Astute business executives know that their customers are not the rational decision makers that economic models presume them to be. People often make suboptimal decisions that don’t reflect their needs or best interests. For instance, customers overspend on their credit cards, fail to save enough for retirement or don’t take up insurance products to mitigate future risks. Designing financial products and services for this behaviour can be a challenge.
Behavioural science has been seeking ways to address this challenge by understanding how we, as humans, behave and why we behave that way. The idea is that once we better understand how we process information and how our context affects our behaviour, we can design behavioural interventions that influence how consumers behave in certain ways while keeping their freedom of choice intact.
Behavioural interventions have been found to be especially effective in the public sector, specifically on impact per dollar spent. These interventions can also be applied to the private sector as well. Take, for example, financial service provision. Behavioural interventions can be used to make it easier for consumers to make better financial decisions and for FSPs to solve a business problem that they are facing while incurring lower costs; bringing us a little closer to the nexus between consumer and firm value.
Evidence of this impact has already been demonstrated in both lab and field experiments in the developed and developing world. Below are three common problems that FSPs face and examples of cost-effective, subtle and context-specific behavioural interventions that have shown to be effective at increasing uptake, usage and ultimately the value of financial services for consumers:
Problem 1: How can we encourage consumers to take up our product?
- Make the initial uptake of the product more salient (e.g. visible, simple and convenient) for the consumer.
- For example, Ghanaian participants in a field experiment were 39% more likely to open a savings account if they could do so at their place of work.
- Change your client communication and marketing strategies to enhance interaction with clients by appealing to their emotions and affective feelings.
- Including a photograph of an attractive woman on an advertisement sent in the mail as part of a field experiment in South Africa had the same effect on increasing loan demand as reducing interest rates by 25%.
Problem 2: How can we encourage consumers who already have products to use them more?
- Frame the financial benefits of the product in a way that makes the product more attractive by highlighting the negative (loss) aspects, as opposed to positive (gain) of the decision.
- A field experiment in Israel found that the utilisation of credit cards and the amount spent on the cards were more than double when the message was framed in terms of the losses that individuals could suffer by not using the card compared to when it was framed in terms of the benefits they would gain from using the card.
- Create predefined default product options at the point of take-up that utilise people’s tendency to go with the flow.
- A field experiment in Guatemala found that the savings rates (and final balances of microfinance customers who set a specific savings goal upfront (which they had to opt out of if they wished to change the amount) were higher than those of customers who either were not encouraged to set a specific savings goal or were asked to set their own savings goal.
Problem 3: How can we encourage consumers to use products so that they do not incur unnecessary costs or are more valuable to them?
- Communicate with consumers by means of SMS reminders to enhance interaction with consumers and make their goals salient.
- SMS reminders in a field experiment in the Philippines decreased the likelihood that a microfinance loan would remain unpaid after maturity by 38%.
- Design products that help consumers exert self-control by restricting or disincentivising a set of possible future choices.
- A lab experiment in Rome conducted among Filipino migrants found that introducing a label for educational purposes increased the total amount of funding they allocated for remittances by 15%.
Above, we illustrated how integrating behavioural science principles into the design, delivery and marketing of financial products and services can allow FSPs to solve a business problem while simultaneously helping their customers overcome their biases, meet their financial goals and promote long-term financial wellbeing. To explore more behavioural interventions for financial services, view our collation of studies here or see our blog on the importance of data for closing the financial inclusion gender gap.