Tim Hogg

By Tim Hogg

Like many, we started using online shopping for our groceries during the first pandemic lockdown. We began with Asda.

As the groceries landed on our doorstep each week, we immediately checked to see whether the fresh fruit and veg looked edible. Sometimes it would. Sometimes it wouldn’t. Sometimes it would look edible, but display short use-buy dates (and be mouldy or mashed within hours).

As we hit issues, it was very easy to test out different online stores. We would soon find out whether their service provided value for money.

Eventually, we reverted to shopping the old-fashioned way (Lidl doesn’t do online shopping).

Why does learning matter?

Our online shopping odyssey was an indication that the online groceries market is competitive*. Consumers quickly learn from their experiences and adapt their purchase behaviour, forcing firms to work hard to deliver value-for-money.

Conversely, if consumers don’t learn from their past purchases, then competition is weaker than it would have been otherwise.

The FCA’s focus on fair value—as part of the Consumer Duty—is a sign that the FCA isn’t happy with the outcomes delivered by many financial services markets.

Consumer learning is often difficult in these markets. Given that learning has such a large impact on competition and consumer outcomes, we may want to understand where learning is more or less likely…

What DOES it take for consumers to learn from their experiences?

  • Are there repeated, frequent interactions? It is hard to learn from a one-off event. And it is hard to recall what we learnt, if we then don’t face a similar purchase decision for several years. Unlike groceries, we may make infrequent decisions about how to borrow, save, or invest our money.

  • Is the feedback timely? If the feedback is delayed, then we may not associate the outcome with the purchase. Or it may simply be too late for the feedback to be useful. If you only realise that you haven’t saved enough for your retirement when you hit 68, then you have left it too late.

  • Is the feedback salient? If the consequences of your decisions are hidden from view, you may not realise the costs of a mistake. For example, you may not realise that shopping around for your home insurance at the point of renewal would have saved you £100. Inertia is often a sign of non-salient feedback (or else we might not be so inert!).

But the mere ability to learn isn’t sufficient for a competitive market… consumers also need to be happy to put their learning skills to the test.

  • Are consumers willing to experiment? We need the willingness to try out new products, to test out new providers. Typically, we are more willing to do this in ‘low stakes’ environments. For example, I might be more willing to try out innovative microwave meals than innovative savings accounts. When it comes to the big financial decisions, many of us won’t want any added risk. We may not be overjoyed with our current bank, but it might be good enough and, hey, why rock the boat?

Behavioural science shows us that humans tend to learn fastest from making mistakes.**

With online groceries, we were prepared to risk a mistake in order to find a better shop. I am unlikely to feel that way about my mortgage, pension, or savings.

So, what? The Consumer Duty implications…

In theory, poor value-for-money is more likely where customers are not able to learn, and where consumers are unwilling to experiment. Therefore, FCA-intervention is more likely where customers are not able to learn and unwilling to experiment.

Ask yourself the following questions…

  • Which of your customers are able to learn?

  • Which of your customers are willing to experiment?

  • What mitigating actions have you taken to ensure good outcomes for those customers who are not able to learn and who are unwilling experiment?

Answering these questions is also a ‘no regrets’ move from a commercial perspective. Even if consumers are not easily able to learn, poor value-for-money usually comes to light in the end.

From fresh fruit and veg to insurance and mortgages… widespread customer regret is a powerful force to reckon with.

*As long as you don’t live in the Outer Hebrides.

**Not that we always learn from our mistakes. Our power of habit may be so well ingrained that the negative feedback from making a mistake doesn't result in a different pattern of thinking and behaviour.