Consumers of Financial Services

  • Post last modified:3 August 2023
  • Reading time:19 mins read
  • Post category:Finance
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Consumer Choices in Financial Services

A consumer choice can be defined as preferences present by the consumer for the products/services. In the case of financial services, consumers face a lot of options to choose from. They require stable, secure, and fair financial services.

Factors of Choice of Financial Services by a Consumer

Various factors determine the choice of financial services by a consumer:

Internal Factors

These factors are controllable factors, also called personal factors. These are related to the consumer’s internal environment. Personal factors are as follows:

Consumer’s Income

This is the major factor that determines the choice of financial service to be taken. A consumer with more income can opt for more financial services such as insurance, investments, fixed deposits, etc.

Retained Earnings

These are part of profits retained for strengthening the financial position. If the consumer has more retained earnings, he/she can opt for financial services.

Consumer’s Expectations and Confidence

This affects consumer choice to a great extent. A fall in confidence and expectations lower savings and investments. It would further change consumer choice for some financial services.

Rate of Return

The rate of return of financial investments affects the consumer’s choice. Consumers would prefer financial services that guarantee a high rate of return.

External Factors

Financial Market Environment

A stable or unstable financial market environment affects consumer choice to a great extent. A financially unstable environment such as an unstable share market poses a risk for financial losses in the future. In this situation, consumers may not be able to choose any of the preferences for some time.

Political and Legal Factors

These are the government regulations and laws that affect the consumer’s choice of financial services. These also include changes in fiscal, taxation, industrial, and labor policies. The changes in the policies affect the earnings of individuals to a great extent.

For example, the entry of foreign players into the financial market attracts many organizations with new financial products and services. This increases the preferences available to the consumer to choose from.

Consistency and Uniformity in Returns

This means the regular payment of returns from financial services such as investments, shares, debentures, etc. This motivates the consumers to further invest in financial services and choose more financial services with more profit.

Purchasing Behaviour of Consumers

The purchasing decision process of a consumer involves the action that a consumer undertakes before, during, and after the purchase of any product. A person needs to go through several processes for selecting the desired product out of multiple alternatives. A consumer has to identify his/her decision behind the visible act of purchase. The purchasing decision process is followed by consumers in the case of financial services.

The model has been developed by various marketing experts and scholars based on the product trial experiences of consumers. The decision-making process starts well before the actual purchase, but a person need not always pass through these stages. For example, consumers using bank services regularly need not follow information search and evaluation.

Here, the buying process starts directly from the need-to-purchase decision. The scenario may differ for a new consumer or a person purchasing any financial product for the first time. Financial services planners/ managers always need to understand the buying process of their customers and initiate any changes based on the post-purchase behavior of consumers.

Let us learn the purchasing decision process in detail.

Problem Recognition

Recognizing the problem is the first stage of the buying decision by a consumer. This stage takes place when the problem or need for a particular product is identified through the internal and external stimuli of a person. The internal stimuli may drive a person to meet his/her basic needs such as the need for future savings.

A person may also get influenced by external stimuli such as a neighbor’s new car as a result of financial investment or by a television advertisement. These external stimuli often drive the possibilities of purchasing financial services such as fixed deposits, savings, insurance, etc.

Information Search

Information search represents the second stage of the buying decision process. Once the problem or need of a person is recognized, he/she goes for searching information related to his/her requirements. A financial advisor has to present all possible information related to financial instruments such as interest rate, locking period, profits expected, etc.

Consumers often search for information related to features, interest rates, market value, and popularity of a product. On the other hand, marketers are more concerned with searching for information related to consumers’ interests and requirements for financial services.

Evaluation of Alternatives

After gaining the required information, a person can make the final decision. Evaluation of alternatives indicates various attributes that enable a person to judge or assess financial products/services. The alternatives are evaluated based on the features of a financial product/ service. Some features of financial products include their market value, reputation, rate of interest, return, and customer feedback.

Evaluation of alternatives is also influenced by two factors, namely attitudes, and beliefs. Every person holds his/her thoughts regarding any product, and they are reflected in his/ her attitudes at the time of decision-making. Attitudes and beliefs enable a person to come close to a product, and also from getting away from the same.

A marketer is well advised for placing the product based on the existing attitude of consumers, rather than changing their attitudes. This is because attitude and belief make a person like or dislike an object, and these two factors are very difficult to change.

Purchase Decision

The purchase decision is the fourth stage in the buying decision process. In the case of financial services, the purchase decision by a consumer is influenced by several factors such as brand name, attractive features, previous experience with the product, terms and conditions, availability of the substitute, and the payment method.

For instance, the availability of debit cards with attractive features such as more transactions per day and maximum withdrawal limit may stimulate the customer to surrender the debit card with fewer transactions.

While taking a purchase decision, the consumers may perceive different types of risks associated with the product. These risks are functional (product does not meet the expectations), physical (use of the product threats the health of the user), financial (product is not worth the paid amount), social (results in embarrassment), psychological (affects the mental well-being), and time (a better alternative is expected in future).

Post Purchase Behaviour

A post-purchase behavior occurs when a consumer, after purchasing a product, compares it with his/her expectations and feels satisfied or dissatisfied. Any consumer satisfied with the post-purchase activities possesses repeat purchase behavior.

