If you build it, they might come: What behavioral science is doing for financial services

Financial institutions still have a long way to go when it comes to providing gratifying customer experiences. A recent survey conducted by TimeTrade found that while both bank and credit union executives thought that they were providing positive personalized banking experiences, their customers thought very differently.

This experience gap between financial institutions and the customers they serve is all the more troubling for the questions it raises: if banks and credit unions don’t understand the basics of how customers want to interact with financial institutions, how can they possibly understand the intricacies of how people spend and save their money, and how to help them do this better?

Sadly, financial education isn’t living up to its promise of financial salvation. Various independent studies have shown that financial education’s impact on future behavior is negligible. Behavioral science principles, when integrated into financial products and design, have been shown to make a lasting impact on consumers’ financial actions.

Behavioral science tries to understand how people behave and why. “Fundamental behavioral principles can make it hard to act on your finances,” said Katy Davis, vice president at ideas42, a nonprofit that leverages behavioral science to design scalable solutions for societal problems, including financial ones. “Finances can be daunting, it can be confusing, it’s easy to procrastinate. It’s what we call the ‘intention-action gap’ – even if you know what you should be doing, it’s actually really hard to follow through.”

Since its founding in 2008, ideas42 has helped a number of financial institutions overcome the intention-action gap through its blend of behavioral diagnosis and design. The firm first explores the behavioral problems that might be at play with a financial product, then solves for the problem with a new design, using a full-scale randomized control trial to ensure its design works. Many of ideas42’s solutions utilize financial technology.

For example, Alliant Credit Union, the 8th largest credit union in the US with 300,000 members and $8.9 billion in assets, partnered with ideas42 to improve existing services and to expand into new non-prime credit consumers. What ideas42 has found in its work with Alliant is that the barriers to changing financial behavior are often much smaller than you’d imagine, and are often caught up in a behavioral principle called “status quo bias”; namely, customers tend to use the methods that they’re most familiar with. Getting customers to try new things is the first step towards getting them to change their long-term financial practices.

For example, Alliant approached ideas42 after the credit union launched its new mobile check deposit technology. Despite the convenience that the new check tech affords, Alliant found that most of its user base stuck with the traditional method of depositing checks. After talking to the credit union’s clients, ideas42 realized that the problem wasn’t about security or trust, but about experience. Customers just didn’t feel comfortable trying out technology they hadn’t tried before.

To counter this stagnant cycle of status quo bias, ideas42 designed a quick intervention: the firm sent out a mailer with very clear instructions about how to deposit a check using a mobile phone which included a space where the customer could actually put down the check to take a photo of it. It also included a five dollar starter check to reward the person for testing out check deposit for the first time. “We found that once people used that technology once, they were more likely to use it again in the future,” said Davis.

Behavioral science is also making its way to into more mainstream banking: ideas42 serves as an advisor to JPMorgan and Chase & Co. Foundation’s Financial Solutions Lab, a community of startups, financial services companies and nonprofit organizations building solutions to improve the financial lives of Americans. The nonprofit also has another 18 months of collaboration left with the foundation on the newly launched Behavioral Design Project, which teaches other financial institutions and fintech startups how to incorporate behavioral design into their work.

Does JP Morgan implement ideas42’s behavioral findings into their own practices? “I would love it if they did,” says Davis. She posits that the bank’s creation of the JP Morgan & Chase institute, which is essentially a bridge between its commercial side and its foundation side, could make this possible. “They actually do use anonymous aggregated data from their accounts to publish reports about trends in financial wellbeing. Does that inform their actual operations as a bank? I don’t know. I could imagine that it could.”

Even without the bank’s seal of approval, behavioral science has the potential to rock the industry to its core. Using behavioral science principles and design, financial institutions could offer experiences that actually improve their customers’ financial activities and overall wellbeing. And with millennial customers in particular looking for financial guidance from their bank, having a system in place that makes them better at managing their finances could raise financial brands above the crowd.

For this to happen, financial institutions, incumbents and startups alike, first need to embrace the concept of consumer-centric design. “Oftentimes in technology, there’s a sort of ‘if you build it they will come’ mentality,” explains Davis. “Financial institutions need to think about how this product is going to fit into customers’ lives. They need to design for people and know their customers well.”

It could happen.

Photo credit: Ant1_G via VisualHunt.com / CC BY-ND