Long reads

Nudging Financial Services Towards Behaviourial Science

Joseph Hurman

Joseph Hurman

Associate Consultant, BJSS

Bloomberg lists it as a top job for the upcoming decade. Both Google and Uber have elevated specialists to their c-suite in recent years. Even the FCA encourages its widespread adoption. Yet the topic of behavioural science is still not wholly accepted within the private sector. However, with banks such as Barclays and Lloyds setting up dedicated teams in this area, the ongoing digitisation of financial services is proving to be a natural transition point for the academia behind behavioural science to migrate to the corporate world. If implemented in the right way; this can only be good news for customers and their experience.

World Record Insurance

Take Lemonade, the American InsurTech unicorn. Since hiring prominent behavioural scientist – Dan Ariely – as Chief Behavioural Officer in 2016; Lemonade has prided itself on fully integrating behavioural science into every part of its business model via an app which has not only set the world record for the fastest insurance pay-out, but even has customers returning unneeded settlements.

Policyholders make claims by filming a video detailing their claim and digitally signing an honesty pledge, features which have proven to have positive effects on trust within academic experiments and designed to deter false claims. This leaves the automated claims process free to run in just a couple of seconds, either paying out to the customer or escalating them to a human employee.

A key discriminator for Lemonade is their status as a Public Benefit Corporation, meaning social impact and profit coexist as organisational goals. Lemonade donates any leftover premiums to a charity of the customer’s choosing, aligning the incentives between policyholder and insurer, who therefore do not profit directly from whether the claim is accepted. Some customers have even asked to return pay-outs if their lost item reappears – a black swan event within the insurance sector.

This honesty and trust between insurer and policyholder, guided by behavioural science, is what facilitates the quick turnaround time and outstanding customer experience that has led to rocketing investor confidence.

The Digitalisation of Mental Accounting

Everyone that uses digital financial management apps will be familiar with the concept of dividing up a customer’s money, with the likes of Monzo and Starling introducing ‘pots’ and ‘goals’ to make saving more interactive and engaging for its customers. Crucially, however, this is not just a run-of-the-mill customer experience win, and its basis can be found within behavioural economics.

Imagine you receive a refund for a considerable expense, such as a transatlantic flight, would you:

A)      Use it to buy yourself an expensive treat priced outside your normal budget.

B)      Split it between expenses and savings as you would with your salary.

Researchers find that most people select the former, as the money in question has already been ‘accounted for’. It is very common to spend unexpected windfalls such as bonuses and tax rebates on extravagant items that normally would not even be considered.

Richard Thaler, the Nobel prize-winning economist, coined this phenomenon ‘mental accounting’. It is the digitalisation and simplification of this mental accounting that we see with the likes of Monzo and Starling, acknowledging the natural human desire to divide up money into simple chunks.

However, I believe retail banks can go further than just facilitating mental accounting. By outlining where this mental accounting leads to irrational losses, they can provide moments of real insight to customers. For example, imagine nudging a customer with a high-interest credit card and low-interest savings to ignore their mental accounting and pay off that debt with their savings. The customer becomes more financially aware and builds the trust they place in their bank, who are now looking after their best interests. In this example larger incumbent banks would need to balance the gain in customer confidence, trust and sentiment with the potential implifications of cannibalising traditional revenue streams from credit card interest. Whilst on its own this can look like a big leap, as part of a wider play to engage customers throughout their financial lives based on their behaviours it can help to build brand loyalty.

The Dawn of Behavioural Banking

Discovery Bank, the South African digital bank and self-proclaimed ‘world’s first behavioural bank’ , is another example of where this academic field has migrated into retail banking. By leveraging nudge techniques to promote rewards such as discounts at retail stores, they seek to push customers towards more financially conscious decisions. Discovery wagers that if customers move towards financial sustainability, this will benefit the firm too. Its Chief Client Officer, Phuti Sebidi, says:

“We believe that a shared value banking model that incentivises people to make better financial decisions will generate higher savings levels, lower risk and increased wealth for society as a whole”

Phuti Sebidi (CCO, Discovery Bank)

Nudge theory has started to be used more widely in public policy. However, implementing it in this way remains uncommon in the private sector, not least because it isn’t possible without a modern technology stack with strong data and AI capabilities. The importance of these features’ precision and reliability necessitates market-leading AI and data functions being built into the operating model, with even basic insights requiring substantial data collection and management as a key starting point. The ability to test and experiment with different types of nudges is invaluable. However, this is again reliant on the ability of a firm’s technology function to deliver fast, scalable and resilient change.

Overall thoughts

Although behavioural science can deliver considerable wins in customer experience, care must be taken to ensure these are implemented in a way which is mutually beneficial for both customer and firm. Any behavioural science integration must build and maintain trust between the two parties. Companies such as Lemonade appear to be on the path to success through its open dialogue, as well as its strong technological pedigree, facilitating continuous testing and fine-tuning of these methods.

Furthermore, successful integration of behavioural science into financial services not only requires  the behavioural insights driving the change but the ability to leverage the technology required to implement it. If organisations can get this right, and integrate behavioural science as a complementary piece in the customer journey, customers can begin to trust their provider and make more financially conscious decisions, and financial services institutions will reap the rewards.

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