Financial Wellbeing: Helping Customers Manage Their Money Better (Andrew Beatty)

The temptation to spend is always with us, but for some people the compulsion to consume is overwhelming.

Financial discipline takes practice; our tendencies to spend or save are habitual and form a predictable pattern. However, with the right approach, even long-standing bad habits can be changed for the better. This blog explores how banks can apply behavioral
economics and modern technologies to help their customers develop good financial habits – and build customer loyalty along the way.

For the most part, human behavior is driven by habits and in accordance with underlying personality traits and cultural influences. It follows that some people are savers while others are spenders. This also helps explain why financial education generally
fails to deliver long-term improvements as people tend to default to ingrained ways of behaving.

So, if increasing financial literacy doesn’t lead to better financial habits, what will?

Recognizing the Need to Change

The truth is people are fearful of change and many will resist it. This human trait is endemic and there’s even a psychological term for it:
metathesiophobia –  or fear of change – is believed to be rooted in the deep psychological need to be in control, even when bad habits dominate. To change a habit requires an awareness of that habit in the first place and then a conscious effort to behave
differently.

 If a financial institution can better understand customer behavior, it can design products and services that are aligned to effectively help customers manage their money to meet life goals. There’s a clear need for this in the real world. Recent surveys
reveal some alarming statistics, including:

• 9% of people in the U.K. have no savings at all
  [1]
• 26% of Americans have insufficient emergency savings to cover expenses for more than three months[2]

Unfortunately, many people live in denial of their economic realities and persist in making irrational financial decisions. They need help, and banks are well positioned to do just that.

Behavioral Economics

As discussed in a prior blog, banks can adopt an approach founded in behavioral economics to create the right conditions for people to make
sensible financial decisions. The behavioral approach is firmly rooted in practical reality and “nudges” people to do the right thing – with proven results.

Pairing behavioral economics with modern technology conjures up a powerful alchemy. Following are several examples of how banks can apply these as tools to help their customers achieve better financial outcomes:

Automate savings programs to make savings as easy as possible for customers. Such programs reduce the mental burden of decision making (when to save, how much to save) and the results can make it seem like magic for customers. It’s crucial to make
the signup process easy and frictionless. Also, because not all customers like to save in the same way, be sure to offer a variety of automated savings options to give customers a choice for what best fits their needs and situation. Once enrolled, customers
will see their savings accumulate, positive reinforcement for the new savings habit being formed.

Set savings goals once a customer has signed up for automated savings. With the right technology customers don’t have to actively decide to prioritize their own future needs, which so many people find challenging. Setting a goal is a proven way to
improve outcomes; going a step further you can also allow customers to share their goals with friends and family to enlist support and help reinforce the customer’s commitment and odds for success.

Leverage predictive analytics to analyze each individual customer’s real-time transaction data and financial behavior. The amount saved can be automatically adjusted accordingly to optimize savings. By including behavioral economics in the customer
experience, banks can help customers develop habits that will steadily and sustainably improve financial wellbeing.
 

Manageable Steps

Financial goals that are both long-term and large can be daunting. Saving for retirement or even a new car may seem like an insurmountable challenge for some. When helping customers save for the future, banks should break the goal down into increments and
create a clear set of steps for how to get there. Customers should be encouraged to start with a manageable amount and build from there. It’s all about demonstrating progress.

 Make Finance Personal

Financial institutions are uniquely placed to help customers calculate what they can afford based on their own cash flow and financial goals, rather than external data and influences. With a wealth of customer data available, this is a perfect example of
how modern tech can enable hyper-personalized services. By harnessing customer financial data, banks can offer personalized insights and recommendations for details like:

• How much additional money the customer can afford to save
• Saving for specific goals
• Aligning spending with income
• Building credit scores

Not only will customers see improvements in terms of their financial wellbeing, but they will also value their bank that much more.

[1] https://www.finder.com/uk/saving-statistics#:~:text=better%20or%20worse%3F-,Key%20statistics,for%20a%20month%20without%20income.

[2] https://www.cnbc.com/2021/07/28/51percent-of-americans-have-less-than-3-months-worth-of-emergency-savings.html#:~:text=For%202021%2C%2025%25%20of%20survey,cover%20expenses%20for%20three%20months.