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Financial Services Marketing to ABC1s Market Assessment 2000
Key Note Publications Ltd, Jan 2000
Introduction:
'Marketing Financial Services to ABC1s' sets out to review the attitudes of upper income groups to financial services, and to see to what extent financial organisations meet their needs. This edition builds on the data used in the 1997 report. (Section 1.)
Definition:
The main product types under review are savings, investments, loans, mortgages, and insurance. These are becoming less distinct, as companies start to cater for customers throughout their life stages with flexible products which can be a loan, mortgage and savings account rolled into one.
Financial products are becoming broader in scope, but socio-economic groups are not changing in step to become more homogenous. The gap between the wealthiest and poorest households continues to widen. Within this trend, there are some important changes. Many of the skilled industrial workers and tradesmen currently called C2 have, in their peak earning years, higher disposable incomes than large numbers of Bs and C1s. Overall, though, over their life span, the ABC1s have larger earnings than C2s, and much larger incomes than Ds and Es. (Section 2.)
Strategic Overview:
The British save much less than their European neighbours, and finance more spending on credit. Loan repayments take large amounts of income, which could otherwise be saved. Ten per cent of households have nearly 30% of all regular income. The households with highest incomes tend to have a principal earner aged 30 to 49, and to be childless. Wealth is highly concentrated, the richest 1% of households having 20% of all marketable wealth. Most households do not use income systematically to create wealth.
There are nearly 94 million personal bank accounts lodged with British-based banks in the UK, compared with fewer than 60 million in 1985. The rise reflects the transformation of building societies into banks, and suggests that there is relatively little scope for expansion, especially among ABs. Growth in plastic card usage has been explosive and the market has fragmented. Organisations of all types - including schools and clubs ñ have their own co-branded cards. The Visa-MasterCard battle has been won decisively by Visa, which has more than 25 million credit cards and over 24 million debit cards in issue in the UK. Credit card lending is now equivalent to almost 19% of net mortgage lending compared with less than 4.5% in 1993. Cash is still the dominant payment method, although the number of cash transactions fell 1.4% between 1995 and 1998. Debit card purchases rose 74%, credit card purchases increased by 35%, and automated payments grew by 27.5%. (Section 4.6.)
Consumer Dynamics:
Households are becoming weary of direct mail. The need now is for communications, which develop an existing relationship. Customers show more loyalty if they have an emotional rapport with the company, of the sort fostered by Co-operative Bank (ethical investment) and Nationwide (a final bastion of mutuality). There are substantial opportunities for building business with these core customers, providing pensions, equity release plans and - most of all ñ flexible mortgages cum loans cum bank accounts.
Market Assessment commissioned NOP Solutions (NOP) to survey attitudes to financial services. Detailed findings can be found in Section 5.2, but briefly, they include:
- More than one-third of ABs and more than three in 10 C1s have borrowings exceeding their savings.
- Those with children are nearly twice as likely as those without children to owe more than they have saved.
- ABs and C2s find saving easier than C1s, Ds and Es.
- The cost of supporting children in higher education is now a great worry to parents. Just over two-thirds of ABs, and almost two-thirds of C1s, expect to fund their children out of savings and investments.
- Just on one-third of ABs and one-fifth of C1s have purchased savings plans, investments or insurance over the telephone.
- So far, only three ABs and two C1s in 100 have purchased savings plans, investments or insurance over the Internet.
- Pension saving is low. Only one AB in eight, and one C1 in 16, is setting aside more than £200 a month to save for a retirement pension, in addition to National Insurance contributions. Almost one in five ABs, and nearly one in four C1s, puts less than £50 a month into pension savings.
- ABs are less concerned than other social groups about the accessibility of bank or building society branches, and thus are less worried about branch closures.
Selling to the ABC1 Group:
E-commerce is the prime new marketing medium for male ABs, but there is a real danger that women will be left behind. National Savings has surveyed women's attitudes to financial services, and found that only 11% invested, compared with 20% of men. Only 19% of women had a pension plan, compared with 31% of men.
Interactive television is an exciting new way to reach female customers. Hsbc's involvement in British Interactive Broadcasting gives it an advantage as it seeks to attract more female customers. Print has a continuing role in financial services marketing, especially for older AB men, whose favourite newspaper is the Daily Telegraph. Sponsorship is now an essential way to develop empathy among customers, by selecting causes, events and programmes that strike a chord with target consumers. Brands are changing so that they no longer represent values, they are values.
Sponsorship is not yet effectively measured, but advertising spends are studied in detail. The main advertisers of financial products in the year to the end of September 1999 were Barclays the Royal Bank of Scotland Group including Direct Line and Tesco Personal Finance Scottish Widows Lloyds TSB Group including Cheltenham and Gloucester Prudential including Egg and Hsbc including First Direct. The total advertising spend on financial products and services was almost £800m.
Credit cards were losing kudos among high earners because of their extremely high interest rates. The arrival of American organisations offered card interest rates at fewer than 10%, and comparable with many personal loans, has shaken up the sector. Flexible mortgages have quickly become a dynamic new sector, with the Halifax, Woolwich, Standard Life, Direct Line, Legal and General, Mortgage Express, Egg, Bank of Scotland and First Active all prominent. Tax-efficient savings now mean independent savings accounts (ISAs), which had a slow start but by October 1999 were drawing in more money than was put into PEPs in October 1998. Older savers regard security as particularly important and National Savings has revitalised its marketing to attract more of them. Equity release plans will become much more significant in the financial services world. Several leading providers formed Ship (Safe Home Income Plans) to guarantee a code of practice (Section 7.9). Supermarket banks are particularly significant for female C1s.
The Future:
Demographic changes mean that, between 1996 and 2026, there should be a decline of over 7% in the 30-44 age group, the prime working and earning group. At the same time, numbers of men aged 75+ will grow by more than 75%, and the numbers of women by over 33%. Explosive expansion in numbers of over-90s will create large extra needs for residential and nursing home care, which the state will not want to pay for.
Women, even those on above-average incomes, are still unlikely to save enough for their retirement, or to ensure income protection if they are ill and unable to work. Companies are not yet targeting women sufficiently in their financial services marketing. At the same time, there is intense competition in marketing to affluent men, and powerful brands are crucial.
Market Assessment expects personal savings and investments in the UK to grow from £2,767bn in 1999 to £3,600bn in 2004, at constant 1999 prices. The average wealth of all ABC1 households in 2004 is likely to be about £230,000, including life and pensions funds. The few thousand households with very great wealth inflate this. The average C1 household is likely to have financial assets of only about £65,000. The average B household is likely to have about £214,000, which is not vast wealth: if it yielded interest of 4% gross, it would give an annual income of £8,560.
Affluent customers want to choose trusted brands, communicate with knowledgeable and polite staff, and have access to copious accurate information. The Internet gives great power to savers and investors, who can compare product ranges and make real-time decisions. Most As and many Bs are taking their future financial health seriously, but the majority of C1s make wholly insufficient provision for financial emergencies and for retirement. The huge rise in numbers of the very old has enormous cost implications that have hardly begun to be considered. Companies were very slow to adapt to meet changing lifetime income patterns, and increased life expectancy, but have now begun to tap the demand for flexible products. Organisations to watch include those in TV banking - notably Hsbc - and in online banking, including Egg, Halifax, the Co-operative Bank's smile, and Standard Life. The rapid growth in equity release plans (or reversion mortgages) has massive implications for the transfer of wealth between generations. Far fewer people will be able to rely on inheritances to put their finances in order.
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