Most organizations often make follow-up calls during the post-purchase phase in an attempt to convince the consumer, that they made the right buying decision. Marketing communication should ensure and create the belief that consumers feel good about the brand and may refer others and influence them in purchasing the product.

Characteristics of Financial Services Customers

Understanding customers is a very difficult task. Their needs, expectations, and responses to marketing activities form an important part of consumer research. In the case of financial services, it is quite difficult for a consumer to evaluate purchases in advance as returns are uncertain. Personal consumers generally regard financial products and services as distressed purchases they have to make as they don’t want to purchase them.

Consumers are generally uninterested and passive buyers. This is not true for business customers as financial products and services help them to grow their business. They have specialized financial teams with detailed knowledge of financial markets. The main characteristics of financial services customers are:

  • Take great risks

  • Assess all the alternatives available to get the maximum return

  • Depend on brand loyalty

  • Depend on financial planners for financial decisions

  • Desire to know the long-term benefits and risks of the investments

  • Tend to take financial decisions based on perceptive factors such as trust, instinct, brand or suggestion.

  • Concentrate on facts and figures, so that they can easily compare different offers.

Behavioural Finance

Behavioral finance implies the influence of psychology on the behavior of financial practitioners and its effect on markets. It explains how and why markets behave improperly.

Behavioral finance is a generally new field that tries to join behavioral and cognitive mental hypotheses with the routine matters of trade and profit and fund to give clarifications to why individuals settle on unreasonable monetary choices.

One of the most elementary assumptions that conventional economics and finance makes is that individuals are rational “wealth maximizers”. They seek to improve their well-being. According to conventional economics, emotions, and other irrelevant factors do not influence people when it comes to choosing economic factors.

In most cases, however, this theory doesn’t reflect how people behave in the real world. The fact is that people often behave ridiculously. Many people purchase lottery tickets even when they know that there is little chance to win the jackpot. Despite this fact, millions of people spend countless dollars on this activity. These irregularities incited scholastics to look to cognitive brain research to record unreasonable and unusual practices that modern finance had neglected to clarify. The behavioral account looks to clarify our activities, though cutting-edge money tries to clarify the activities of the “financial man” (Homo economics).

Manage Behavioral Finance Risk

Behavioral finance changes the way individuals perceive risks. They manage risks in four ways which are:


Risks can be avoided possibly by eliminating the task that comprises a risk factor. It is the easiest method to get rid of the risk. Nonetheless, eliminating the task will also eliminate the chances of accomplishing the attainable goals. In certain cases, it is possible as well as worth eliminating the task which involves significant risk.

However, this is not possible in the case of the business as it may bring the business entity to a halt. Business operations cannot be implemented without any risk element in them and this is not a practicable solution for any business entity.


The second possible method to handle the risk is to reduce it. There are two ways to reduce the risk that is by limiting the activity to be performed or by increasing the precautionary measures. There are well-structured methods to take precautions like utilizing the services of established departments like police, legal office, ombudsperson, and health improvement programs.

Besides this, sound systems can be developed to understand the root cause of risk, patterns of repetitive losses, and issues that can be solved at the base to decrease or eliminate the risk. But this approach needs to be evaluated in terms of returns. If the returns are not high enough and the cost of reduction of risk is more, it is not sensible enough to move forward with the method. Moreover, if limiting the activity is not going to give sensible returns, the use of this method needs to be reconsidered.

Transfer or sharing

Transferring or sharing the risk is the best possible way to manage the risk. This also means insurance. Transferring risk is a method of passing on the risk or sharing it with other entities. However, transferring or sharing is possible if the other entity is willing to accept it and can deal with it.

Acceptance or retention

Deciding to face the risk and deal with it is called acceptance. Not transferring or sharing the risk is called retention of risk. This approach is acceptable when the loss sustained is minimal and does not have any hazardous effects. This method is adopted when the cost of transferring or reducing the risk is excessive and goes beyond the returns expected. It is better to identify and evaluate the potential losses exactly when one is determined to accept the risk.

Mental accounting is one of the aspects of behavioral finance. It refers to a tendency for individuals to separate their money into different accounts; this is mainly based on a variety of subjective criteria, like the resource of the money and the purpose of every account. For instance, individuals often have a special “money jar” or fund set which is kept for a vacation or a new home.

As indicated by the theory, people allocate distinctive capacities to every asset group, which has a regularly irrational and damaging impact on their utilization choices and different practices. Although there are lots of individuals who use mental accounting, they may not understand how unreasonable this line of thinking is. For example, almost all individuals tend to casually spend the money that they get through tax returns, work bonuses, and gifts. They may use this money for excursions, beauty spas, shopping, etc.

However, they do not spend money in the same way if it’s earned in an expected form, like from their paychecks. In this case, money is spent based on the priorities of the needs. This example shows how mental accounting can cause illogical utilization of money. The mental accounting bias is present in investing field as well. For example, some investors prefer to divide their investments between a safe investment portfolio and a speculative portfolio.

This is mainly done due to prevent the negative outcomes that speculative investments might have the capacity to affect the entire portfolio. The difficulty with such a practice is that despite all the job as well as money that the investors spend on their different portfolios, the net value will be no different than if he had held one larger portfolio.

Article Reference
  • Ennew, C., Watkins, T. and Wright, M. (1995). Marketing Financial Services. Oxford, England: Butterworth-Heinemann.

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