As European energy prices break new records, many consumers wake up to a significantly altered financial outlook. This change occurs through multiple factors. First, the increase in household outgoings makes living costs less manageable. Second, as central banks strike an increasingly hawkish tone to keep inflation expectations from spiralling out of control, rising interest rates make it more difficult for borrowers to service their mortgages.
Currently, there is relatively high uncertainty regarding inflation and interest rate outlooks (due to a higher than usual volatility in CPI and GDP, see, for example, "Positioning for a new regime of higher volatility" by BlackRock (accessed 26-08-2022). As BlackRock argues, production constraints influence the heightened macro volatility due to supply chain disruptions in the short term and geopolitical tensions over a longer horizon. All this highlights the need to provide the end customers with a framework (oftentimes embedded in some financial planning software or service) they can use to navigate this uncertainty and make well-informed financial decisions.
Traditionally, the financial industry approached customer needs through a product-centric approach, focusing on creating and promoting financial products that would satisfy the needs of target customer segments. In this context, this strategy could, for example, be represented by offering an inflation-linked investment or a fixed-rate mortgage for a certain term.
While these are appropriate options to consider with the current macroeconomic situation, one could argue that the starting point should be the individual customer's financial situation. Increased inflation could affect various customer groups and their financial goals differently. For example, the HNWI segment might prioritise long-term wealth preservation, whereas the less affluent segments might focus on ensuring that their short-term expenses are covered.
One contributing factor to the pervasiveness of the product-centric approach is that financial planning software on the market is ill-equipped to facilitate a personalised discussion of the inflation impact. Many digital tools may suffer from this problem too. At the same time, we see a growing demand for more personalisation as digitalisation gathers pace in various retail industries (such as Spotify, Netflix or Amazon). Over time, the financial sector will likely join this shift from product-centricity to personalisation and customer focus. This transformation will focus on wealth customer goals and individual financial situations for wealth managers.
The shift from product-centricity to customer-centricity requires an appropriate analytical framework driving the underlying customer journey. If you use a goal-based model with a poorly designed decision-making element for personalisation, it will be challenging to provide your customers with an accurate picture of how economic phenomena such as inflation would impact their specific situation. There are many factors to consider when choosing appropriate elements for your financial planning software and we discuss them in-depth here and here. In our experience, industry players building customer-centric, goal-based experiences should therefore consider adopting a utility-based approach such as that employed by Kidbrooke's OutRank®.
Kidbrooke®'s analytics places your customer needs at the centre of the decision-making framework for your offering by design via evaluating your clients' utility (Read more about our approach and how it compares to more simplistic solutions here) across every scenario and available investment products. By leveraging OutRank®'s utility-based approach, it is possible to perform an individual assessment of customers' financial situations by evaluating how high inflation and interest rates impact their finances. OutRank®, our financial planning software, can help the advisor estimate a customer's personalised situation, create a favourable atmosphere for trusted conversations or improve digital tools. That will help advisors not only analyse inflation but other economic phenomena as well.
By considering the actual outgoings specific to each end customer, OutRank® can create a forward-looking measure of inflation that accurately reflects the customers' expected future costs. For example, someone living in an apartment might be affected by a spike in electricity prices very differently from someone living in a house. Note that such actual outgoings can be provided by the end customer or estimated by OutRank® through population statistics.
Successful implementation of a customer-centric approach will improve your services by helping your customers tailor their financial decision-making to respond to economic phenomena, such as inflation. The transition from the product-based strategy is likely to enhance your focus on your customers and help you increase their expected future wealth. Therefore, it's more likely to lead to higher satisfaction, loyalty and Customer Lifetime Value.
Putting your customers first helps you address their anxiety about inflation or other economic phenomena more efficiently. With OutRank®, you can do it by providing more personalised, visual and engaging experiences via physical, hybrid channels or self-service journeys run by financial planning software.