The noise around St James’s Place (SJP) last year highlighted the fact exit fees are back on the Financial Conduct Authority’s radar.
Try to put yourself in the mind of a competition economist at the regulator. You would naturally focus on whether it is possible to increase competition by reducing the barriers consumers face when switching provider.
These barriers are broader than explicit exit fees. More often, the barriers take the form of exit friction.
Exit friction can discourage customers from leaving, reducing competition and hindering consumers from exercising their choice
Decision-making ‘friction’ is perhaps best defined as the actions consumers must (or feel they must) take in order to exercise their choice. Friction could be measured in terms of online clicks, screens and scrolls, or the steps and time spent in a telephone queue.
Friction in the exit journey can discourage customers from leaving, thus reducing competition and hindering consumers from exercising their choice.
Roach Motel
The classic example of excessive exit friction is the subscription which allows you to sign up online but call up to cancel.
For instance, those who want to cancel their subscription to The Times and The Sunday Times are directed to call the customer services team. I signed up to The Sunday Times Wines Club last year without realising it was an annually recurring payment. It took me a while to cancel as I had to find the time to call up and answer questions about why I was leaving.
Excessive friction is known as a ‘Roach Motel’, after the US pest control brand which famously used the slogan: ‘Roaches check in, but they don’t check out!’
Excessive friction to leave a contract is known in the trade as a ‘Roach Motel’. This is named after the American pest control brand which famously used the slogan: ‘Roaches check in, but they don’t check out!’.
A Roach Motel does not charge an exit fee. It doesn’t need to. Exit is very effectively discouraged through the design of the architecture.
No such thing as neutral
The level of friction is one element of the wider choice architecture. Behavioural science shows us that changes to the choice architecture influence consumer behaviour and decisions. The FCA’s Consumer Duty places the onus on firms to design choice architecture that will deliver good consumer outcomes.
As with any element of the choice architecture, there is no such thing as a ‘neutral’ level of friction. The question is whether the level of friction you’ve got in the exit journey is appropriate.
Of course, not all this friction is an intentional commercial decision on the part of the provider. Some of the friction may be a regulatory or legal requirement, such as the anti-money laundering rules.
It’s exactly this trade-off the FCA is scrutinising
Some may also be the result of inflexible IT systems, which have not yet been adapted to the digital era. This is especially likely when it comes to closed book products, which are often running on legacy technology.
From a commercial perspective, it might be hard to justify investing in improving these legacy systems, particularly if the upgraded system will be used to reduce the level of exit friction and therefore increase customer churn. Nevertheless, it’s exactly this trade-off the FCA is scrutinising.
Sometimes required
Exit friction is sometimes required to deliver good customer outcomes. These are examples of ‘positive friction’, to use the regulator’s language.
For example, private medical insurance (PMI) policies typically don’t cover a new customer’s pre-existing conditions. This means – in many cases – a PMI customer effectively loses cover for any pre-existing conditions when they leave their current insurer. Customers looking to cancel their PMI policy should be made aware of this.
Does the exit journey have more friction than the onboarding journey? If so, there should be a good justification for this
By way of another example, life insurance policies typically become more expensive as the customer gets older. This means a customer who cancels their existing life insurance policy, only to subsequently purchase another, is likely to face a higher monthly premium. Customers looking to cancel their life insurance policy should be made aware of this.
There are other scenarios where a product may be mandatory, and the customer should be made aware they may need to purchase another product. For example, motor insurance (where the customer drives) or buildings insurance (where the customer has a mortgage).
Given the importance of the right level of friction, it’s worth thinking about exit journeys from a behavioural science perspective.
- Does the exit journey have more friction than the onboarding journey? If so, there should be a good justification for this.
- Enough friction must be deployed to make sure the customer is aware of any risks and costs from exiting their product. They shouldn’t make a decision without being fully informed.
- Questions should be asked of customers before, during and after the exit journey. To what extent are they making informed decisions?
Tim Hogg is director at Fairer Finance
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