Introduction to financial services marketing
3.4 The distinctive characteristics of financial services
The discussion above briefly outlined some of the areas in which services are different from physical goods and introduced some of the basic features of financial services.
This section explores the characteristics of services in more depth and considers
specifically their implications in the context of financial services. In what follows, intangibility is considered as the dominant service characteristic; intangibility then leads to inseparability and this in turns results in perishability and variability (heterogeneity). Finally, three further characteristics are introduced which relate specifically to financial services – fiduciary responsibility, duration of consumption and contingent consumption – and their marketing implications are discussed.
Box 3.1 G Lynn Shostack - ‘Breaking free from product marketing’
Lynn Shostack’s paper in the Journal of Marketing in 1977 is one of the formative articles in the development of services marketing. Shostack starts by noting the problems experienced by practising marketers who have switched from prod- uct to services marketing. Academic marketing appeared to have no readily available frameworks which could guide marketing practice in these environ- ments. Shostack’s response is to emphasize the importance of intangibility, not just as a modifier but as a fundamental characteristic of services – she notes that no amount of physical evidence (however provided) can make something as fundamentally intangible as entertainment or advice into something tangible.
A service is an experience rather than a possession.
Of course, physical goods do provide a service, but the distinction between the two is illustrated with the example of cars and airlines. Both provide a transport service, but the former is fundamentally tangible but with an intangi- ble dimension, while the latter is intangible but with tangible dimensions. The car provides transport but is also something that the customer can own; the air- line also provides transport but without any ownership element.
Thus, Shostack argues that we should view goods and services as existing on a continuum from intangible dominant to tangible dominant. She supports this framework with a molecular model of products which comprises a core or nucleus and several external layers. The nucleus represents the core benefits provided to the consumer, while the layers deal with the way in which the product is made available to the consumer – including price, distribution and market positioning via marketing communications. The nucleus for air travel is predominantly intangible, while that for the car is predominantly tangible.
Finally, Shostack considers the marketing implications of her analysis. She suggests that the abstract nature of services requires the marketing processes to emphasize concrete, non-abstract images or representations of the service to provide consumers with a tangible representation of the service which will make sense to them. By contrast, because consumers can see, picture and feel physical goods, such tangible images are far less important and marketing pro- grammes can therefore concentrate much more on abstract ideas and images to attract consumers’ attention.
Source: Shostack, G. L. (1977). Breaking free from product marketing.
Journal of Marketing, 47, 73–80
3.4.1 Intangibility
Since services are processes or experiences, intangibility is generally cited as the key feature that distinguishes services from goods. In practice, this means that services are impalpable – they lack a substantive physical form and so cannot be seen, touched, displayed, felt or tried in advance of purchase. A customer may purchase a particular service, such as a savings account, but typically has nothing physical to display as a result of the purchase. In some cases, services may also be characterized by what Bateson (1977) and others have described as ‘mental intangibility’ – i.e. they are complex and difficult to understand.
From the customer perspective, these characteristics have important implications.
Physical intangibility (impalpability) and mental intangibility (complexity) mean that services are characterized by a predominance of experience and credence qual- ities, phrases used to describe attributes which can either only be evaluated once they have been experienced or even when experienced cannot be evaluated.
Physical goods, by contrast, are characterized by a predominance of search qualities, which are attributes that can be evaluated in advance of purchase. Thus, the potential purchaser of a car may take a test drive, the buyer of a TV can examine the quality of the picture, and a clothes shopper can check fit and style before buying.
In comparison, the service offered by a financial adviser can only really be evaluated once the advice has been experienced, leaving customers with the problem that they do not really know what they’re going to get when they make the purchase decision. Even more difficult from the consumers’ perspective is not being able to evaluate the quality of the service. The technical complexity of many services may hinder consumer evalu- ation of what has been received; a lack of specialist knowledge means that many con- sumers cannot evaluate the quality of the financial advice they have received, and only the most fanatical investment enthusiast would really be able to determine whether a fund manager has made the best investment decisions in a particular market.
Of course, it is possible to argue that, ultimately, a consumer can evaluate financial advisers or investment managers based on the performance of a portfolio or a particular product. However, inadequacies in either service may take time to come to light, and even when a particular outcome occurs – for example, the value of a portfolio of assets falls – how certain can the consumer be that this failure was due to poor advice or to unforseeable market problems? In contrast, with relatively complex products such as a PDA or a TV there are visible manifestations of the qual- ity of the product (information stored and retrieved by the PDA, pictures displayed on the TV screen), giving the consumer something tangible to evaluate and poten- tially a clearer idea of the relationship between cause and effect – a poor-quality picture is most likely to represent a problem with the performance of the TV set.
