Over the recent years, numerous studies have highlighted the tangible business value that banks that form strong relationships with their customers bring.
A recent Gallup report, for example, found that engaged customers generate 37% more annual profits than non-engaged customers. However, too many banks still have inadequate participation strategies, which in the long run, could significantly undermine their hopes of competing and staying relevant in this current financial landscape.
Leveraging insights from behavioral science and implementing a financial wellbeing strategy can be a game changer for financial institutions that want to get serious about banking.
Customer engagement as a vital necessity in modern banking
It was only relatively recently that customer involvement was recognized as an absolute business necessity for banks. While banks have historically been problem-free due to a lack of competition within the industry, the level of investment in the fintech sector has doubled over the past decade or so.
At the same time, technological advances have continued to accelerate digital innovation and stimulate a growing consumer preference for easier access to digital services. This has created somewhat fertile ground for a new wave of rival banks – distinguished in terms of their digital engagement and marketing capabilities – to grow and compete with traditional banks.
Given that the increasing competitive intensity within the industry is far from slowing down, banks that fail to engage customers can not only risk losing significant market share, but worse yet – becoming irrelevant at the expense of these new fintech companies.
Moreover, with the next great intergenerational wealth transfer on the horizon, with an estimated £5.5 trillion worth of wealth set to pass through in the UK (with much of that money flowing into the bank accounts of Generation Xers and Generation Yers), the need for banks to attract The next generation of customers is more important.
Despite the urgent nature of customer engagement, a large number of banks still struggle to establish meaningful relationships with their customers. According to another Gallup report, only 32% of Americans report feeling confident in their banks and only 21% of Europeans feel that their bank wants the best for them, indicating that there is still a significant trust problem in bank-customer relationships.
The importance of financial well-being and behavioral change in increasing customer engagement
Customers have become more demanding in recent years and have much higher expectations on their banks, while being more critical of those who fail to provide services that meet their specific needs.
Customers simply don’t want to help manage their finances anymore, but they want to be reassured that their bank is doing what’s best for them, helping them control their finances and improving their overall well-being.
With this in mind, posting cannot be just an end goal. It must improve financial well-being in order to be effective in helping customers change their financial habits for the better and become more confident in their bank. In other words, an attractive financial service should not only attract the attention of customers, but also motivate users to maintain healthier financial habits.
Crucially, this requires a fundamental shift in how banks approach engagement, in particular a new focus on the end user and their behavioral profiles, rather than the product.
One of the main reasons banks nowadays often fail in terms of effective participation is their neglect of the importance of behavioral change in improving financial well-being. In fact, there is a common misconception that financial knowledge is sufficient to improve well-being. While awareness, knowledge, and skills are certainly necessary to help individuals make better financial decisions, they are not sufficient to enhance overall financial well-being.
Financial well-being and financial stress stem from endogenous factors, which means that improving them must ultimately entail a change in behavior and the development of healthy behavioral patterns.
Just like other behavioral changes, such as improving physical fitness levels, eating habits, or sleeping patterns, maintaining good financial habits can also have an overwhelming positive effect on an individual’s happiness, productivity, and overall well-being.
Looking at the worlds of health and fitness in particular, what makes apps like Strava so appealing is that they manage to bridge the intent and action gap and keep users emotionally motivated to achieve goals and build healthy habits.
This gap between intent and action is also an issue that needs to be addressed in the world of personal finance. The majority of consumers are well aware of the importance of saving money, yet only a small minority are satisfied with their own savings.
When designing their own digital experiences, banks first need to understand the mechanisms that cause the intent and action gap and then use that understanding when designing products to help customers bridge that gap.
Thus, banks need to create digital banking products based on a deeper understanding of human behavior in order to keep users motivated and drive behavioral changes. And this is where the science of behavior becomes vital.
Extracting insights from behavioral science to design financial services engagement
Among the many lessons learned from behavioral science is that humans make irrational decisions, especially in the context of making financial decisions, and that people have a very strong emotional attachment to money and financial matters.
One reason traditional personal finance management models fail so often when it comes to providing attractive and personalized services is their failure to consider how financial decisions are driven by customers’ emotions.
Banks have long thought about products and accounts rather than people and their needs, and often prioritize investing in the development of new technology over the challenge of understanding the psychology of their customers.
Instead, digital engagement must continue beyond the actual product, on an emotional and psychological level. As mentioned earlier, engagement is not just about getting people’s attention, but actually motivating users, both emotionally and psychologically, to change their financial habits for the better.
In this sense, intrinsic motivation is a very vital component of effective banking. What we have learned from decades of scientific research is that goals associated with intrinsic motivation, such as inner values, needs, and desires, are more likely to be met.
By helping customers relate positive emotions to their financial goals, for example, banks will be able to activate their customers’ intrinsic motivation and achieve long-term emotional engagement.
Another idea drawn from cognitive science is the concept of instant gratification bias, which is the tendency to favor immediate rewards over long-term goals. As humans, we are affected by the instantaneous gratification bias when making financial decisions, the latter often requiring the rejection of immediate rewards in favor of our future selves.
Banks can take advantage of this knowledge of instant gratification bias to make savings tasks more useful and thus reinforce this behavior in the future. For example, banks can provide immediate positive feedback on savings actions, design goal-based experiences that are linked to intrinsic motivation or allow customers to visualize their financial progress, to instantly turn saving money into a fun, enjoyable and rewarding experience.
Likewise, ‘alerts’, a behavioral science concept of using suggestions and small rewards to influence behavioral change, can be used to help clients make better financial choices.
Ultimately, there are a plethora of ways that insights from behavioral science can enable banks to open up new dimensions of customer engagement. However, there is an urgent need for modern financial services to evolve beyond the traditional personal finance management model, and for banks to truly connect with customers emotionally and take care of their overall well-being in order to stay relevant in this increasingly competitive financial landscape.
It is difficult to predict how well banks will succeed in this new age of banking, although using behavioral science to design digital experiences that guide customers towards better decisions will certainly be the key to success.
About the author:
Dr. Stena Soderqvist is the Director of Science at Dreams.
Stena holds a PhD in Cognitive Neuroscience from Karolinska Institutet in Sweden.