SUNANDO ROY – On Banking, Finance and Society

@sunandoroy February 2020

The financial sector landscape is transforming rapidly with the entry of fintechs, challenger/neo-Banks and rapid evolution in the open banking ecosystem. Payment service providers are increasingly entering the financial services space . As a result, the financial sector is flooded with new products that are embracing innovation and emerging technology. In this situation, the  design of new financial  products are becoming important in ensuring consumer protection in delivery of financial services. Robust product development that  takes into consideration customer profile, customer need and affordability is becoming the need of the hour to shield customers against consumer harm.

It is well known that consumers can be significantly affected by the design of the financial products they use. The contractual nature of relationship around the product often being medium to long term, product design can have a significant impact on the consumer in terms of financing cost and service delivery. For the financial firm, the thirst for higher returns requires a delicate balancing with the desire to deliver value to customer and establish a sustainable relationship. New product development process is therefore a complex multi-dimensional endeavour, and, more often than not,  involving third party solution providers and technology. Governing the entire product life cycle development process is thus critical to consumer protection.

Consumer Protection Focal Points in Product Design

The financial firms desirous to launch new products or services must therefore carry out a thorough review of the new product development process. This review should ideally take into consideration a set of product design steps.

First, the product planning process while looking at standard risk return perspective should also focus on potential customer needs by performing customer Risk Return analysis and thereafter documenting consumer centric risks.

Second, there is a need to align the product development aligned to genuine need  of customer segment the product wishes to serve. In the absence of prior data on customer preferences, a mechanism to obtain consumer feedback should be established. Organizations often have in-house deep understanding of markets  and involvement of Senior and experienced personnel in product development strategy should be considered to obtain valuable inputs regarding the prospects and constraints in dealing with potential market segment. This process of  assessing customers is often broad based, covering review of  – Target Markets,  Competition , Relationship with Other Products , Delivery to customers , Product Complexity and Value to Customers reviewed , Regulatory risk  and Conduct Risk, Strategy to Outsource , Contract Clarity , Third Party Oversight , Sub Contract Oversight  and  considerations of Business Continuity.

The Undeniable Impact of Strategy

Strategy, appetite, governance and reporting therefore becomes key elements of a conduct framework and ensuring customer focused outcomes. Embedding consumer protection as the end goal of the company business plan and strategy therefore becomes as critical as to ensure how strategy is translated into day-to-day decision making.  When strategy is fundamentally driven by robust conduct alongside shareholder value creation, an entity can create sustainable value and reputational advantage.

The strategic dimension of consumer protection involves  to begin with a clear articulation of  risk appetite. The risk appetite framework  provides support to the strategic perspective of firms, as any deviation / departure from the predetermined level of appetite raises concern and introspection.

In this context,  financial institutions need to put  interest of the consumers at the heart of its strategy. This means that the strategy must consider the value brought to the firm by extending such relationships. It is important that “customer centricity” recognizes the different stages of the relationship cycle with the customers. This takes strategy beyond pricing and into the realm of operational efficiency, relationship management and enhancing the value proposition of the customers.

Since regulatory frameworks are increasingly devised with consumer protection requirements, a thorough understanding of the Regulatory Environment becomes a necessity. While developing Strategy, adequate focus should be kept on regulation, as regulators have consumer focus as one of their key objectives.

 In addition,  consideration of implementability and resource adequacy should be part of the product design consideration, as product is as good as its delivery capabilities.  The execution of strategy is dependent on having resources and procedures to safeguard the best interests of the customers. 

The design should be continuously tweaked with fresh inputs from potential customer base. Financial entities designing new products must keep in mind that

• Consumer protection concerns get reflected in business strategy and decision making;
• A set of  key risk ,control and  performance indicators for consumer protection risks  are factored into the business strategy;
• ” growth at all cost” approach should be discarded at the design stage;
• Customer Feedback  is obtained at various levels feeds into strategic decisions ( beta testing)
• Strategy is responsive to changing regulatory requirements that relate to business conduct;
• Legal challenges that can emerge from consumer protection considered in product development stage, particularly in ethical concerns arising in product algorithm ;
• Risk Management and Compliance professionals should be  consulted in product design stage
• Resource adequacy and Operational capacity to ensure consumer protection discussed
• Required skillset in client facing roles should be  reviewed during early design stages and as part of  decision making.
• Consumer feedback  and complaints must be used  as inputs in product design strategy due to the valuable knowledge it provides from user perspective.

The Outsourcing Dimension of Product Design

Outsourcing disperses risks as well as accountability.  A product developed with vendor participation therefore becomes a design of shared responsibilities. The performance of the product is therefore dependent on multiple actors and should be carefully considered to mitigate product design and delivery risks.  For this, it is imperative that the financial product under development is empowered with:

• a clear and documented business case in support of the decision to use one or more service providers
• careful consideration of financial, legal and regulatory risks in the design of contracts between the firm and its service providers
• a thorough assessment of legal or regulatory obligations and requirements
• Properly documented exit and transfer clauses to avoid future Lock-in and lockouts
• Pre-agreed third party oversight arrangements
• Exit Plans in Outsourcing robust enough to cater to Consumer Interests
• Adequacy of business continuity arrangements.

A careful review of the above aspects while designing financial products can help   firms to  grow their customer base  of satisfied customers while  protecting  their revenue streams and reputation.