Overall, the predominance of experience and credence qualities means that financial services consumers are much less sure of what they are likely to receive and, conse- quently, rather more likely to experience a significant degree of perceived risk when making a purchase decision. Thus, financial services marketing must pay particular attention to ways in which the buying process can be facilitated. The following issues may be particularly important:
1. Providing physical evidence or some physical representation of the product.
Physical evidence per se may take the form of items directly associated with
a service (e.g. the policy documentation that accompanies an insurance policy) or the environment in which the service is delivered (e.g. the rather grand premises in prime locations occupied by banks). An alternative or even a complement to actual physical evidence is to create a tangible image such as ‘Citibank – where money lives’, or to offer physical gifts to prospective consumers.
2. Placing particular emphasis on the benefits of the service – customers do not want a mortgage as such, but they do want to own a house; they do not want a savings account, but they do want to be able to pay for their child’s education. Thus, for example, the Malaysian bank, Maybank, promotes its Platinum Visa card with an illustration of a Korean vase bought using the card. Similarly, in Hong Kong, HSBC promotes its PowerVantage banking service as ‘Helping you build better returns on your life ... on your money ... on your time ... on your opportunities’.
3. Reducing perceived risk and making consumers feel less uncertain about the out- come of their purchase, perhaps by encouraging other customers to act as advo- cates for the service, by seeking appropriate endorsements or even by offering service guarantees. For example, the State Bank of India Mutual Fund reassures prospective customers by drawing attention to its links with the State Bank of India – ‘India’s premier and largest bank’. In the US, US Bank promotes itself with the slogan ‘Other Banks Promise Great Service, US Bank Guarantees It’.
4. Building trust and confidence to reassure consumers that what they receive will be of the appropriate quality. Many financial services organizations make particular efforts to emphasize their longevity – the fact that they have been in business for, in some cases, hundreds of years serves as a mechanism for sig- nalling their reliability and trustworthiness. In the US, Bank of America’s private banking arm emphasizes its longevity as a means of building confidence –
‘For more than 150 years, The Private Bank has been the advisor of choice for the afflu- ent’. Others, such as HSBC and Axa Insurance, emphasize their worldwide coverage and the size of the organization in order to reassure customers that their money and business will be safe and secure.
3.4.2 Inseparability
The nature of services as a process or experience means that services are inseparable – they are produced and consumed simultaneously. As Zeithaml and Bitner (2003: 20) put it:
Whereas most goods are produced first, then sold and consumed, most services are sold first and then produced and consumed simultaneously.
A service can only be provided if there is a customer willing to purchase and experience it. Thus, for example, financial advice per se can only be provided once a specific request has been made; until that request is made, the advice does not exist – there is only the potential for that advice embodied in the mind of the adviser.
The provision of a service will typically also require the involvement of the consumer to a greater degree than would be the case with physical goods. As few services are totally standardized, the minimum input from the consumer would be
information on needs and wants. For example, an investment adviser would, as a minimum, need to know an individual’s attitude to risk, and whether that indi- vidual wants to invest for capital growth or income, before advice could be given.
In many instances, the input from the customer will need to be more extensive.
Because the customer actively engages and interacts with the provider, services are often described as interactive processes. While this interaction has traditionally been face-to-face, developments in telephone and information technology mean that an increasing amount of customer provider interaction is taking place remotely.
As a consequence of the interactive nature of services, the way in which the serv- ice is performed may be as significant to customers as the actual service itself.
A financial services provider’s staff may be of particular importance in this process.
As the group with whom the customer has greatest involvement, the staff can and do play a decisive role in customer evaluations of the service experience.
From a marketing perspective, then, inseparability presents some interesting challenges. Given the interactive and inseparable nature of service provision, the following issues will be of particular significance:
1. Ensuring that the processes of service delivery are clearly specified and customer orientated – in effect, the service should be designed to suit the customer rather than to suit the organization. For example, many banks might find it preferable to have product specialists – i.e. staff who focus attention only on specific products – but a customer with multiple services from a particular company will much prefer to deal with a single individual. Westpac Banking Corporation in New Zealand stresses to its business customers that it offers ‘One number for all your banking needs’. United Overseas Bank of Malaysia promotes its ‘Privilege’ banking service, emphasizing that ‘you need to only deal with one person’.
2. Ensuring that all staff involved in service provision appreciate the importance of a customer-orientated approach and are empowered to be responsive and flexible in customer interactions. Pacific Crest Savings Bank in the US reassures its customers that ‘Premier customer service is delivered by a staff empowered to make decisions. The Pacific Crest service guarantees ensure that customers receive the high level of service they are promised.’
3. Identifying methods of facilitating customer involvement in a way which will enhance the quality of the service provided. This may be as simple as making clear exactly what information is required from the customer, or may extend to outlining and explaining the responsibilities of the customer. Most financial services providers have terms of use which outline customer responsibilities, although often these are presented in the style of legal documents, which may limit the extent to which customers really understand their responsibilities.
