Reminders – A surprising powerful way to shape financial behaviors

It’s a question that has bugged economists and social scientists for generations – why so often do people fail to do things they have committed to doing?  Even in situations where the benefits of doing something are significant, or the consequences of not doing something are severe, compliance with deadlines, obligations or commitments is often very underwhelming.   People fail to show up for court dates, students fail to register for classes or don’t apply on time for financial aid, and members fail to make regular contributions to their savings accounts.  

Why are we so bad at following through?  

Financial incentives to shift behavior don’t have the anticipated impact, and penalties don’t consistently work.  Dan Ariely, the best-selling author of Predictably Irrational and professor of psychology and behavioral economics at Duke University, explains it like this: 

“Usually when people approach solving problems, they think, ‘Let’s just give people some information and then they’ll make the right decision’.  Change comes not from the inside, but the outside. If you want people to lose weight, give them a smaller plate. You have to change the environment.”

Smart organizations have taken some pages from the behavioral science handbook and have introduced low cost, low effort processes that are having a huge impact on behaviors.  Their idea?   Use focused, timely reminders to put obligations and commitments in front of their audience.

How is it working?

In 2014, 41 percent of individuals who received a summons from New York City for low level offenses missed their court date.  Failure to appear in court results in an automatic arrest warrant being issued; a pretty significant consequence. To improve attendance, the NYC court system tested a series of text messages reminding civilians of their court date and the result was a 26 percent increase in timely court appearances.   Think about that for a moment.  A series of simple reminders did what the threat of an arrest warrant did not – it got people to show up for their court date.

Learning from this success, several colleges and universities use targeted messages, reminding students about enrollment deadlines, class schedules, assignment and test due dates.   These institutions are having a significant positive impact on the number of students who graduate on time.  Additionally, some schools send text messages to high school students in June and July, reducing the impact of  “summer melt”, the infamous months after graduation when many students who have been accepted to college decide not to go.

What about financial institutions?  Increasingly,  firms are using messages to remind and encourage consumers to save.  

Here’s how one credit union structured a program:

• Worked with members to develop a savings plan
• The member agreed to receive status messages from the institution
• The credit union sent targeted, timely messages to their members reminding them of their commitment to save
• Further messages either acknowledged the plan was on track or identified shortfalls and encouraged  improvement

The program is working with savings levels up, even for some of the most financially at-risk members. Some credit unions are expanding the idea of timely reminders, giving their members the option of receiving text messages regarding car, mortgage or credit card payment due dates.   Would you do this even if the effect is to reduce the late payment fees your credit union receives?  

How the messages are framed, how success or shortfalls are described, and the frequency and timing of the messages are all important aspects that need to be tested with the member base.  To note: some institutions are using emails, but timely text messages appear to be more effective for most demographic groups.  

Leveraging message capabilities is just one way to help members improve their financial well-being.  Remember, it’s not enough to teach people what they need to do; you need to create an environment that helps them.  To do that, you have to understand what really influences how they analyze choices, make decisions, and ultimately behave.