Seven Ways Behavioral Science Can Improve Customer Financial Health

By Mariel Beasley, Co-Founder, Common Cents Lab And Kristen Berman, Co-Founder, Common Cents Lab

Mariel Beasley, Co-Founder, Common Cents Lab

For many casual observers, a CFO’s role is largely assumed to be only about balancing the numbers and making sure the company ends the year in a good financial place. But modern CFOs are responsible for so much more. Increasingly in the world of financial services, a CFO also has a role to play in promoting the positive financial health of the company’s customers. 

"Money is about opportunity cost, our real goal should be not just to spend less but to spend on things that can make us the happiest"

That is because the evidence shows that financially stable consumers can use more of a company’s products and services more frequently - leading to better performing providers. For example, one the biggest reasons for defaulting on a car loan is incurring a large car repair expense. If more borrowers had a safety net set aside for these emergencies, it is likely that banks would have to foot less of the bill for loan defaults. This ultimate improvement in company bottom line performance provides an incentive for CFOs to take an interest in product development and refinement in service to customers.

One of the more promising ways to build products that promote better consumer financial decision making and eventual wellness comes from the field of behavioral science. This approach leverages a deep understanding of innate human behaviors to build products that naturally guide people to more positive financial decisions. For example, defaulting consumers into saving money or nudging them to avoid an unnecessary expenditure.

To help CFOs better understand the roles and lessons of the discipline, here are seven ways to advance Americans’ financial health using behavioral science:

1. We need to make saving money more of a norm and spending money less of a norm.

A thousand years ago when we dealt in goats and chickens, the nice thing was that we could compete with our neighbors on who had more goats and chickens. But then we invested money and we made spending very visible, but we made savings completely invisible.” — Dan Ariely. Today, the most visible financial behavior is consumption: what people wear, what car they drive, where they are eating out, etc. People are instinctively driven to do what they see others doing around them (the descriptive norm), this means that spending and consumption is intuitively more motivating than savings. To make a real dent on saving in the U.S. we need to explore ways to make savings visible to increase that natural motivation.

2. If we could make saving money easier, more people would engage.

Kristen Berman, Co-Founder, Common Cents Lab

Friction decreases action. Removing friction increases action. In the financial domain this may look like creating (safer) automated saving options for employees, tying it to another financial moment (like the paycheck or a loan) or asking people at the right time (for example: five Fridays when they have a windfall or an age milestone to take advantage of the fresh start effect).

3. Tomorrow is always a better day to start.

As possible, we should ask people to make saving decisions that go into effect tomorrow and not today. Because of our present bias (especially for low-income population) we want to avoid trying to complete with today’s temptation and instead appeal to people’s ideal self in the future. This drives us toward more aspirational and optimal decisions.

4. Money is about opportunity cost.

“Every time you buy coffee, the money comes from something else. What is this something else? We don’t envision it. With money, the trade offs are really unclear. Every time we buy something, it’s about what we are not going to be able to do in the future” — Dan Ariely. Because money is about opportunity cost, our real goal should be not just to spend less but to spend on things that can make us the happiest.

5.Financial incentives to save are best used to motivate a one-time behavior but not repeated behaviors.

There is little evidence to show that financial incentives for repeated behaviors — like saving or health behaviors — have a lasting impact after the financial incentive is removed. There is stronger evidence to suggest financial incentives can help move the needle on one-time behaviors like signing up for a credit card, adding direct deposit or filling out an auto-savings form. In addition, the presence of a financial incentive matters more than the specific amount (i.e., a 2x vs 3x match) unless the amount is incredibly high. There is little empirical evidence that incentives help build habits, in fact, theoretical work suggests it may have the opposite effect.

6. To facilitate savings, people will need to reduce expenses or increase earnings.

Sadly, there is little evidence to support the rational approach for expense reduction. People underestimate their expenses, think they spend less than others and show low enjoyment and persistent with budgeting. Instead, we believe we should rely more on rules of thumb (easy heuristics) to help decrease and control daily spend.

7. The people who are most struggling financially are the least able to spend time, effort, and attention to address their financial life.

Resource scarcity places a cognitive tax on people’s bandwidth. Some studies have equated the cognitive cost of scarcity to be equal to the cognitive cost of a night without sleep. Therefore, we are more skeptical of solutions that require significant time and effort from LMI households, as they have the least of it to give and it’s likely not widely scalable.

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