Why even good companies struggle to do the right thing

Price comparison sites have transformed many parts of the banking and insurance markets over the past decade - making it easier than ever before to compare prices across a large range of products. But while this has undoubtedly driven down headline prices, it's also created a much harsher reality for companies: be competitive on price, or watch your sales plummet.

You might think that this sounds like great news. And if these markets were perfectly efficient - it would be.

But very few markets get anywhere close to efficiency in economic terms. And once price competition hots up, companies start trying to seek out other inefficiencies in the market to exploit. When it comes to banking and insurance products, the easiest way to build in extra margin is to exploit the customer's lack of knowledge about your product area - by increasing complexity, stripping out product features or introducing new fees and charges.

An impossible addition to break

The challenge in this kind of environment is that doing the right thing can be tantamount to committing commercial suicide. While you may not think that it's right to add on charges for making simple changes to your customers' policies, it may be the only way that you can afford to offer headline prices that put you anywhere near the top of the comparison tables.

A few years ago, Jack Straw blew open the scandal of insurers selling on their customers' details to ambulance chasing claims farmers - who would in turn encourage the customer to claim for compensation after being involved in a car accident. The practice was driving up the cost of car insurance for everyone - as ultimately, it was insurance companies who ended up paying out on successful claims for whiplash or other such injuries. But while the insurers knew this bad news for everyone, they found it impossible to stop. As long as other competitors were doing it, selling leads provided another source of revenue that could help them keep headline prices low.

It took regulatory intervention to break this cycle. And eventually, insurers were banned from selling accident leads on.

Time for intervention

Some similarly radical solutions are needed to keep comparison sites being tools that drive good, rather than bad, competition in banking and insurance. While comparison sites are always working to shorten the length of their questionnaires, as they know that longer forms lead more people to drop out, it may be time to move back in the other direction. With insurance products now increasingly different, the future role of comparison sites will be to help customers make more meaningful comparisons - which can only be done by asking more questions. This is one useful measure that could come out of the FCA's current review into comparison sites - due to report this summer.

There are also changes needed to the insurance market. I'd like to see modular policies - so that there was one basic car insurance product, which customers could compare across providers on a like for like basis. After that, extras and add-ons could be bolted on. This would help move us away from a market where customers make the wrong assumptions about what's included and what isn't included in their insurance policies.

In the meantime, we hope that services like ours can help reward the companies that are brave enough to do the right thing.