Posted By Jessica Weisman-Pitts
Posted on October 7, 2022
By Ginny Follen, GAABS certified behavioural scientist and tech marketing expert.
Whether you are a legacy bank, or a new-generation, born-in-the-cloud fintech, the challenges around winning, understanding and engaging customers are exactly the same. Using learnings from behavioural science and the irrationalities of consumer behaviours, as diverse as they are, can positively impact both your business and your customers.
What is behavioural economics?
Neo-classical economics assumes people are rational beings – they will make financial decisions based on their logical self-interest and pre-defined preferences. Behavioural economics was brought to the fore with the Nobel Prize for Kahneman and Tversky’s work[1] (but shows origins far earlier with Adam Smith’s ‘invisible hand’[2]), and acknowledges that people are not always rational. We know investing in our pensions is what we should do, but many people still do not[3]. Behavioural economics (also termed behavioural science) acknowledges our apparent irrationality in our decision-making and searches for explanations about behaviours, and also for interventions to influence decision-making.
Behavioural science and heterogeneity.
It barely needs explanation that behaviours across people and cultures are diverse, which makes universal truths that influence our decisions, unlikely. However, there are commonly accepted behavioural traits. Loss aversion is one: Kahneman’s Prospect Theory states people dislike losses more than they like any equivalent gain[4] (for example, a £1k loss, they might want to be compensated e.g. £2k). This can explain why households pay disproportionally more for an additional insurance premium for a relatively low-risk event like an earthquake, which from a financial point of view is irrational. This is because we expect to pay a premium for insurance, that’s just what we do. What we don’t like as much is paying an unexpected deductible when we make a claim – we view this as a loss of money – and we, therefore, try to avoid it[5].
It is behaviour such as this which has driven many financial institutions to consider learnings from behavioural science.
Using behavioural science in finance marketing for engagement and customer financial wellbeing
Revolut, a neo-bank, is exploiting common behavioural science techniques to improve its customers’ experience. For example, an easy-to-access, personalised area of the banking app is available to cancel those pesky subscriptions you forget to cancel (this appears to follow the popular EAST framework used by policymakers[6]). Revolut also leverages the ‘default option’ – which is a strong driver for altering behavioural decisions. (Altering a default takes more effort than just rolling with it!) Revolut has a ‘gambling block’ choice in its app[7] – this is where you can choose to change your default option for transactions to gambling merchants from: automatically processing the payment to automatically blocking the payment. (Although one might argue a better practice would be for the default to be the block, until you choose otherwise.)
A recent behavioural science field experiment tested a hypothesis on almost 400,000 customers of a traditional bank – Commonwealth Bank of Australia. This experiment was testing whether marketing the downsides of an offering, equitably alongside its advantages, would impact sign-ups or engagement with choosing between credit card products. Intuitively one might assume highlighting the negatives of a product would not improve its use. Customers who did sign up, however, spent more and cancelled less. Additionally, customers’ financial wellbeing was positively impacted – 10.8% of people were less likely to make late payments and face fines[8].
Using lessons guided by behavioural science learnings, even for a heterogeneous customer base, can provide opportunities for small changes to have big impacts.
Use behavioural science and adapt to the net-generation
Customers’ behaviour differs by generation. Those who are born since the mid 90’s have not known a world without technology, and according to scientific studies, technology use can re-wire our brains[9], with the starkest impact being on this ‘net-generation’[10]. A need for constant stimulation, driven by easy access to technology and its gratifications is one of the suspected consequences of this[11]. Businesses therefore need to be mindful of the changing desires of their customers.
Buy now, pay later is a product that neo-banks have embraced, that attracts the younger generations, which traditional financial institutions are now implementing in an attempt to entice the younger customer base[12]. Financial institutions, whether neo or traditional, must understand the behaviours altered by the proliferation of technology and pivot their strategies, both to improve customer wellbeing, and their business outcomes.
No matter how different people may be, at the end of the day, any business is marketing to the same group of heterogeneous people – whether they be traditional or neo institutions. Using learnings from behavioural science to guide marketing and product development can not only impact their bottom line, it can improve their customers’ financial wellbeing.
