Takeaways from the Latest Research in Consumer Financial Decision Making
Once a year I take a break from industry conferences and vendor analyst days by going to the Boulder Summer Conference on Consumer Financial Decision Making, hosted by the Center for Research on Consumer Financial Decision Making at the Leeds Business School at the University of Colorado Boulder. Academics, regulators, central bankers, and a handful of private sector people (like me) gather to discuss the latest research in the field. For many bankers much of the content is, frankly, too academic, but there are always some nuggets worth passing along to those who are interested in forging closer connections with their banking customers. My key takeaways follow.
Consumer data is valuable; advertisers & consumers don’t get their fair share
We all know that data is valuable; The Economist has even called it our most valuable resource, the new oil. Banks have historically not done a great job of monetizing the data they have, but neither have consumers. Consider a three-actor model for internet advertising consisting of an advertiser, an ad exchange, and the consumer. In different scenarios (which vary by who has how much information on consumer demographics), the ad exchange typically is the big winner, the advertiser comes in second depending on how much data they have, and the consumer rarely gains any of the economic benefit. Who’s going to step up and design a business that helps consumers monetize the value of their data?
Scope Insensitivity can be used for good
I’ll admit that this is a new concept for me, and one that is completely counterintuitive. Here’s an example from a site called LessWrong:
Once upon a time, three groups of subjects were asked how much they would pay to save 2,000 / 20,000 / 200,000 migrating birds from drowning in uncovered oil ponds. The groups respectively answered $80, $78, and $88. This is scope insensitivity or scope neglect: the number of birds saved - the scope of the altruistic action - had little effect on willingness to pay.
Researchers studied this phenomenon with credit card bills. They found that a group of people struggling with debt tended to pay roughly the same (rounded) amount on their credit card bills each month, regardless of the balance, a classic case of scope insensitivity. Here’s the clever part: it turns out that if people are paying, say, $50 once a month, they’re generally willing to pay roughly that twice a month, thereby improving their financial position over time.
Getting people to take action, let alone change, is really tough
An experiment in the UK tried five different ways to let consumers know that they could earn a higher rate of interest with a different kind of savings account at their existing bank. In the best case, only ~10% of those notified acted on the offer. There were a variety of hypothesized reasons, and there was certainly a great deal of consumer inertia at play, but I was frankly surprised at the low take up rate. The most successful scheme used a form that a customer could sign and mail back in to make the switch. It was familiar-looking and relatively simple, but still had a low acceptance rate. I’d bet that a lot of people were suspicious of the offer; it simply looked too good to be true, and why would my bank offer to switch me into a product where I’d be earning more?
I also liked the categorization of three flavors of switching costs. Paraphrasing, they’re ignorance, inertia, and inattention. While it may be difficult to rank the relative importance of each, bankers seeking to change behavior should be clear about which obstacle they’re trying to overcome.
Using Prepaid Accounts to set aside funds shows some promise
I’ve long advocated that banks and credit unions consider taking a portion of their marketing dollars and use them to pay consumers directly to encourage better financial behavior. An experiment tested various methods to encourage consumers who held the American Express Serve prepaid card to save. There are now some early indications that incentivizing consumers by paying them $10 to try out the savings feature is an effective strategy. More details are available at a landing page for the study here; it contains a link to the full report.
As the research from the CFPB states,
The results emerging from this pilot suggest that incentivizing prepaid card customers to save, and providing an opportunity for them to do so using a savings feature that keeps funds dedicated for saving separate from those used for spending, could provide tangible financial benefits. Consumers in this pilot demonstrated a willingness to take up the savings feature, indicating interest in alternative savings vehicles, and some customers also reported actual changes in their financial behavior.
Financial Education, done right, can work
Much work at prior Boulder conferences has examined the failures of financial education / literacy programs to make a significant difference. My hypothesis has been that many of them simply weren’t very good, so they didn’t work. To simplify, it’s the difference between having a good teacher guiding a well-designed course vs. a bad one teaching crummy material. As program designers learn what makes a program good, they’ll design better offerings, and efficacy will improve. An interesting pilot on 529 enrollment used parent education via a 45 minute session, together with targeted incentives and a thoughtfully designed curriculum, showed promising results. So, too, did an experiential program called My Classroom Economy that incorporated elements of financial education into classroom settings throughout the day, regardless of the course, and without having dedicated lessons set up specifically to teach financial literacy.
Like the American Express experiment, the use of a $50 offer to seed the 529 account was critical in enticing people to take the time to open the account before they left the education session. Immediate action to overcome inertia, together with a financial incentive, was critical.
Caveats and wrap-up
Let me end with a caveat: the researchers are much more precise, measured, and nuanced than I am in their reporting of their findings. They are extremely careful to note the limitations of their research and circumspect about its broader applicability. I may be overenthusiastic in my interpretation, and have not taken the time to caveat my interpretations of their research as carefully as they would. Nevertheless, the insights that these and other researchers continue to generate have potentially-far reaching implications as banks try to improve their relationships with customers and generate win-win outcomes.