Customer Centric Answers to Bad Business Practices
Customer Experience Design Solutions to Common Business Issues
In Australia the Hayne Royal Commission is about to report. Many issues for customers have emerged through the multiple rounds of public enquiries and already the banks and financial services institutions have started changing processes and other aspects of their business models in response. Unfortunately, customers may already be suffering through more onerous processes or reduced choices of products. This paper sets out ways that the issues can be addressed without those negative customer impacts. It will be ironic and counter the original intention of an enquiry if most customers end up with harder processes to follow and fewer choices.
Three of the key issues that have emerged that we tackle here are:
That banks and other financial services companies have applied inadequate models of checking income and affordability for products such as home loans. They have also used simplified income and expense models and have had episodes of customers presenting fraudulent documents that weren’t caught.
Many “sales“ related functions have been focused on sales results not customer outcomes because of their reward and pay structures and customers have suffered as a result.
Concerns that brokers and advisers promote the product of the companies that own them rather than the best product for the customer.
We’ll look at potential answers to these that may not be the blanket, “don’t do it” and “tighten up” that seems to have been the initial reaction from the banks and media. Our
concern overall, is that the Royal Commission, being a legal process, will look for legally correct but not customer centric solutions to these problems. Commissioner Hayne and his team are astute legal minds, but they aren’t trained in service and process design. In many of our clients we have had to dismantle and redesign processes and sub processes designed by lawyers that put customers through unnecessary hoops. In this paper we’ll explore potential customer centric solutions to these issues. We should also say that in our experience some of these issues apply equally in telcos utilities and other industries. These problems and solutions apply more broadly than the financial services examples we’ll discuss here.
Fixing Loan (or product Affordability) Using Leaky Funnel Thinking (the 90/10 Rule of service Design)
The Royal Commission found many instances of loan approvals that it felt didn’t meet the responsible lending legislation. The commission criticised use of applying simple formulas to test capacity to pay rather than detailed analysis of customers’ income and expenditure.
Other cases showed instances of customers obtaining loans using fraudulent pay slips or false documentation. (Apparently the banks are irresponsible if customers try to defraud them and they don’t catch it but let’s not explore the associated ethical issues!). The knee jerk reaction to these enquiries has been Banks requesting far more information and proof of income and expenditure than they sought previously. They are assessing each customer’s income and expenses at a detailed level. We also assume that they will seek more proof such as payslips signed off by an employer. Loan approvals have dropped since these issues emerged and there is fear of an effective credit squeeze in Australia as a result.
This move to more detail and greater proof breaks one of the key principles of service and process design that we described in the book “Your Customer Rules” (Josey Bass 2014). We call it “not tarring with the same brush” or the 90/10 rule. If very detailed checks are needed for 10% of loan applications, as an example, we think we could and should avoid 90% of customers providing this detail if we can. We think of it as a “leaky funnel” in which customers fall out of the process or the funnel, if it doesn’t apply to them. In practice, this would mean that a bank would seek more and more detail the closer you are to the “margins” of approval.
This is how it works. It’s quite likely that 70-80% of customers clearly qualify or don’t qualify for the loan they are applying for. Those customers who either clearly do or don’t qualify would be asked for less proof and have a simpler process. Another 10-20% might need an additional set of steps as the bank needs to check some things in greater detail and then only 10% who are marginal would be asked for the most detailed proof. The further you go down the funnel, the more onerous the requirement for proof and documents. There could also be variable processes linked to the ratio of loan to income, or the complexity of the loan. Someone borrowing five times their income surely needs more proof than someone borrowing two to three times. This design is a win-win. Most customers get a simpler process and save time and effort. The bank invests more time and effort the greater the risk and the lending guidelines are rigorously applied.
Finance company “Afterpay” used an extension of this argument at the recent Senate enquiry into “Pay Day lending”. They argued that as their typical customer used their service for amounts between $100 and $200 they did not need the same credit checks and rigour as a customer borrowing $1000 or more. This takes the “leaky funnel concept” to lending as a whole arguing that larger loans need greater “responsible lending” criteria and far greater checks than small ones. We see this in many industries. For example, a general insurance business will often pay a small claim with almost no proof but send an assessor to your home to evaluate major damage. They have worked out that the risk/effort equation changes as the value increases. We hope the Royal Commission will get this principle because it is one we apply in all our service design work.
Aligning Sales Rewards with Selling the Right Way
There were many instances raised at the Royal Commission of customers being sold products that they didn’t need, couldn’t afford or that didn’t meet their needs. A major cause of these poor behaviours seemed to be commissions and reward structures driving sales staff, brokers or advisers to try and hit their targets and get bonuses or commission-based rewards.
