By Mark Gibson
The disconnect between consumers’ self-perceptions and the reality of their financial health is striking, and suggests that financial services need to be doing something different. Findings from a recent Ernst and Young study—infused with insights from behavioral economics—point toward an exciting new path forward. Digital and mobile delivery, social media, gamification and lessons from physical wellness technology will all play a role. This new approach could catapult financial health and wellness from a “nice-to-do” to an essential and differentiating tool for customer and revenue growth.
The financial health paradox
New research from EY uncovers a yawning chasm between how consumers think they’re doing financially, and the actual state of their finances. Even more striking, the study suggests that improving consumers’ financial health will become one of the top imperatives in reframing consumer financial services.
The study asked consumers to rate their own financial health, and 83 percent rated themselves “good,” “very good” or “excellent.” Contrast this figure with what we know about their actual situation:
- 60 percent of Americans say they are financially stressed.
- 56 percent of Americans have less than $10,000 saved for retirement.
- 40 million American families have no retirement savings at all.
- 40 percent of Americans are not prepared to meet a $400 short-term emergency.
Fortunately, even though the vast majority of consumers rate themselves as financially healthy, the study found that most still want to improve. Importantly for bankers, the attractive 25-34 and 35-49 year-old age groups were most likely to be extremely or very interested in improving their financial health. Also relevant: mass affluent consumers are even more interested in improving than their mass market counterparts.
Intentions vs. behaviors
If the majority of consumers say they want to improve their financial health, why don’t the dismal retirement and savings statistics get better over time? After all, financial institutions and nonprofits offer hundreds of online tools, programs, and seminars on financial literacy. Not to mention the entire personal finance industry that has dedicated itself to providing useful how-to’s and calculators.
John Thompson, CFSI’s chief program officer and an expert on financial health, recently explained to ABA, “Consumers are saying, ‘teach me and help me to act.’” And action has been the missing link. “We need to start breaking the concept of literacy down into searchable bite-size chunks—learning about things quickly and taking action.”
In other words, there has been a ton of “teaching,” and not much “helping.”
But there has to be another explanation why all these people who say they want to do better don’t seem to do any better.
In addition to consumers not knowing how to start the process, there are two behavioral aspects that are getting in the way of our industry moving consumers forward.
First, by talking about budgets and reducing discretionary spending, consumers are made to feel bad for buying something that makes them feel good, like an expensive coffee drink. As a result, even people who have tried budgeting tools often abandon them.
Credit: CNBC Video “Why Budgets Are a Waste of Time”
Second, every time the financial industry or journalists publish alarming statistics—remember, 56% of Americans are woefully unprepared for retirement—this actually motivates fewer people to save. Jonah Berger, a well-known behavioral economist, told a recent class at the ABA Stonier Graduate School of Banking that the power of social influence encourages people to tell themselves that if they’re part of a large group or a growing trend, they must be okay. That’s right—every time we publish those alarming statistics, we actually motivate fewer people save for retirement.
Moving beyond nice-to-do
Bankers have often viewed financial literacy as something that’s nice to do—an extra that helps them reach underserved communities. However, EY’s recent findings suggest that financial health and wellness can be, and will be, much more. But first, we’ll have to clear the initial hurdles.
- Recognize that banking is boring—but finance is emotional. Banking is a necessary task that doesn’t engender much excitement. But building financial health is a much more emotional, engaging topic. Improving one’s financial situation directly benefits all areas of life, including family, health and travel. It’s no wonder the majority of consumers say they are interested in improving. Furthermore, the need is universal—just as strong with the mass affluent as it is with mass market consumers.
- Accept that customer-centricity is the baseline expectation. The business world has fundamentally changed. Consumers expect companies to do things that are in the best interests of the customers. And when it doesn’t happen that way, they have plenty of ways to broadcast their discontent. But the opposite is also true. When consumers find a company or product that delights them and treats them well, they tell everyone they know—and many people they don’t know—through social channels and reviews.
- Imagine a future growth strategy based on data. Understand each consumer to help them make better financial decisions. This approach promises to create sticky customer relationships that lead to additional product purchases and lots of referrals over time.
Helping consumers improve their financial health and thrive is one of the major emerging trends in consumer financial services. Clearly, though, we need to do it in new ways that are more effective. So, what are those ways and how can your institution provide more helpful and actionable tools to improve savings?
We need more nudging and gaming
We’ve acknowledged that financial health is critically important to consumers, and yet they’re doing little or nothing about it. All this human behavior—including the powerful force of inertia—suggests that the banking industry’s traditional approach to financial health and wellness is not enough. Content like seminars and reading materials work well for the small minority of consumers who have confronted their reality and motivated themselves to take action. (Remember that sliver of the population that signed up for PFM?), but it doesn’t do anything for most of the people who really need the help.
Where do we go from here?
- Harness the power of the “nudge.” Part of the answer lies in the work of another behavioral economist, Richard Thaler. In his book, Nudge: Improving Decisions about Health, Wealth, and Happiness, Thaler theorizes that people can be nudged to do things that are good for them. The classic example of a financial nudge was changing the 401k retirement enrollment from “opt in” to “opt out.” By capitalizing on human inertia, enrollments skyrocketed.
