Takers versus givers- why financial regulation fails

We’ve all read the news about flawed financial regulation, excessive risk-taking, poor auditing and lack of personal responsibility in our banking sector. It’s clear why there are some companies out there that are hated by their own customers – these companies tie us into long term contracts with complex terms and conditions and we’re so baffled by the fine print that we don’t bother to read it all.
The reason companies follow those strategies is because these customers are very profitable, argues Hugh Davidson, writing in Market Leader,the Marketing Society quarterly review. Bewildering your customers and making it difficult for them to compare products and services makes them poor decision-makers. He refers to companies using these strategies as “value extractors”.
Contrast this with companies operating in more competitive environments like FMCG goods or OTC medicines. These markets are characterised by a high frequency of purchase, it’s quick and easy to switch suppliers, pricing is very clear and products straightforward. Here consumers are empowered to make capitalism work effectively because it is easier to make decisions and move when a new product or service offers better value for money. Davidson calls these companies “value adders” because the drive to provide better products for customers makes these companies more innovative and responsive in their marketing. So it is those companies that truly embrace the needs and desires of their customers, adapt to them and are respected by them, that are successful in the long term.
Most markets are dominated by either value adders or value extractors and our financial services fall into the second camp because of the complexity of their products, high switching costs (money and time) and the need for consumers to be more savvy about the products. Although retail banks should be able to deliver great value because they can make large economies of scale, you rarely find their products in the ” best buy” or “highly recommended” category. Their attitude to profit is one of entitlement rather than re-investing short term gains into long term profitability.
So regulators have a challenging job ahead – how to make consumers of complicated products and services, such as finance or energy, better able to make more informed decisions and compare providers easily. Innovative use of technology to aid comparisons will help, as will the support of governments, politicians and the press. The most effective power, however, still rest with us, as consumers. We need to do our best to make capitalism work and make value extraction a thing of the past.
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