A Decade of Behavioural Banking

This month I've been reflecting on a decade of working at the intersection of applied behavioural science and retail banking. It has been quite the journey! Here are 10 lessons I've learnt from 10 projects I've worked on.

Lesson One: Map the Transactional Ecosystem

Earlier this year, I helped a bank introduce a new point-of-sale device into a large South African township. The intention was to make it easier for customers to use their cards and digital payment channels instead of relying on cash.

I've investigated the cash-to-card/digital payment behavioural challenge many times over the years, but during this project, it became vividly clear to me how important it is to map out the wider social context when working to move away from complex behaviours like cash transactions.

From my research, it became apparent that there was a small but important stakeholder (foreign nationals) in the transactional ecosystem who were constraining the wider transformation of behaviour within the transactional ecosystem because of a rigid structural limitation imposed on them (limited access to bank accounts without work permits).

No matter how easy, accessible, or attractive the proposition we provided to our customers, without finding a solution to the indirect constraint in the system, the shift away from cash would remain stifled. Foreign nationals operating as merchants would continue to demand cash for their products and services, pushing local banking customers to continue withdrawing cash from ATMs to access their goods and services.

At a more abstract level, the problem above relates to a social principle the writer and statistician Nassim Taleb calls 'The Law of Strong Minorities', which points to the observed pattern where a small minority can have a outsized effect on an indifferent majority, because of either a strong conviction, religious value, cultural barrier or a more formal structural limitation like national law.

The general lesson here though is to make sure I map the stakeholder ecosystem surrounding the target audience, and identify the influences that these surrounding stakeholders have in shaping the behaviour of interest.

Lesson Two: Limit New Product Marketing Until After Research & Testing

Last year I supported a banking team with behavioral research around a new product they had recently launched. They wanted to understand the impact of one of the product's key features as a motivational driver for the adoption and usage of the new banking product.

My research (and that done by an internal team) both support the hypothesis that the product feature in question did not affect adoption and had very little effect on continued product usage behaviour. Additionally, by including it, the product was limited in serious ways.

The problem was that the marketing teams had already launched a set of above-the-line and in-branch campaigns, highlighting this particular feature as a core differentiator in the market. There was now a risk of creating inconsistencies and false brand promises if this was changed.

The case points to the importance of doing behavioural research and testing as far upstream in the design process as possible. This can be tricky in a fast-moving financial technology company, but the value generated and reductions in risk will be well worth it.

Lesson Three: Assess the Feasibility of Implementation as Early as Possible

I've helped conceptualise some incredibly innovative behavioural banking interventions, thoroughly informed by the scientific literature, grounded in a well-founded understanding of the root causes of a problem, and aiming to change narrowly defined and well-thought-through behavioural objectives.

...And yet, still, the interventions fail to be built because the requirements for implementation weren't fully appreciated.

This is where having a good grip on the internal operational flows, design and development processes, and the bureaucratic dynamics of the banking organisation are all important.

As a result, implementation moves from a conversation that is had post the designing of an intervention to something that is discussed as part of the intervention ideation and prioritisation phase of a project.

Lesson Four: Resist the Urge to Jump to Monetary Incentives

As a result of operating in a banking context, where a lot of what goes on is looked at through the lens of.. well.. money, there can be a tendency to throw a monetary solution at all the existing behavioural problems that arise.

Some examples:

"How do we get customers to use their cards more often? Make transaction fees free for card usage, and add a fee to ATM cash withdrawals."

"How do we get customers to repay their loans on time? Add interest and monetary penalties for late payments, and give them access to more money on their next loan if they pay back this loan in a timely manner."

"How do we get customers to save more of their money for rainy days?" Increase the interest rate as the total amount in a savings account increases."

"How do we get small business owners to make use of the bank's POS devices? Reduce the device purchase cost and the ongoing transactional fees for usage."

"How do we get customers to engage with their mobile banking app when setting up debit orders, checking balances and transferring money? Tie app usage to a loyalty program, where customers get financially rewarded for active engagement."

Monetary incentives and penalties can work, but it is important to recognise that they are not the only intervention tools in the behavioural change toolkit. Sometimes simply removing friction and hassle factors from a financial product take-up journey can go a long way. Other times, leveraging social norms and signalling trust can have a strong effect on adoption. Even just explaining the obvious benefits of an offering in relation to the customer's own existing needs and drivers can significantly change behaviour.

Lesson Five: Consider the Psychological Impact of the Intervention

Interventions can be potentially impactful, cost-effective and easily implementable at scale, and yet are still to be avoided.

Why? Because of the subtle psychological second-order consequences, that aren't immediately obvious, and yet over the long run, can have a significant negative impact on the customer experience, and the bottom line of the bank.

An orthogonal example of this is Rory Sutherland's revolving door fallacy. He noticed that in major cities, upmarket hotels replaced their doormen with electronic revolving doors. This meant a big save on efficiency (due to a reduction in doormen labour costs), and a seemingly smoother entry process for their customers.

