FCA’s propsed swipe at customer retention explained – The view from within

During the last week, FinanceFeeds reported on a move by the Financial Conduct Authority (FCA) in England that could affect the entire way in which customer retention is carried out by all companies in this industry.

Currently, customer retention can be considered to be one of the most, if not THE most important components of all FX and online trading companies, as the cost of gaining new customers is at an all time high, and companies generate most of their revenue from existing customers making repeat deposits.

Many novel and innovative methods of retaining customers and engaging them further have been introduced over recent years, however if the FCA puts a lid on the way that companies use existing data to ‘snoop’ on their customers and the behavior of their existing client base, this could have a dramatic effect on the majority of businesses.

The FCA is looking at how firms check their customers’ internet use, buying behavior and habits, and the use of systems that act on certain signs that existing customers display in order to harvest data and upsell to those customers. 

Today, Sebatian Kuhnert, Co-Founder & Managing Director at Tradimo Interactive elaborated in great detail in an exclusive interview with FinanceFeeds on this matter. Mr. Kuhnert understands what retail FX firms need in order to engage their customers, and takes a look at what may change if the FCA goes down its intended route.

Over to you, Sebastian…

It looks to me as if the FCA seems to want to restrict something that is very difficult to prevent and which could also have benefits for consumers. Rather than solving the potentially excessive use of third-party data by financial firms through regulation, an investment into more education on privacy rights seems more practical to me.

Let’s take a look at the FCA’s starting point first, the insurance industry. There, this topic is highly relevant since insurance premiums have always been determined on the basis of additional information about a person such as gender, age, previous health history, etc.

Bringing third-party data such as social media data or also information from health-tracking apps into it could bring a lot of customers great benefits and encourage healthier living in general, but it will also be a challenge for insurance firms to identify the right data as it’s also easy to create fake positive data in order to lower one’s own insurance premiums.

The question is where the right of the insurance company to price their products perfectly for each individual “risk” clashes with the fundamental right of the individual to be treated equally, without discrimination. If my understanding of that situation is correct, then setting minimum and maximum insurance pricing might be more easy to regulate than the usage of third-party data.

With regards to brokers or binary options providers getting clients who are in a “buying mode” to refund their accounts, the question is whether a company focusing on that kind of “retention” will be successful. I’m asking: Is this really retention – contacting a customer at an opportune moment to encourage him to deposit?  – Sebastian Kuhnert, Managing Director, Tradimo Interactive.

I would say that is 1st level, short-term retention and therefore limited in its effectiveness. It’s merely the trigger that helps force the point in time when existing clients act.

More important is 2nd level retention: your brand equity: what do you stand for, what are the values and emotions associated with your brand that keep a customer loyal to you? And already here you might struggle as a company when you’re focusing mostly on short-term deposit maximization, because clients are seldom going to create positive word-of-mouth for a company that got them to become a repeat-loser in an intrusive way.

Ultimate retention is 3rd level retention – where you have a real competitive advantage not just in one area such as pricing or short-term deposit-maximization, but a unique mix of multiple competitive advantages that make you inimitable and attractive independently from the client mood.

A firm focused on 1st level retention is more likely to be a dodgy player than others, because it will have to make up for the lack of overall attractiveness by being better than anyone else at short-term deposit maximization.

At the same time, just looking at whether a company is engaging in this practice, will not give regulators the answers they’re looking for, because clean players would also optimize that part of their value delivery, maybe in more subtle ways, but they also stand to gain from displaying information at the right points in time.

Hence, just looking at the usage of third-party data or the moment in time that someone is approached to re-deposit will not answer the question “Is this a reputable financial company?”. In my opinion, the industry and end-customers stand to benefit the most from more comprehensive examinations, e.g. a ghost-shopping inquiry by the FCA into the exact ways that financial firms market their services, from initial advertisement to the last email or phone call over a client’s lifetime.