML and PEP processes.
Low friction might also mean lower customer Lifetime Value (LTV). By late 2022,only 5% of neobanks (like Revolut and Monzo) had broken even. Fintech startups aren’t designed to be immediately profitable, but one reason they aren’t is because of their high customer acquisition cost (CAC) due to offering lower fees and free services to swiftly onboard new customers. This is then exacerbated by lower margin products and lower value customers who are often reluctant to trust them with large deposits, who they can’t afford to lose since overall customer numbers and ‘churn rate’ are key investor metrics.
So, reducing complexity and friction can only go so far. To be truly sustainable, it needs a focus on value propositions, higher value customers and offboarding lower value customers who – critically – are also not benefiting from the services and not achieving Consumer Duty’s ‘good customer outcomes’.
In effect, it requires a ‘win-win’ for both sides. So, how do we achieve that?
The solution doesn’t come ‘out-of-the-box’
Despite the raft of AI and other quick fix Consumer Duty software tools on the market; they often miss the critical point about the Duty: it’s not about box-ticking to achieve ‘compliance’.
Compliance is the side effect of making the shifts – cultural, behavioural, technological, operational – to achieve the win-win. The whole firm’s system engineered to support good outcomes and vulnerable customers in circumstances such as bereavement, mental health and disability. Automation and AI tools alone can’t fix those broader issues.
The FCA makes it clear Consumer Duty isn’t about slowing things down for the sake of it: “We expect firms to distinguish between positive frictions or nudges that support good outcomes and harmful frictions that create unreasonable barriers.”
So, it’s about introducing the right level of friction at the appropriate moments to help the business and the customer think: is this product or service really suitable? What potential good (or bad) value outcomes are going to result from this action?
Getting a systems view is vital
Finance firms often look at things from a products and service perspective, linear and in parallel: ‘the customer journey’, ‘the product lifecycle’ and seeing if those journeys and lifecycles are ‘compliant’. But signing up a customer to 10 individually well-designed products with 10 individually well-designed customer journeys won’t guarantee an overall ‘good customer outcome’.
Instead, by using Service Design we use the Iceberg Model for Systems-Thinking to analyse what’s happening ‘above the surface’ and understand the deeper underlying causation patterns in the firm’s people, processes and technology. Letting us identify where the pain points and risks are to the customer and business, and design solutions to solve them. Effectively setting up systems to be as fast as humanly and technologically possible, so adding in positive friction where needed doesn’t negatively impact CX or employee experience (EX).
A starting point is often combining business analysis and inclusive stakeholder research and the integration of disparate data sources to provide decision-making insights for the whole business. We’ve created holistic customer journey frameworks for finance clients to support their product teams and marketers to make these sustainable ‘win-win’ decisions, including supporting customers through periods of stress and difficult life events.
These frameworks ‘design in’ in positive frictions like putting in additional steps for verification to prevent fraud, adding in mechanisms to raise flags in the case of certain vulnerabilities and guiding people to a different customer journey or product entirely and proactively notify customers of the consequences of cancelling a contract early, for example.
This Systems-Thinking design approach not only helps achieve Consumer Duty compliant customer outcomes, but dramatically reduces risk to the business itself. A win-win all round.
