FOR CEOs WHO RECOGNISE THAT INNOVATION
AND STRATEGY ARE KEY TO FUTURE PROFITS

The RBA’s deficient response on credit card interest rates is an example of why innovation fails

The recent response of the Australian Central Bank to a Senate inquiry on Credit Card rates is a glaring example of how organisations can totally fail to understand consumers’ problems. The RBA (Australia’s central bank) inferred to senators that consumers were paying high rates because they were, to put it bluntly, stupid and lazy in not switching to cheaper products. I have depicted their response in a harsh light here to demonstrate a critical mistake companies too frequently make. The RBA was too quick to see blame in the consumer, too quick to look down on the consumer and too quick to consider consumers as foolish instead of digging deeper to identify other possible causes for the problems.

In too quickly faulting the consumer, the RBA failed to identify significant extenuating circumstances that were preventing consumers from swapping to cheaper products, which I will go into later. The RBA failed to identify to the Senators the market failures that were leading to consumers being trapped in high interest cards. It is a pertinent example of how organisations can totally misdiagnose consumer issues.

How does this tie up with innovation. If we want innovation to successfully drive growth and profits, then it is critical that that innovation is solving the customers’ problems. Hence if we misdiagnose the real issues the customer is dealing with, then that innovation will fail. Companies cannot afford to make the mistake the RBA made in not understanding the real issues.

At this point, many readers will probably be agreeing with the RBA in that you have to be a complete idiot to have large balances on credit cards and paying such high rates. However just because you don’t have a specific problem does not mean that there are not valid reasons why others have the problem. It is important not to judge our customers, but learn to walk in our customers’ shoes and understand their problems from their own perspectives so that we can better understand how we can solve their problems.

To give some insight into the customers’ problems with Credit Cards, I would like to share some of the findings we made in work we have done with clients in Australia and the USA. Whilst there are some differences in credit laws in each country, many of the issues were similar.

The only available credit for the flexible work force
Changing demographics of the work force has led to the flexible work force growing to near 50% of all employees. Half of the banking sectors customer base is now self-employed, part time or casual. Unfortunately, the banking sector severely discriminates against the flexible work force with an assumption they are a higher credit risk than full-time employees that is not backed up by hard evidence.

Flexible works have less access to credit facilities and are often forced to accept high interest credit cards as their only form of credit. The RBA failed to identify this issue.

The only credit for most small businesses
In Australia there is an estimated $14B on personal credit cards of business owners that is being used to fund their businesses. There is around another $37B on credit cards where small businesses cannot get access to overdrafts. It is systematic of the difficulty small businesses are having in getting access to credit to fund growth.

Again most small businesses are incorrectly assessed as high risk due to outdated assumptions rather than any real hard evidence. Hence many small businesses have little access to credit other than high interest Credit Cards and don’t have the choices that the RBA inferred. Again the RBA failed to identify these issues.

Failed Credit Scoring and outdated assessment processes.
The credit assessment process and credit reporting structure are major hurdles to product switching that the RBA completely failed to identify.

We are frequently finding assumptions in credit assessment processes that are twenty years out of date. If you are a flexible worker you are deemed high risk and frequently rejected by credit systems for assumptions based on a different era.

The following was a real clanger that the RBA completely missed. If you have a high balance on credit cards, you are deemed as high risk and will be rejected by credit assessment systems. So how does the RBA expect consumers to switch to low priced products if the bank’s credit systems reject them when they apply for low interest cards. It makes a mockery of the claims there is a competitive market, the consumer is trapped.

In Australia the credit reporting system is its own worst enemy, it penalises people for applying for too many loans. So now consumers will not apply for loans unless they are confident they will get approved to avoid damaging their credit score. As they don’t have confidence in the assessment process many don’t even try. This is a major obstacle to account switching that the RBA completely and utterly failed to identify.

The question here is why the RBA failed to identify the above points to Senators and that consumers were trapped in high interest credit cards due to market failures that would not let them switch to a lower cost product.

When looking at innovation, learn from the RBA’s mistakes and ensure you are not misdiagnosing your customers’ problems for the same reasons the RBA did. Make sure the culture and methods of analysis are not skewing your assessments of the situations. The following are some observations of where the RBA went wrong.

Decision makers failing to relate to the customer
The RBA analysts who are in protected full time jobs don’t understand a flexible workers problems. An employee of the RBA walks into the bank and asks for a loan, they show their pay slip and no questions asked. When a self-employed plumber walks in, their payslip is not good enough. The bank wants tax returns and copies of the company accounts and so on. The employees from the RBA have no comprehension of these problems for the flexible workforce, it is not on their radar when they were making their assumptions.

It is critical that we walk in the shoes of our customers. We should not judge them in our circumstances but in their circumstance if we want to understand the pertinent problems we are solving for customers.

A culture of looking down on the customer base
This is the biggest error of the RBA, in that there was a culture of looking down on the consumers. This is a form of academic snobbery where assessment is made from a position of learning and the consumer is looked upon as uninformed and unlearned.

The depth of this problem hit me when a CEO referred to his customers as the “great unwashed” in that he was dealing with the uneducated masses. Whilst in most organisations it is not as extreme as this, looking down on customers is an issue and it is costing business.

The RBA was too quick to assume the problem was with consumers being uneducated and incompetent. In looking down on consumers, they failed to go to the next step of digging deeper into the problem. In doing so they missed some serious market failures that the senate were actually asking the RBA to identify.

Companies have to empathise with their customers to understand their customers’ problems. If they don’t some digital disruptor will and it will cost market share.

Focused on the wrong issues
If you read the RBAs responses on Credit Cards, they focus on what they see is their core responsibility. They are focused on ensuring there is competition. The RBA saw that there were low interest credit card products on the market and hence were satisfied that competition was working and that is where they stopped. The RBA did not focus on barriers to switching accounts.

This is an easy mistake companies make in that their focus is aligned to their core competence instead of objectively looking at the customers’ issues independently of what the company is offering. In doing so they miss important factors that would give them a competitive advantage.

Incomplete Big Data is misleading
The RBA based its findings on their analysis of big data and this is a lesson companies need to learn when getting involved in big data. Make sure you have all the facts in the data you are analysing and make sure your assumptions are sound.

When we were doing analysis for clients, we found that the information that the RBA was working on was incomplete and lacking in critical information. The RBA does not have the information such as the purpose for loans on credit cards. They don’t know if it is for business development or gambling. The RBA does not know the demographics of those with large balances, they don’t know if they are flexible or full time workers, are they twenty year olds or fifty year olds.

The inference is that people are building credit card debt because of spending on luxury items yet there is not enough information to make this assumption. We are judging consumers when the facts don’t support it and Government policy is being misdirected on incorrect assumptions.

Frankly the RBA is doing a lot of guessing and not doing a very good job at it.

Conclusion
The reality is that 80% of innovations are failing to deliver growth or profits. The major reason for failure, is that innovation is solving the wrong problem for customers. This happens because companies misdiagnose what the customers’ issues are. The RBA was not being malicious or uncaring, but rather its analysis of the situation was flawed due to problems of culture and problems in the way they approached their analysis.

It is a critical lesson for all of us to make sure that we step back and really understand what our customers are dealing with. Don’t let culture, cynicism, stereotyping or any other assumptions cloud our judgement. Properly understanding the customers’ problems is critical to business success, so it it important we do it right.