And yet, with hindsight, it became clear that the doormen were playing an important role that had not been considered. These doormen were the first touchpoint for a customer and the touchpoint the customer engaged with every time they re-entered the hotel. They were a point of human contact which generated a warm and friendly experience at the transition between the outside and inside of the hotel. They were having an enormous impact on the customer experience, but because the effect was subtle and psychological it wasn't considered as one of the dimensions when evaluating the economic costs and benefits of the hotel entrance renovations.

I've come across countless examples of doormen-like fallacies in the retail banking space, but one of my favourites is an intervention, me and my team designed for an East Asian bank a few years ago.

The behavioural objective was to do with timely loan repayments, and we designed an intervention that leveraged the social panopticon effect, knowing that the customer group were sensitive to 'saving face'. We also worked out that a large portion of the customers lived in high-rise buildings which required publicly visible post-boxes. Knowing this, we changed the color of the physical letter envelopes that were sent to notify customers of their late repayments. With time the association between late repayment and the publicly visible purple letters would evoke feelings of discomfort, due to the social sensitivity of the audience, and wanting to avoid being categorised by their community as a late payer...

This is a powerful intervention, and would certainly have had an enormous impact. But at what cost to the customers' well-being, their relationship with the bank and the reputation within the local community? The embarrassment and feelings of shame may have turned into animosity and resentment towards the bank, creating further barriers to repayment, and potentially harming these customer's relationship with the bank.

Making an effort to ask questions about the subtle psychological impact of an intervention, the second-order effects and social risks, won't make you the most popular person in the product or communications team, but the inquiry may lead to huge psychological and economic savings over the long run.

Lesson Six: Don't Underestimate the Impact of a Small Change at Scale

There are many reasons why applied behavioural science works so well within a retail banking context. For one, there are a myriad of challenges that involve the closing of intention-action gaps, a real sweet spot where behavioural insights can play a role. Secondly, behavioural data in the form of transactional behaviour, financial product takeup decisions and administrative account activity are all passively tracked, making it easy to measure the impact of interventions, and the ROI of changing a particular decision. But most importantly, the nature and scale of digital retail banking, means that small smart changes at key customer touchpoints can have a disproportionate effect on customer and business outcomes.

If you've got 20 million customers moving along certain system rails, actively engaging with digital interfaces and transacting via several regular payment channels, small changes along these flows can have an enormous impact.

One of the textbook examples of the disproportionate impact of small interventions is the 'Benefits Finder' tool that Commonwealth Bank created in 2019. The tool was created to assist CBA customers with access to Australian government benefits, rebates and concessions, that they may not have been aware of or had the motivation to pursue.

The digital tool is a smart piece of technology built with a good behavioural lens in place, but at its core, Benefits Finder is just a simple humble piece of well-designed software. And yet, so far the tool has led to more than $1 Billion (!) in grants, rebates and concessions being received by customers since its launch.

A personal example comes from a project I was part of several years ago, which aimed to prevent at-risk loan clients from falling into arrears. The intervention involved the development of a propensity model for identifying our target group, and a simple call centre and direct communications intervention, that was heavily informed by insights from our customer research and the behavioural literature. The communication channels used were already active and ongoing, so the only real costs were from the research, data analysis and content redesign, which according to an impact evaluation, saved the bank over R25 million in revenue that had been provisionally written off as bad debt.

Lesson Seven: Understand the shifting product roadmap

One of the key elements of the applied behavioural science approach to solving banking problems is the unwavering focus on the details, nuances and subtleties of a product, service or communication experience. More than any other approach I know of, the behavioural lens dives deep into the finer-grain components of the customer context. You'll often hear behavioural practitioners talk about getting 'uncomfortably specific' with one's goal, and 'mapping intricacies of the choice environment'.

The problem is that in a banking setting, the context (be it a product, service or communication experience) often changes, both directly through adaptations to the product or service itself, or indirectly through wider operational, structural or cultural changes that affect the context of interest.

As a result, there is a risk here that can never be fully avoided. Rather than aiming for full prevention of situational change, one should manage the change risk through foresight, and sensitivity to the broader waves of changes that are present at the time of investigating the context of interest.

To do this, I've found it to be incredibly helpful to have sight of the product or service roadmap and to be in close contact with all the internal stakeholders who are driving or approving changes related to the situational context of interest (e.g., a product take up journey, service flow, in-app interface, etc).

Lesson Eight: Untested Assumptions Can Be Dangerous

Sometimes a seemingly intuitive and reasonable solution can hurt customer experience and behavior, and in the process create more problems than it solves.

A few years back I was working with a bank that was interested in understanding the impact of translating its product communication content from English into the local first languages of its customer base.

The assumption was that customers would be able to understand the product's benefits more clearly, onboard themselves more easily and feel more affinity to the bank speaking to them in their familiar first language.

These assumptions turned out to be completely wrong....

Customers were accustomed to speaking in their first language in social settings, but hardly ever read product content in this language, meaning comprehension of product info went down when it was communicated in their first language.

