Can lenders improve the financial health of consumers through design?
- Design can play a critical role in improving consumers' financial health when it comes to lending.
- Research by the Financial Health Network shows that areas like defaults, making payments, and borrowing the right amount can be significantly improved through behavioral design principles, to ensure customers make decisions that improve their financial well-being.
Digital interfaces can nudge and direct customers toward healthier financial decisions. Recent work by the Financial Health Network has found multiple areas in digital lending where issuers can improve digital experiences and help customers understand the implications of their choices.
1) Reducing defaults by design
Defaulting is bad for borrowers but high default rates are also costly for lenders. Research estimates that 3.% of general purchase credit card balances result in default, which means approximately $26 billion is spent in charged-off balances per year. Hence prioritizing that consumers make healthy choices when they borrow and make payments on time is a win-win for both consumers and lenders.
One aspect of digital interfaces that can complicate making a good choice on which card products to choose is the sheer number of card products available to consumers. This can often result in choice overload.
It is important therefore that interfaces simplify and simplify the information they present to their customers. FHN recommends that one particularly useful digital flow that can help customers make the right choice is using a recommendation engine that takes consumers’ needs into account and guides them to the product that fits them best. It is also important that lenders make “trade-offs” of different card products explicit and highly visible.
As the image from the Commonwealth Bank of Australia shows, being able to highlight salient features as well as tradeoffs of each choice ensures that customers are fully cognizant of the implications of their decisions. However, the amount of information on the page is still too much for a consumer to keep track of. This is handled by the interface by making the compare option on the top left available to customers, where they can choose two products and then compare them side-by-side.
These types of interfaces can be helpful in comparison but to avoid the initial overwhelming presentation of information, a recommendation engine can be the best strategy.
2) Aiding the action of making on-time payments
The intention-action gap refers to the phenomenon where a person may have every intention to enact a task but never acts on it. FHN states that situational and contextual reasons may play a role in why consumers may not make payments despite having every intention to do it. Similarly, the reasons behind delayed payments can be as simple as forgetfulness. To limit these behaviors, many financial institutions have enabled auto-pay.
But that is a quagmire unto its own. In 2020, 20% of credit card accounts were enrolled in auto-pay.
But the jury is still out on whether this automation of payment actually improves financial health. In fact, research has shown that auto-pay can both significantly increase or decrease delinquency rates. Moreover, auto-pay can also open customers up to overdraft fees which negatively impacts their financial health.
Moreover, if auto-pay is set to the minimum amount, customers can get locked in a cycle of revolving debt. But simply nudging customers to increase their auto-pay amount hasn’t yielded clear successes either, as a UK-based study found that customers often counterbalanced their high auto-pay amounts with low manual payments.
FHN recommends that interactive voice response calls can inform customers about payments that they missed or are soon to be due. They can also inquire if customers intend to pay within a concrete timeframe (next days or within three days). Research has found this mechanism to make customers 2.26% more likely to make payments than those who just received a reminder notification or text.
Similarly helpful can be easing the access borrowers have to their credit scores. In a study, student loan borrowers who received emails about their FICO scores were 4% less likely to make late payments. This is because a window into your credit standing can help clarify the effect making payments on time can have on one’s credit score as well as keep borrowers from misestimating their credit rating.
3) Help borrowers pay the right amount
Consistently making the lowest payment possible results in revolving debt and hurts consumers’ credit utilization rates. Currently, 1 in 3 accounts regularly pay the minimum amount possible for their credit card balances.
Research suspects that at least 22% of this is because of the way information is presented and the design of financial digital interfaces. While on the repayment screen, often customers are presented with only two choices: pay with their entire balance or pay the lowest amount possible.
This is compounded by the fact that customers may not be able to adequately ascertain how much interest adds up on debt over time. To avoid a cycle of minimum payments, companies can keep the option of paying with the current balance as a default selection. Highlighting this higher amount can in turn nudge the consumer to increase the amount they are willing to pay.
4) Allow control over credit line increases through design
Large credit credit limits can lead consumers to spend more and in turn, incur more revolving debt. Credit line limits can also act as spending targets for customers – data shows a $1000 credit line increase generated $130 more in debt on average.
Friction has become taboo in modern digital experiences, and removing it in key digital processes is a design goal as well as a marketing strategy. And hence credit line increases are often applied without a consumer’s consent. What is not obvious in this ethos is that friction serves a critical purpose in design. It allows user space to reconsider, change, or mindfully take action. Therefore allowing customers to opt-in to credit line increases can help them stay on top of their debt and spending habits. Similarly, providers can also give consumers the option to opt out of future credit line increases.