- Deliver nudges digitally. The other part of the answer is using existing and emerging digital technology to automatically deliver nudges as part of the consumer’s daily routine. Think about successful applications in other categories like physical health. Both Fitbit and Weight Watchers have used digital technology to provide real time encouragement and small nudges—and consumers have welcomed being digitally monitored, prompted and rewarded! These apps also employ gamification (“I just got my Great Wall badge!”) as well as social influence (“I got 1,000 more steps than my husband today!”). These encourage users to embrace the nudge and continue moving step by tiny step closer to their goal.
- Guide, don’t teach. That tiny step piece is very important. Rather than laying out a big complicated budget, users are encouraged to set achievable daily goals that, if achieved, will eventually add up to big changes in their physical health and appearance.
- Encourage, don’t criticize. It goes back to the element of action. Instead of nagging—“Don’t buy that expensive cup of coffee”—it’s about providing information and empowering decisions on how to earn and spend. This encourages consumers to weigh trade-offs on a daily basis – skipping things that don’t matter so they can splurge on what does matter – and still reach their daily goals.
- Make it automatic. The 401k example highlights another key piece of the solution—automate it and make it painless. The consumer don’t have to think about putting money aside each pay day—it just happens.
Emerging solutions in banking
How do we apply these techniques and bring them to life in our banks? And what will this solution look like?
“Banks have plenty of content and tools to educate customers on improving their financial lives,” says Mary Ellen Georgas-Tellefsen, managing director of Capital Performance Group. “The next step is to embed actionable features into digital apps—and perhaps even product design—that automates and gamifies savings and financial wellness.”
EY describes the value proposition in its report as “A new AI-driven financial health platform [that] will enable more relevant daily interaction with consumers in ways that ultimately will change financial behavior.” The report also offers a peek at what EY envisions a consumer dashboard might look like. It would aggregate all the customer’s financial information in one place, create a single financial wellness score to help track progress, and provide proactive financial advice based on actual behavior to help you improve your score.
There are several tools currently available that also illustrate what’s possible.
- ‘Go To’ Bankers – Umpqua Bank provides customers the Go To app, featuring a real live banker who “understands your goals” and “offers solutions tailored to you.” This approach lacks the scalability of monitoring every interaction to learn and provide real-time nudges. But it’s an important step in the right direction.
- Chatbots – There are many chatbots available to banks, and they overcome the scalability challenge of using live bankers. However, they still tend to be reactive. They don’t kick in until a customer visits a site or asks a question. Consumers need a digital assistant that assesses data and proactively offers prescriptive advice, and most chatbots don’t fulfill that requirement today.
- KeyBank HelloWallet – This mobile financial wellness tool embraces the gamification of a single financial wellness score. When the customer clicks on the score to find out specific ways to improve it, the tool provides a nudge.
Source: Key Bank.
AI-based digital bankers
Artificial intelligence will be a key element in bringing financial health technology to its full potential. The historic challenge with a digital interface is creating that personal human connection, but this can be overcome. As Elisabeth Laett, VP of business development at Exagens, puts it, “You need to create a conversation over time that builds trust. And the customer needs to like you in order to engage and do more business with you.” At their best, AI-based digital bankers have access to a customer’s account information as well as transaction behavior across channels. These digital bankers are also always “on duty” and able to interact with the customer 24/7. Laett adds: “the more time we spend together and the more relevant we make the conversations, the more likely you are to accept the advice.”
At least three approaches emerge in the digital banker space, and each one lays the foundation for providing customized nudges to consumers at scale.
- MX Helios Mobile Banking – This mobile banking platform integrates PFM capabilities behind the scenes and uses machine learning to identify trends and spot micro-opportunities for customers to improve their finances. It offers these suggestions in real time as it nudges the user through the mobile app.
- Exagens Personal Banker – This software solution incorporates behavioral economics and AI to have interactive conversations with customers, get to know their unique situation, build a relationship over time, and offer up nudges through the mobile banking app to improve their finances.
Source: Exagens Corp.
- US Bank Mobile Banking –S. Bank recently rebuilt its mobile banking app to aggregate functions like P2P payments, credit cards and mortgage into the app, and provides personalized insights and money management tips powered by AI.
Who will lead the way?
Call it what you will—financial health, financial wellness, financial fitness—banks, their customers and even the broader community all stand to gain. Successful parallels in both behavioral economics (uptake in retirement plans) and in digital gamification (physical fitness and weight loss) suggest that harnessing a customer’s unique behavioral information with AI and digital delivery can be a powerful value proposition. And the exciting thing is that the critical ingredients are already emerging in financial services.
Banks are in a unique position to fill this important need: they already have the client relationships, data and trust. Building upon that strong foundation, a digital financial wellness platform could just be the next “killer app” in personal finance.
Mark Gibson is senior consultant at Capital Performance Group, a strategic consulting firm that provides advisory, planning, analytic and project management services to the financial services industry. Email: [email protected]. LinkedIn.