3.4.3 Perishability
The fact that services are produced and consumed simultaneously also means that they are perishable. Services can only be produced when consumers wish to buy them, and when there is little or no demand the service producers cannot ‘manufac- ture’ surplus services for sale when demand is high. Thus services are perishable
and cannot be inventoried. If an investment adviser’s time is not taken up on one particular day, it cannot be saved to provide extra capacity the next day. If the counter staff in a bank have a quiet period with no customers, they cannot ‘save’
that time to use when queues build up.
This characteristic of perishability presents marketing with the task of managing demand and supply in order to make best use of available capacity. Issues that require particular consideration include:
1. Assessing whether there are identifiable peaks and troughs in consumer demand for a particular financial service. Bank branches, for example, may be particularly busy during lunch breaks, while tax advisers may experience a peak in the demand for their services as the end of a tax year approaches.
2. Offering mechanisms for reducing demand at peak times and increasing it at off peak times. Tax advisers, for example, might consider offering discounted fees for customers who use their services well in advance of tax deadlines.
3. Assessing whether there is the opportunity to adjust capacity such that variability in demand can be accommodated (either through changing work patterns or some degree of mechanization). Many banks employ part-time staff to boost capacity during periods of heavy customer demand, and ATMs provide many standard banking services quickly as an alternative to queuing for face-to-face service.
3.4.4 Heterogeneity
The inseparability of production and consumption leads to a fourth distinctive char- acteristic of services: variability or heterogeneity.
Service variability can be interpreted in two ways. The first interpretation is that services are not standardized – different customers will want and will experience a dif- ferent service. This source of variability essentially arises from the fact that customers are different and have different needs. To varying degrees, services will be tailored to those needs, whether in very simple terms (such as the amount a consumer chooses to invest in a savings plan) or in very complex ways (such as the advice provided by accountants, consultants and bankers to a firm undertaking a major acquisition).
The second interpretation of variability is that the service experienced may vary from customer to customer (even given essentially similar needs), or may vary from time to time for a particular customer. In effect, this type of variability arises not because of changing customer needs; it is primarily a consequence of the nature of an interaction between customer and service provider, but may be influenced by events outside the control of the service provider.
The first source of variability is easily understandable as a response to differences in customer needs. The obvious implications for marketing are as follows:
1. Service processes need to be flexible enough to adapt to different needs, and the more varied are customer needs and the higher customer expectations, the greater the need for flexibility. Thus, for example, business banking for small and medium-sized enterprises will need to accommodate the needs of the long- established small, local shop and of the fast-growing biotechnology company which
primarily sells in international markets. Equally, brokers may need to be able to adapt their service to the person who buys and sells stock infrequently on a small scale and the enthusiast who tracks the market and trades frequently and/or in volume.
2. It is becoming increasingly important that staff are empowered to respond to dif- ferent needs and situations, so that processes can be adapted as and when necessary. Typically, this implies decentralizing service systems and delegating authority such that non-contentious modifications to a service can be dealt with by customer-contact staff. Thus, for example, a bank may delegate a range of lending powers to account managers such that every requested change in the normal terms of a loan to a small business does not always require head office approval.
The second form of variability provides more problems as it represents fluctua- tions in the level of quality that the consumer receives, rather than variations in the type of service. Essentially, this form of heterogeneity arises as a consequence of inseparability and the importance of personal interaction, but may also be influ- enced by external events. Customers are different and so are service providers;
customer contact staff are people rather than machines, and will experience the same range of moods and emotions as everyone else. Differences arise between indi- viduals (from one employee to another) and within individuals (from one day to another). The service provided by an account manager who is feeling happy, relaxed and positive at the start of a new week will almost certainly be better than that pro- vided by the same account manager at the end of a long day, suffering from a headache and feeling undervalued.
From the consumer side, quality variability within and between service experiences may also arise if customers are not able to articulate their needs clearly. The greater the willingness of customers to supply appropriate information about their needs and circumstances, the more likely it is that they will receive the quality service they expect. Customers who are able to explain clearly their risk preferences, the purpose of their investment and the characteristics of the rest of their portfolio are likely to get better advice than customers who simply request advice on an investment that will give a ‘decent return’.
In addition to the impact of personal factors on quality, it is important also to rec- ognize that there are many factors which are outside the control of a service provider but which may have a significant effect on the overall service experience and the quality of the service product. The performance of an investment fund, for example, may be influenced by broad macro-economic forces which fund managers cannot change. The major fall in stock markets during the early 2000s had a signifi- cant negative impact on the performance of many personal pensions and equity- based investment products, but was outside the immediate control of the institutions which supplied these products (although many UK-based financial services providers were criticized following these events for having raised customer expectations by assuming continued rapid growth in stock markets).
Thus, both personal interactions and uncontrollable external factors can result is consumers feeling that they have experienced considerable variability in the service and in some case, an unsatisfactory experience. To address this aspect of variability, service marketers may need to pay particular attention to the following issues:
1. Motivating and rewarding staff for the provision of good service and encouraging consistency in approach. Internal marketing campaigns to emphasize the