research

How convoluted language affects the way consumers understand and purchase financial products

A TFI research project by Mario Kienzler, Kinga Barrafrem & Daniel Västfjäll
Posted on October 20, 2020

"How convoluted language affects the way consumers understand and purchase financial products" is one of the research projects supported by the Think Forward Initiative.

Mario Kienzler, Kinga Barrafrem and Daniel Västfjäll investigate how the jargon used to describe financial products affects consumers' understanding and willingness to purchase those products. The findings of this study do not only have important implications for consumers, but also for policy-makers and financial institutions.

Download the report or read the summary below to discover the main findings of this research project.

SUMMARY

Financial products can be difficult to understand for consumers because of the convoluted language that is used to describe them (Rowe et al. 2015). Terms and conditions are often teeming with financial jargon instead of common words, reducing consumers’ understanding of financial products. Not only does this decrease their willingness to purchase such products, but we also discovered that convoluted language impairs their financial well-being, making them feel more anxious and less secure.

We investigated convoluted language in the context of car insurance policies. However, our findings are potentially applicable to a wide variety of financial contexts, such as investments products. In May 2020, we conducted two scenario-based online experiments with a combined sample of 891 participants from the UK, recruited through prolific.co. Respondents all have (or had at some point) a driver’s license and own(ed) a car.”


Our investigation

In the first experiment, almost 300 participants read a short scenario in which they were asked to imagine they were looking for a car insurance policy. It contained information typically available in the terms and conditions of today’s car insurance policies, either in simple or in convoluted language. The convoluted version of the insurance policy came with a short glossary of the financial terms that were used, which is common practice in the insurance industry. Here's an example of both versions of the compulsory excess fee information of the insurance policy:

“We will pay to repair or replace your car’s glass windscreens, sunroof, and/or glass windows after it has been damaged in an accident. You will need to contribute £55 for each accepted request for payment, and we will cover all remaining costs” [simple version]

“The insurance policy will provide unlimited coverage of the insured motor vehicle for accidental damage to that necessitates the repair or replacement of glass windscreens, sunroofs, and/or glass windows, less the compulsory excess of £55 per covered claim.” [convoluted version]

We asked our participants various factual questions about the content of the insurance policy. How likely was it that they'd purchase it? How did they perceive their financial well-being in regards to the insurance policy? We also presented them with a very similar insurance policy that had objectively better terms and conditions, and asked them which of both policies they would pick.

For our second experiment, we recruited almost 600 participants. It was identical to the first one, except that at the end we measured participants’ financial self-efficacy, subjective financial knowledge, objective financial knowledge, and their numerical ability .


Main results

Our results indicate that consumers who saw the insurance policy with convoluted language showed a reduced understanding of the terms and conditions, compared to those who saw the simple version. This is noteworthy as a reduced understanding may impact consumers' ability to make valid claims. The complexity of the language also had an effect on purchase intention: consumers who saw the more complex version indicated that they were less likely to purchase the insurance policy, compared to those who saw the simple version.

However, this did not impact people’s choice: consumers in both groups were equally likely to choose the more favourable insurance policy when given a choice between two different car insurance policies. Language did have an effect on people’s financial well-being: consumers felt more anxious and less secure about the insurance policy when it was presented in convoluted language.

Financial self-efficacy, financial knowledge and numerical ability did generally not have an impact on this adverse effect of convoluted language. Whilst individuals with greater objective financial knowledge did show a better understanding of the terms and conditions of the insurance policy in both language versions, they were still affected by the language used in the description of the insurance policy.


Implications and recommendations

Our results have implications for consumers, policy-makers and financial institutions. We show that convoluted language plays an important role in people’s perception of financial products. They can experience reduced understanding and negative emotions when considering financial products. Besides improving their financial self-efficacy, financial knowledge and numerical ability, consumers are advised to choose financial products from financial institutions that provide them with information on a level that is understandable to them. In addition, if written descriptions are not clear, consumers should discuss the terms and conditions with financial advisors who avoid financial jargon.

Policy-makers may use our results to reduce convoluted language in order to protect consumers better. They could, for instance, introduce a mandatory fact sheet that specifies which information needs to be explained to potential customers - and how. This fact sheet would require financial institutions to provide a simple and unified overview of the key features of their insurance policies. Policy-makers should also keep in mind that providing a glossary with plain English definitions of financial jargon is unlikely to be sufficient. In our experiments, we see a negative effect of convoluted language - despite additional information provided in a glossary.

Financial institutions can learn from our results that convoluted language can have adverse effects on their business. Convoluted language reduces consumers purchase intention, leading consumers to refrain from buying financial products at all, or possibly preferring competitors’ products if they are easier to understand. Either way, this could hurt the profitability of financial institutions.

Taken together, our results suggest that consumers, policy-makers and financial institutions could all benefit from more simple language in financial products. While it is important to keep legal requirements in mind, less complex language could align interest of all three groups.

References

  • Rowe, B., De Ionno, D., Peters, D., & Wrigh, H. (2015). Mind the gap — Consumer research exploring experiences of financial exclusion across the UK. Retrieved 14th of August 2019, from https://www.fca.org.uk/publication/research/mind-the-gap.pdf