Banking on behavioural science Banking on behavioural science

As customers, it’s clear that our relationship with our banks has recently been evolving. Several macroeconomic factors have shifted customer expectations and continue to do so. Challenger banks have been paving the way when it comes to digital offerings, focusing on the customer and configuring a tech-driven and customer-centric approach. Through getting under the skin of the realities of customers’ daily lives, they take an outside-in approach to product and service development. This has propelled the banking industry as a whole forward, with legacy banks stepping up to the challenge – innovating and going head-to-head with their own propositions.

The concept of behavioural science has played a pivotal role in the creation of these offerings, especially when it comes to financial wellbeing. In simple terms, “financial well-being is feeling secure and in control ofyour finances, both now and in the future”.

Behavioural science principles are used to incentivise financial decisions for customers. They can influence decision-making, change customers’ behaviours for the better and motivate them to sustain healthier financial habits. What’s critical to understand is that behavioural science provides a deeper understanding of human behaviour and, if used in the right way, aids the task of both retaining customers and motivating them to act in certain ways.

Evidently, banks are at a unique position to capitalise on this. Through the vast amount of first-party data and insight they have via their long-standing and comprehensive relationships with their customers, banks can leverage this field to help them reach their financial ambitions.

In the past, several banks have used behavioural science to their advantage – but it didn’t always benefit the end customer. For example, we’ve seen banks calculate and promote how long it would take customers to repay their debt if they only processed the minimum monthly payments. This anchors customers on making payments low enough to keep them in debt longer, which in turn generates higher interest income for the bank. In behavioural science, this is widely known as ‘sludge’, which is defined as a behavioural intervention that doesn’t have the customer’s best interest in mind. Historically, practices such as this have negatively affected trust within bank-customer relationships.

In contrast, we’ve recently been seeing a lot of banks using behaviour science to help both their customers reach their financial goals, as well as increase engagement and usage of their apps. Providers that use behavioural science achieve a win-win scenario for their customers and their firm. On one hand, customers are nudged toward reaching their financial goals and staying in control of their finances. On the other hand, this would typically lead to customers being more engaged with their providers – studies show that engaged customers bring 37 percent more annual revenue to banks.

Over the past few months, we’ve been reading a lot about the psychology of saving money and find the idea of “the best trick for saving is to eliminate the decision to save” fascinating. This is particularly effective when it happens during high motivation points, which tend to occur monthly (i.e. pay day). The concept of ‘saving without thinking about it’ is a powerful financial well-being solution which many banks and apps are currently leveraging.

Taking this a step further, banks need to start thinking about how ‘default bias’ is used as part of this theory. It’s human tendency for customers to tend to choose the option that requires the least amount of effort and time. By having a default option that would benefit customers from a financial well-being perspective, they’ll be more likely to proceed with this default choice, rather than opt in/opt out (something that would take them more effort and time). In practice, this translates to enabling automatic deductions directly from customers’ salaries as soon as these are debited in their accounts and allocated to their savings pot.

Some of us will be familiar with digital financial management offerings as part of banking apps. The idea of dividing up our money has been particularly popular over the recent years, with the likes of Monzo and Starling introducing ‘pots’ and ‘goals’ to make saving interactive and engaging for their customers.

Behavioural science also comes into play when considering how humans are often influenced by instant gratification bias, which is the concept of favouring immediate rewards at the expense of long-term goals. To overcome this in a financial context, many banks and digital financial management apps have designed goal-based experiences that allow customers to visualise the progress they’re making towards a financial goal. This motivates them to think for the longer term. As a result, it flips the process of saving money into a rewarding experience for customers, assisting in driving inner motivation and reinforcement of the commitment.

Financial management app, Plum, prides itself on its mission which looks to “a world where people effortlessly manage their money without having to worry, or even think about it”. What sets this offering apart is that, at its core, it’s based on behavioural science principles. By linking your bank and credit card, the app allows you to control your spending and automate your savings by automatically putting aside a set amount of money each month (i.e. default bias) depending on your financial and saving goals. It also tracks your amount against a longer-term goal (i.e. reward and psychological motivation). It’s a great example of the process of taking the ‘thinking’ out of saving.

As banks go through ongoing digitisation of their offerings, it’s important for dedicated teams to be set up in this area. If implemented in the right way, behavioural science can be critical in helping customers be more in control of their finances, and in turn strengthen the relationship banks have with their customers through increase in trust and loyalty.

Closing off with a few considerations:

• Banks need to understand their customers’ specific money habits, lifestyles, life stages and more, to establish a 360-degree view of how they can make their money work best for them
• Banks need to consider the when, how and where behavioural science principles can be used, to create a more effective experience
• Banks should think about how using principles such as default bias and the automation of processes (i.e. monthly savings) can increase the financial wellbeing of customers
• Banks can incentivise and motivate their customers to keep on top of finances by using reward-based approaches (i.e. reaching their savings goals in return for discounts at retail stores)
• Companies have a responsibility to ensure that interventions are used in an ethical manner that is good for the customer as well as the business – nudges should be transparent, and allow the customer to still make their own choices

KPMG is a leader in applying behavioural science expertise to clients’ most pressing challenges. Please do reach out to me if you would like to find out more.