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 behavioral 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 of your finances, both now and in the future”.
You’re probably wondering why and how behavioural science found its way into banking
Behavioral science principles are used to incentivise financial decisions for customers. They can influence decision-making, change customers’ behaviors for the better and motivate them to sustain healthier financial habits. What’s critical to understand is that behavioral science provides a deeper understanding of human behavior 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.
For good or for bad?
In the past, several banks have used behavioral 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.
Behavioral science with a purpose
In contrast, we’ve recently been seeing a lot of banks using behavior science to help both their customers reach their financial goals, as well as increase engagement and usage of their apps. Providers that use behavioral 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.
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