Many industries reward sales people with bonuses for hitting targets from retail stores to
professional services. Until recently it has been seen as acceptable that the “best” sales people get paid more than those who aren’t as effective. The key issues raised at the Commission were a misalignment between the rewards for sales and the customer’s interests. Selling a customer an insurance product they don’t understand, or need is not the same as a car salesman up-selling you the benefits of alloy wheels and leather seats. Clearly, the customer can choose whether they want leather seats or not, but insurance and other financial products are more complex and less well understood.
Similarly, customer interests aren’t served by Mortgage Brokers “churning” portfolios to pick up bigger up-front commissions unless the customer gains through a significantly better rate or other product features. We’ve also seen financial advisers try to churn life insurance business for similar reasons as they get 60-100% up front commission but only a 10-20% trail commission in subsequent years. The financial press has discussed the idea of a flat fee for brokers but that could also encourage “book churning” for no clear customer benefit.
We know it is possible to create incentives for sales staff that do align with the customer’s interests. The trick we find is to have a well-defined sales process that forces the sales person to sell in the right way and be transparent about how the process works. In these models we first have to define how the sales process should work. We use a framework we call “Best Practice Procedures” or BPPs that defines how sales should work and that embeds principles of service design. These procedures ensure that the sales staff have the conversation in the right way, match customer needs to the products available and inform that customer of everything they need to make the right decision. Sales staff are then measured less on sales outcomes and more on adherence to the process. This can be a triple win;
Customers are well informed and get the right products that meet their needs
The company gets a compliant process and good sales results because the processes also help sales staff sell in an effective way
Sales staff get rewarded for following a process well.
An example of this working well is a company that sells high end kitchen appliances. Their staff get no sales commissions, but they are among the highest performing sales staff in the industry in terms of value of products sold. The process they follow is to understand customer needs and then help customers understand the best products for them. Sales staff focus solely on the customer and customers value their advice and buy from them. Everyone wins and it’s a great example of defining a good process and rewarding adherence to that process. We hope those reacting to the Royal Commission will recognise the alternative to sales outcomes as reward models.
Two Models of Product Distribution (aka Coles v Aldi)
There is a major debate, partially provoked by the Royal Commission, as to whether companies that “manufacture” products can also own the adviser or broker networks that sell them. Most of the banks have already sold off their financial advice businesses as a result but the issue goes across the whole industry. Commonwealth Bank owns
Aussie Home loans, a mortgage broker, and comparison sites like “Compare the Markets” are owned by companies who also manufacture and sell products through those sites. You have to read the small print very carefully to tell if some of these intermediary businesses have links to the companies whose products they sell.
We think there are two answers that both revolve around the idea of “transparency”.
The first is that anyone claiming to be an adviser, a broker or an intermediary should have to declare which products and services are linked to their owners. A mortgage broker at a company owned by a bank should have to make that transparent so that the customer can then see though any bias or “tied” recommendations. This should happen early in the conversation, so the customer can walk away if they aren’t happy with these associations.
We could also see two models developing in areas like financial advice. Truly independent financial advisers not owned by any company that manufactures products would be, we hope impartial. However, we think some adviser groups could be owned by manufacturers provided they admit that that they are and make it clear that they will sell the products of their owner. An XYZ adviser will sell XYZ products. That’s probably what the customer expects rather than expecting an adviser to know all the products available from all other manufacturers.
This is like the choice we have at supermarkets. We know that Coles and Woolworths will stock multiple brands and sometimes their own brand. You go there for choice. Aldi, in contrast, stocks almost exclusively their own brands and that’s what the customers expect. Aldi is an example of limited and tied choice, with an overall compelling cost advantage. Wouldn’t it be easier to understand and more transparent if an adviser or broker admitted their ties and said, “I’m an XYZ adviser and I sell products from XYZ”? This is just a different type of transparency but one that gives consumers choice and clarity.
The overall issue that needs to be respected here is customer choice and transparency of that choice. Claiming independence when an adviser or broker is not, is deceitful. A simple model of admitting who you work for and what you sell and what you don’t should help get some trust back into the process. In the supermarket example, customers choose knowing the products available and make the choice accordingly and there is room for both business models.
We hope these ideas are of interest and demonstrate our approach to design of processes and reward models. These concepts are ones we apply in our work with clients and we have proven that they work. We hope that the Royal Commission recommendations will align with our thinking but suspect, in some cases, they will recommend more regulation and controls that may result in more effort for most customers. We think effective process design, reward alignment and transparency are important parts of the answers to ensure customer experiences lower effort and offer transparent choice. As regulation increases, it’s even more important to design with effective customer outcomes at the centre of the sales and service strategy.