English was also found to have been implicitly branded as the 'language of business', adding subtle layers of credibility and trustworthiness that weren't previously considered. There were other more nuanced insights, that I won't go into here, the point is the reality turned out to be very different to what would initially be presumed to be the way forward.

This lesson also points to the immense value of field research, both qualitatively in the form of interviews, product testing and ethnography, as well as quantitatively in the form of surveys and experiments. Sure it consumes some resources, but the bank, in this case, was going to spend millions on tailoring all the written content of its product range into first languages, which would have not only been ineffective but also led to negative effects on the customers, their brand and ultimately the bottom line.

Lesson Nine: Setting Up an Internal Behavioral Science Capability

A big question I often get asked is 'Where is an internal behavioural science team best suited to be positioned within the retail banking org structure?' I've worked with teams that operate in strategy units, marketing teams, product verticals, and data analytics departments.

Another big question is 'whether the behavioural science capability should be a centralised stand-alone unit, or dispersed across the organisation?' Typically the centralised unit takes the form of an internal consultancy or research agency that receives (or goes looking for) projects from across the business. While the dispersed model embeds the behavioural science skillset in existing product, marketing, servicing, and operations teams.

A third question that is relevant here, is 'How to measure the success of an internal behavioural science team across time'? As Behavioral science typically plays supportive roles rather than being stand-alone product owners, teasing out their impact can be tricky.

With all three of these questions, and questions like them, I've learned to shift my attention towards a more fundamental question: Did we positively affect the right behaviour?

This question seems simple on the surface, but it holds important components about the strategic direction (right behaviour) and impact (positive affect).

As a result, a subsequent question can start to be answered: Was our intervention effective? And if we can answer this, it provides us with some level of validation that our understanding of the root causes (drivers and barriers) of a particular behavioural problem is correct.

Understanding the necessity of answering these fundamental questions, provides clarity on how to answer the initial three questions regarding team setup.

For example, behavioural science teams that are set up in positions within the organisation that make it extremely difficult to evaluate the impact of their interventions (even if it's just simple evaluation), create an uphill battle for themselves in measuring team success and thus justifying their value to the company over the longer term.

As a result of struggling to answer the question, did we positively affect the right behaviour, the teams have to build very complex models and narratives to affirm their utility, which takes attention and resources away from just doing the work.

Other internal teams have difficulty because of their distance from the development, implementation and operationalisation of their intervention suggestions.

The consequence of this being that their behavioural banking interventions can reach the concept stage (and perhaps the prototyping stage, but unless they are fully involved with the product or communication teams responsible for the final executions, a lot of the nuances and precision of their interventions get lost, or sometimes not even implemented at all.

With this understood, it becomes clear that the internal behavioural science capabilities that are the most effective are those that are close to (or have good relationships with) executing functions (communication, marketing and product teams). This typically leads to a hybrid model where there is a central team, but with dispersed capabilities functioning with executing teams, to drive implementation and collect the necessary data to track the impact.

Lesson Ten: Keep Attention on the Customer Problem

With the pace of innovation and volatility of trends in the world at the moment, it can be easy to get swept up in all the new shiny solutions as they present themselves.

These novel innovations are exciting and interesting, but for the large part they can be a distraction from the perennial question at the heart of all the work I do:

What real human problem am I solving here?

One of the core components of the behavioural lens is that it offers us insights into the aspects of human nature that remain relatively stable and predictable across time and context.

No matter whether a customer is manually cashing out physical cheques or getting a sophisticated AI to automate their debit orders in accordance with fluctuations in their account balance, their inherent human tendencies, needs and inclinations will remain relatively similar.

By applying a behavioural lens in combination with conventional research methods, it can become easy for a bank to filter through the noise and come upon the root of the issue that needs to be solved. The challenge is to keep attention on the customer's problem and ignore solutions until the roots have been fully understood.

Work with me:

If you work in retail banking and are interested in how insights and techniques from behavioural science may benefit your team, please get in contact.

I have extensive experience operating at the unique intersection of behavioural science, business research and retail banking. I am based in Cape Town, South Africa, but have worked extensively with retail banks and fin-tech companies around the world, from Australia to Spain, India, Ghana and the UK.

Within a retail banking context, I have worked on a large number of diverse projects all connected by the shared intention to solve a specific behavioural challenge that the bank is facing.

These challenges range from product-related behaviour challenges, such as remote account onboarding, reduced frictions to consolidating loans, adopting POS devices by sole proprietors, taking up relevant insurance policies, engaging with financial planning tools and applying for credit successfully.

Transactional behaviour challenges, such as increasing salary drops, debit order switching, timely loan repayments, regularly contributing to a savings account, limiting unnecessary large cash withdrawals and shifting everyday spending away from cash and towards card and mobile payment tools.

Administrative behaviour challenges, such as getting the customer to renew their cards before expiry, updating their personal info via banking apps, and customising features within rewards programmes.

I've also worked on interventions to change frontline staff behaviour and shift employee norms to create more engaged, communicative and productive staff.

If you work in retail banking or would like to collaborate on a retail banking behavioural research and design project, please get in touch.

Contact me directly through LinkedIn or via [email protected]