With intense competition in the financial sector - Will the revenues from loyal customers become more critical to business success than ever before?

What factors do consumers consider important when selecting providers for various financial products?

The financial services marketplace has become a more diverse and complex place for consumers - what are the main challenges facing financial service providers?

In the last two decades, financial companies, especially those operating in retail markets, have faced intense competitive pressures and experienced unprecedented change through the effects of globalisation, regulation and new technologies. The financial services marketplace is characterised by hyper-competition, little growth in primary demand and increased deregulation. It should also be noted that in many retail finance sectors, the occurrence of committed and inherited relations between the customer and the provider has become increasingly scarce. This is a trend that is likely to intensify in the future.

With deregulation and technology driving competition, consumer choice has increased significantly. Financial services providers have responded by developing customer-centric strategies, although such strategies would seem to be at odds with the prime objective, which is to maximise shareholder value. The requirement to both maintain profitability and simultaneously become more market-focused has increasingly led providers to embrace new technologies in an attempt to deliver better and cheaper services to customers.

In many market sectors there has been an explosion in price-based competition. New providers have sought to acquire market share by seducing customers with low prices, favourable rates and special offers. Such movement has focused consumers' minds on costs, increasing the pressure on the established providers to follow suit. As a result, margins have been progressively eroded.

Mintel uses this report to examine the competitive pricing strategies that have become increasingly prevalent across several financial product sectors. While pricing is just one element of a wider marketing mix, it must be remembered that this is influenced by several factors. These include competition, distribution strategy, company positioning policy, perceived level of differentiation, technological innovation and perceived product service value. Each of these factors and their implications on pricing strategy are addressed within this report.

Increasing profitability may require a strategic shift

Providers, across an increasing number product sectors, have been forced to compete on the basis of price, often because a market has been driven in that direction. In sectors such as motor insurance, for example, the vast majority of consumers select a provider on the basis of the premium quoted, rather than any other aspect of the service. Furthermore, most consumers would think little about switching to another provider who could offer a lower quote at the time of renewal. This compares to current account banking, where customer churn is very low despite the fact that better deals can be obtained by switching providers.

Like any other market, financial services pricing decisions will be based on factors specific to the sector. For such reasons, this report examines several individual financial products, where price based competition prevails. These include current accounts, savings accounts, general insurance and credit products. At the most basic level, many such products can be described as generic, with little product differentiation between competing providers. Although differentiation is often based on product pricing, increasingly companies have sought to add value to their offerings in an attempt to break the price-competition cycle. Mintel uses this report to identify the many factors that prompt consumers to purchase one product over another. This allows us to determine whether financial services providers who are competing on the basis of price are mis-directing their competitive focus.

Focusing on the factors considered when selecting financial products

Issues relating to product charging will have a significant impact on how competition develops in the future. However, it must be remembered that a product's price is by no means the only consideration that consumers take into account when selecting financial products and services. Mintel commissioned exclusive consumer research specifically for this report and in particular this research identifies how important pricing is to product selection and switching. Respondents were asked about the various attributes that they deemed important when selecting and arranging specific financial products. Furthermore, respondents were also asked about factors that prompted them to switch providers.

Other Mintel reports of relevance include:

- Personal Loans, Finance Intelligence - UK Report, January 2002

- Branding in Today's Finance Services Marketplace, Special Report, February 2002

- Mortgages, Finance Intelligence - UK Report, March 2002

- The Changing Role of the Independent Intermediary, Financial Concept Report, April 2002

- Motor Insurance, Finance Intelligence - UK Report, May 2002

and the forthcoming reports:

- Credit and Debit Cards, Finance Intelligence - UK report, July 2002

- Deposits and Savings Accounts, Finance Intelligence - UK Report, September 2002

- Current Accounts, Finance Intelligence - UK Report, December 2002

- Customer Retention: Solving the Problem, Special Report - UK, December 2002.