In the 1960s, Stanford University conducted the so-called Marshmallow Experiment, a study conducted by Professor Walter Mischel in which a child was offered the choice of being able to eat a single marshmallow now, or if they waited 15 minutes, too. As you can imagine, some children resisted whilst others went for instant indulgence, eating the marshmallow right away.
This experiment shed unexpected light on people’s nature, their motivations, including their financial decision-making.
Good impulse control turned out to be a predictor of success and fulfilment of long-term goals. In other words, we can choose to have something now, or we can choose to have something bigger and better at a later time in life – by saving.
Every day we are faced with multiple financial decisions which test our ability to either receive instant gratification or delay at any given time. When it comes to saving, the question is not whether consumers want to save, but whether how banks can amplify that instant fulfilment through their digital banking channels.
The reason why I am putting the ball in the bankers court is because, if you know anything about behavioral economics, you know how irrational humans tend to be when faced with financial decisions:
- Customers are energized when they establish attainable goals, but the underlying feeling is one of sacrifice rather than the association with a more-enjoyable life
- Most consumers either don’t have the time or motivation to spend their time on managing savings and often times lose track on how much they have spent
Bearing these observations in mind, could banks help build new habits? In this blog post we aim to illustrate how banks could become trusted advisors to their customers who are struggling to stay focused, helping them save more efficiently and with very little effort.
CASE 1: HELP CONSUMERS BUILD SAVING HABITS
“If you create more value with what users have, they will feel wealthier”
In recent months, the user has been spending significantly less on mobile bills.
Armed with this knowledge, the system proactively suggests the user set up a new savings plan: put this excess money to one side.
With an automatic rule, every month the money would be virtually allocated to a savings pot.This movement removes friction for the user and helps to identify opportunities to save extra money.
CASE 2: EXPLORING SAVINGS OPPORTUNITIES
“If you advise users where to save, they will have greater financial freedom”
Depending on the user’s profile, spending behavior differs greatly. A millennial doesn’t earn the same salary or spend the same amounts on products that a parent in their 30s or 40s would.
This information can be used to identify new savings opportunities. In this case, the user spends above average on phone bills.
The bank, knowing this about the user, can recommend a change in phone company in order to cut costs and be more in line with their peers.
CASE 3: ANTICIPATING SAVINGS NEEDS
“If you predict and anticipate, users will enjoy greater peace of mind”
More often than not, a large percentage of your payments or direct debits are the same each month.
For that reason, it is possible to predict potential income and expenses for the coming months. In this particular case, the system has identified that the user pays for home insurance on a yearly basis, and proactively suggests that the user put money aside in preparation for this purpose.
Their banking tool would automatically separate that money every month, and the user would be fully covered when the time comes to make the payment.
CASE 4: KEEPING USERS FINANCIALLY FIT
“Banks are doing the hard work, so their customers don’t have to”
Irrespective of how financially prepared users are, unexpected incidences and expenses inevitably arise.
Faced with last-minute issues of this kind, banks can also identify situations and suggest specific financial products to solve each type of issue.
In this case, the user has bought a new MacBook which will be charged to his account in 3 weeks.
If that happens, the user is likely to go overdrawn. So the bank recommends that the user pay for their new purchase in several instalments.
The example of the Marshmallow test, and its comparison to digital banking shows us that good saving habits might come naturally to some, or be taught and internalized by others, thanks to a small nudge from their bank from time to time.
At the moment, banks do a great job of tracking their users’ finances. What is currently missing, and poses a potential opportunity for banks, would be to work on how to deliver the “pleasure of progress” to their users. I imagine that by effectively integrating more emotional aspects of financial decisions into our everyday money management habits and employing some of the cases above, banks can truly help develop better saving habits.