How do people choose financial services?

This article is based on text from our book, Customer-centric Innovation in Finance: Leveraging Human Insights to Drive Product Innovation in the Digital Age, by Erin B. Taylor and Anette Broløs (2024, Kogan Page). 

Not too long ago, people had little choice when it came to financial services. If we were lucky, several banks had branches in our town and we could choose to switch between them if we wanted to. These days, we are more likely to open multiple accounts with different banks, and we have a wide range of non-bank financial services to choose from, including mobile wallets, payments platforms, and providers of specific services such as insurance, investment, and so on. 

Now that choice is possible, how do people choose financial services? Based on our research in different countries, we have identified six main factors that people consider: value, convenience, control, trust, risk, and emotions. 

But first, though, a word on preferences.

Where do preferences come from?

Before people get to the point of choosing, people already have preferences, though these are not necessarily fixed. Where do our preferences come from? Some economic theory would say that preferences are driven by the calculation on what achieves the most profitable outcome. There is, however, general agreement that people do not usually make decisions in such a rational way. Instead, there are a number of general drivers.

First, people often follow the choices of others (such as a child opening a bank account at the same bank as their parents). Financial preferences can also have cultural roots. For example, whether we pay our tax happily and on time, or try to avoid paying it at all, can be determined not only by our personal characteristics, but also by differences in tax culture, including trust in government institutions.

Many of us change our preferences based on our experiences: if we have accounts at two banks, and find that one provides bad customer service, we may close the account at the bank we don’t like so much. 

And, finally, people’s preferences are shaped by their aspirations. Marketers understand this very well. Just think of the status associated with platinum or black credit cards, which allow us to flash our status when we pay for drinks for our colleagues or our date. A person may use the latest payment technology partially because it is a way of showing their peers that they are up to date and competent enough to be included in the contemporary globalized world. 

In the main, however, people are quite realistic about what they can afford. This has clear implications for how people budget, save, and invest. People who are driven by aspirations may get into more debt due to unnecessary consumption than people who are realistic. And while there are many people in such a position, there are many more who are not. People—especially those with low incomes—are generally financially practical, as we have shown in our research on money and payments in Brazil. 

Choosing financial services

Some general preferences are commonly shared by most people. Generally, we will choose financial services that are good value, convenient, that we feel give us adequate control, that we trust, present low risk, and to which we have a positive emotional response. Let’s explore these in turn.

Value

Value is one of the first things we consider when making a decision to buy something or not. We value our financial services in the same way that we value anything else. For example, in a study we carried out with women living in Switzerland (Broløs and Taylor, 2022), our interviewees reported being motivated by price and value for money. They were aware that credit card fees are higher than the cost of debit cards. The women also considered points schemes to be valuable. Some consistently used their credit card for shopping to earn points—for instance, using the Cumulus Card, which is available as a credit card. But our interviewees were also careful to take advantage of loyalty cards and offers that span from getting their “eleventh coffee for free” to collecting points in supermarket shopping to travel points, and so on. We found similar practices in our study of low income people in Brazil (Taylor and Broløs, 2022). People were highly aware of the price of transactions and would use several bank accounts to lower their overall costs (we will discuss this further in Chapter 7).

Convenience

Convenience is a strong driver of decision-making processes and will deter people from choosing an option that is otherwise the best. For women in our Switzerland study, ‘convenience’ also meant that the ability to carry a card in their phone, or to pay with their phone, meant that they could go out without a handbag. One female entrepreneur in Switzerland switched banks to one that had a branch within a few hundred metres of her home because her clients still paid her in cash and she needed to deposit the money easily. 

Convenience is especially an issue in countries where infrastructure is underdeveloped. For example, in countries such as Haiti mobile money services were developed with the idea that they would be far more convenient than banks, which were few in number and located in urban centres. However, although mobile money allowed people to transfer money and make payments using their phone, they still needed to deposit and withdraw money at an agent. The development of agent networks was plagued by a ‘chicken and egg’ problem that customers wouldn’t sign up for mobile money unless there was an agent near their home or work, but businesses were reluctant to become agents unless there were already plenty of customers. Creating convenience in areas of low infrastructure can be challenging. 

