Inertia in bank accounts and choice paralysis

Nothing’s worse than not having any options, but having too many can be just as bad.

For those who studied The Paradox of Choice this isn’t news, but for some reason banks keep increasing the number of options available to all customers. There are hundreds of current account options, none of which have a meaningful variable. So why do banks keep offering them?

Having lots of options is a good thing, but inundating people with choices creates demotivated customers. That’s not subjective market observation, it’s backed up by academic study.

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Why it’s bad for banks

Most people don’t change their bank account. As ever bankers are keen to trot out the ‘you’re more likely to get a divorce than change your bank account’ factoid. But that’s a false narrative for two key reasons. Firstly, the divorce rate is 42% which is fairly high. Secondly, and more importantly, people don’t change their accounts by closing them. They stop interacting with them.

Closing an account is an arduous process and closes off something customers may need in the future. Instead they’re far more likely to just set up standing orders that transfers their money from one account into another the second a payment hits. They’ve left, but the bank doesn’t realise it. Banks still see money going in and out of the account but customers aren’t transacting on it.

This customer behaviour creates zombie accounts where banks don’t even know that they’ve been cut out of a customer’s life. Banks become a stepping stone not a solution. It’s behaviour backed up by how few customers actually switch. Less than 60,000 people changed their account in August this year with similarly low figures across the year. Yet account numbers at fintechs are rising, most of which only offer one type of account.

Just because the customer hasn’t closed their account doesn’t mean that the bank hasn’t lost them; merely that the customer may be carrying out all their high value activity elsewhere.

It raises the question of where customers are going and why. Given the high customer numbers at neobanks, they’re a safe bet.

Choices for days!

Supermarkets offer 40,000 - 60,000 products and it’s a popular example for choice paralysis. After all, how can anyone make the ‘smartest’ choice with such variation. It’s why shopping lists are so effective. They streamline or remove your available choices. But supermarkets don’t know why you’re there beyond needing food and drink. They don’t know if you’re making a specific recipe, doing a regular grocery shop or buying things for a party. So they fill stores with all the options.

Banks on the other hand pride themselves on having vast data sets that can tell what customers need. Incumbents should be capable of using predictive data sets to offer appropriate choices at the right time for individuals. More than that, incumbents should use that data to increase confidence in how customers make decisions.

However, once the bank loses all visibility of what its customers are doing the bank’s data becomes generic and its value starts to degrade. Then the ability to build new services based on real world scenarios, not journeys, decreases.

One of the most popular experiments regarding choice paralysis revolves around jam. Presented with 24 jams only 3% of customers bought one, when presented with 6 jams that number rose to 40%. It’s a great experiment for showing the need to streamline. But it’s still just jam.

There’s no real variation in jam. Sure there are different flavours, but it’s all boiled down fruit mixed with pectin then sealed in a jar. At its core it’s the same product. Most people would take a raspberry jam if strawberry wasn’t available because it does the same thing.

There’s no real variation with bank accounts either. There are so many options but none of them offer any compelling differences from other accounts. They’re mass market products, marketed en masse. When everything’s so similar is it any wonder that customers don’t know what account to pick or why one account is best for them?

The worst thing you can do is nothing

As of 2016 there are 148 different accounts on offer from over 35 banks. There are a lot of options without any meaningful differentiation. Some providers only have one or two current accounts on offer whereas others such as Barclays offer as many as 15 different accounts.

There’s an argument to be made for all the options a bank can offer. But they’re poorly presented. Instead of offering customers a streamlined services, banks deliver all options at once. It’s inefficient and confuses customers. If variant accounts were gradually presented based on customer transaction history then it would remove the difficulty of endless choice. It also delivers meaningful products that reflect how customers use their money.

Alternatively, find methods to drill in to what customers want before they need to choose. For example, answering multiple choice questions on what you want to achieve can reduce choice paralysis inducing number of options into something easily consumable. It’s already being done by fintechs like Wealthsimple. Customers answer questions on their preferred saving habits and an ISA is chosen for them. You can see the journey in detail on 11:FS Pulse.

There’s a reason why nobody is switching accounts in the UK, or anywhere else. And it’s only partially due to inertia. There’s so much choice between brands for a basic current account that there’s no point switching. Not when they all offer the same thing, which feeds back into the inertia.

Banks are the ones now facing a choice, but there's so few options they don't need to feel paralysed. Will they keep pushing a multitude of similar products that fail to stand out, or will they adapt and offer customers what they really want?