Financial inclusion has in recent years found itself at a cross-road. Ambitious government targets, private sector investment and innovation, and steadfast support from the development community has greatly increased the number of individuals with financial services globally. The availability and uptake of these products have in many cases however failed the litmus test for usefulness – active usage.
The international community has responded by reflecting on what this means for the usefulness of existing financial instruments in assisting the financially excluded to achieve their daily goals. Although this reflection is rational, it is murky territory to assume that would-be users of financial services always act rationally. Fortunately, service providers are increasingly forgiving irrational decision-makers and explicitly designing products and services for real people (who do not devote a great deal of time to computing cost-benefit analyses when selecting the optimal mix of financial instruments to get them through the week, month or distant years).
We should accept evidence that clearly shows the gap between human intentions and actions. An individual may have the best intention to save in novel banking products or timeously repay loans. The problem is, that more often than not, humans don’t act on their intentions.
A 2002 study by Paschal Sheeran suggests that fewer than 30% of our good intentions translate into noteworthy actions beyond wishful thinking. Psychologists refer to this as the intention-behaviour gap. Consequently, if we’re expecting individuals expressing interest in financial services to use them, financial services providers would do well to work with, rather than against, human psychology.
Robust, real world experiments show us how simple interventions that account for human behaviour, such as the tendency to forget or suffering from inertia, can change how individuals use financial services.
Introducing a default option, which plays on this tendency to do nothing or maintain the status quo, is one example of a behavioural intervention that can be used to encourage positive financial habits such as saving.
In Afghanistan, a 5% default, opt-out, savings contribution from the individual’s salary into a mobile savings account was as effective at driving active savings over a six-month period as providing an employee-contribution-matching incentive of 50%.
Although only a fraction of microfinance borrowers of Guatemala’s largest public-sector bank had opted to open a savings account, when served a default savings contribution equivalent to 10% of the loan payment, the number of people opting to use a linked savings account doubled and the final saving balances were five times that of the control group.
SMS reminders have also proved effective in driving usage of financial products. A year-long study of low-income youth in Colombia demonstrated that sending two monthly SMS reminders increased savings contributions by 43%.
However, the same technique cannot be applied with consistent results in every setting and for every financial product class. A loan repayment intervention in the Philippines showed that SMS messages were only effective in improving repayment when the name of the account officer who had previously serviced the client was included as part of the message.
In some cases, technology has been harnessed in applying behavioural theory. It can be difficult to persuade people to invest their income in a retirement fund as people generally display a preference for enjoying the immediate (spending money now) even though forsaking instant gratification to meet a longer-term goal (in this case saving for retirement) would result in more beneficial financial returns. As a response to this cognitive bias, a study was conducted using immersive virtual reality hardware to show people realistic computer renderings of their future selves. All the participants who were presented with an older version of themselves were more likely to accept future rather than immediate monetary rewards.
To assist financial services providers in this tricky task of navigating various interventions, insight2impact (i2i) conducted a systematic review of behaviourally informed interventions that have significantly impacted the financial decisions of individuals as they engage with credit, savings, payment and insurance products (excluding health insurance).
We identified 18 interventions that were evaluated in 97 studies through 124 lab or field experiments across more than 30 countries. The results from these experiments provide us with important insights into the unconscious factors that influence the financial decisions of real people.
Financial services providers are at the frontline of financial inclusion. We thus focused on interventions that providers can reasonably implement. For ease of references we categorised these interventions into:
- Customer choice architecture
- Commitment features
- Product pricing and financial benefits
- Customer communication
For a full list of these categories and associated papers please visit insight2impact’s behavioural interventions for financial services database.
The breadth of studies included in the database means that service providers looking to influence financial decision-making can garner insights into how to build hard or soft commitments into the sales process or product features, how best to present product options to consumers and which communication strategies are most likely to result in a desired outcome. Even financial incentives, which aren’t novel, can be more effectively applied by making use of insights gained from behavioural studies.
For more information on our behavioural science research please contact herman@i2ifacility.org.