Control

Unsurprisingly, people prefer to have control over the choices they make, and they also make choices that give them greater control. People want to feel they are voluntarily choosing financial services rather than having a choice made for them. This issue also arose in our study of women’s payment choices in Switzerland. Several women felt that they did not have enough knowledge to make investment decisions—even if they had plenty of experience already. Besides investments, they all actively managed their finances in ways that made them feel they knew their financial position and were confident about their budget. They found banking apps especially helpful because they show transactions instantly and so provide transparency. 

For wealthier people, control is often about having the ability to make real decisions and build a nest-egg, but this is not the case for low-income people. Instead, control is about making ends meet, caring for one’s family and reducing the stress of poverty. Low income people are less likely to sign up for direct debit services or automatic top-up for travel cards as this may mean the difference between having enough money to eat and get to work until the next payday or having to take a loan from a friend or payday service (or simply stay home and not eat). People who are poor make what the sociologist Pierre Bourdieu (1987) called the ‘choice of the necessary’.

Trust

In order to feel secure depositing, transferring and spending our money we need to trust the financial intermediaries who are managing our transactions. In countries with long histories of a stable banking sector, trusting banks is usually a given. Governments guarantee our deposits up to a certain value and we rarely worry about whether a financial crisis will undermine our savings, or whether there will be a run on the bank meaning that we cannot access our funds. But in countries with less stable financial histories or experiences with banking, trust in the formal financial sector may be a major issue. People who have lived through periods of hyperinflation, for example, may be more wary about keeping all their money in one place. 

People also exhibit different levels of trust in digital financial services. Sometimes a lack of trust exists because people have encountered problems transferring money. This was the case in our study of payments in Brazil, where we interviewed several people who had encountered problems when using Pix, the interoperable payments platform developed by the Central Bank. Customers access the service through their usual bank account and can transfer money for free to anyone in Brazil. Some people accidentally transferred money to the wrong person, and others encountered bugs that meant their transactions failed. The newness of the system did not help, but neither did the fact that Pix did not include a system for dispute resolution.

Risk

Risk is possibly one of the most-researched topics in decision-making, particularly by psychologists and behavioural economists. An interesting question is whether some people are more loss averse than others. It is possible that some (or many) people with low incomes take fewer financial risks than people with more money if they are struggling to meet their basic needs. People with families may also tend to take fewer financial risks: they are less likely to engage in risky entrepreneurial activities or investments if they lack another source of income. 

Like trust, risk has many social dimensions. Our research in Brazil made it clear that when people choose how to pay for a purchase in public they take social risk into account. We carried out a questionnaire in several markets in São Paulo and the countryside near Rio de Janeiro to find out how people choose a payment method when shopping. The results were not what we expected. Customers were highly individual in how they chose between cash, debit card, credit card and Pix. Some people preferred to pay in cash because they were worried that their card would get cloned. Others preferred to pay by card because they feared they would get robbed if they carried cash. Yet other people preferred to pay with Pix because they trusted it more than cash or cards. The results varied somewhat from place to place: people were most reluctant to pay in cash in the most ‘dangerous’ areas of the city. But otherwise people’s choices seemed to depend highly on how they weighed up different variables.

Emotions

All people have emotional relationships with their finances, and both positive and negative emotions certainly affect how people choose financial services. Again, this is something that marketers understand very well, and they build positive imagery into advertising to encourage people to feel good about using a service. 

Indeed, using a financial service can also be a positive emotional experience. A simple example is a free payment request service called Tikkie that was launched in the Netherlands in 2016. Anyone, no matter who they banked with, could download the app and use it to send other people a payment request. Due to its simple and friendly design, people found the app fun to use. It was far more convenient than trying to get the right amount of cash together, especially given that many people no longer carried cash. Any service that reduces stress and complexity, such as by making payments easier or sending reminders that help people avoid late payment fees, also provides a psychological benefit to its users. Indeed, doing research on which financial activities stress people the most would likely result in many ideas for new products or features. 

Complexity

Of course, people consider multiple factors when choosing financial services. Moreover, they make decisions in context: they will be influenced by the people around them, the location of their decision, and the events surrounding it. 

How can we understand such complexity—and why should we try? Surely we need to simplify our understanding of people if we are to design appropriate financial services, programs and policies for them? Well, yes and no. Clearly, we need to be able to identify patterns of behaviour among the groups we are interested in. But this doesn’t mean it’s necessary to throw out complexity altogether. In our forthcoming book we show how complex financial behaviours can be understood without reducing them to simplified understandings.