There is a common thread in most of the conversations we have with our clients. All of them want to improve their member’s financial health; most are looking for new tools to employ. Financial education is not having the lasting impact on behaviors that the credit unions expected. Member’s behavior sometimes changed immediately after literacy programs were completed, but following up 3, 6, and 9 months later showed disappointing results. The training impact withered away; savings levels often returned to pre-training levels and budgeting and expense management tools went unused. The expected value of all of this training was not reflected in their members behaviors. They wanted to know, what now?
Financial literacy training is important, but if it is the only tool you use to improve financial behavior you are likely (as many studies have shown) to be very disappointed in its long term impact. Behavioral economists know there are many tools available that, with proper use and testing, are capable of shifting behaviors in a positive direction. Here are five of the most powerful tools in the behavioral economics toolbox:
- Limit Options. Yes, classic economics told us that we like options, and the more options the better; as a result, credit unions often expand the range of options they provide members and often see a decrease in effectiveness. We call this choice overload. Too many options overwhelm the decision maker and often result in no decision at all. One other effect of too many choices is that members are less satisfied with the choice they ultimately make. This is because the more options we have, the more we expect to find something that will exactly fit our preferences. This raises expectations and sets us up for disappointment in the end, as no choice is likely to be perfect.
- Set Defaults. Defaults are one way to reduce the number of decisions a member must make when considering a product or service. Members still have the freedom to make their own decisions, but we know that defaults are rarely overruled. It takes some level of thought and energy to change a default, and defaults suggest that the right course of action has already been analyzed by an expert, so members are inclined to accept them. It is critically important to establish defaults for the benefit of the member; establishing defaults whose first beneficiary is the credit union will dissolve members’ trust in you.
- Use Friction Wisely. Most of the developments in financial services revolve around reducing friction; making processes and products easier for the member to use. We store information so it does not have to be constantly reentered, we establish automated processes to reduce the risk of missed payments. That can be a good thing. But much of what we have done is reducing the thoughtfulness, the mindfulness of much of the day-to-day interaction with our financial wellbeing. Sometimes members would be better served if they paused; we need members to consider the usefulness of continuing that automated activity. Look for opportunities to add friction to processes, to slow things down just a bit when necessary. Make sure the behaviors that are good for members’ financial wellbeing are easy for them execute.
- Establish Reminders. Work with your members to establish simple reminders that nudge them toward good behaviors. Reminders about payment dates have proven to reduce late payments by a double-digit percentage. Reminders about steps in the loan process and reminders about needed documentation have a similar impact on loan completion results. Timely reminders about progress toward agreed upon savings goals has been very effective as well. But use reminders wisely, with a clear goal toward improving the members’ financial wellbeing. One reminder that I thought was painfully off key – I received a reminder that now that my car loan was paid off I should consider buying a new car and take out a new loan. How much better would it have been if the reminder was, your loan is about to be paid off, let us continue to debit your account each month for the payment amount and put it into your savings!
- Leverage Social Norms. We are all influenced to some degree by the behaviors of people we see as our peers. We do this not necessary because we want to be like our peers, but because our peers act as reference points. We look to see how they think, feel, or behave in a given situation. This effect is especially strong in areas where we, as individuals, may have limited experience or knowledge. By positioning financial behaviors, such as savings goals, as reflecting the behavior of a member’s peer group we can shift the individual’s behavior in that direction. The key here is to link the peer group characteristics as close as possible with the characteristics of the member whose behavior you are trying to shift. You want your member to see themselves as a member of the peer group whose behaviors you are using as targets.
These 5 tools are powerful if applied correctly – and they are just a small set of the tools behavioral economists use to help shape behaviors. If you really want to improve the financial wellbeing of your members, combining these tools with a solid financial literacy program is a great start. And if you don’t have a Chief Behavioral Scientist on call … you need to get one, today!