Six Ways to Reduce Lender Risk: How we can apply behavioral science to say yes more often ?

Approved.?

Denied.?

One word makes a big difference. An approval can mean keys to a home, the capacity to start a business, an onramp to wealth. A denial can mean it’s back to the drawing board for how to make rent or get groceries.?

What if we’re saying no when we could be saying yes? What if, as an industry, we’re overweighting lender risk and underweighting applicant capacity??

At Sawa we believe that more people are creditworthy than they get credit for — and that we can ameliorate this problem by making more sophisticated assessments of creditworthiness, using behavioral science to encourage payback and engagement with creditors, and tapping into the power of community. Here’s how:?

1. Make more sophisticated credit assessments.

To start, we believe the system we use to make credit decisions should absolutely include the 45 million Americans who are credit invisible. Thankfully, it’s possible. Research from The Pew Charitable Trusts found that just a few months’ worth of regular bank or transaction data is all we need to make refined assessments of credit worthiness.?

We can also look at creditworthiness through the eyes of the Sawa Trust Engine. A member’s participation in their Sawa pod gives us accurate information about their capacity and credibility —?without them ever having to take on debt. The successful completion of multiple rounds of the Sawa Savings Wheel gives us a more accurate view of their credibility and capacity, which makes lending less risky and therefore more affordable.?

2. Nudge for good.

Next, we’re always thinking about how we can nudge for good. Human brains are not great at logical thinking or planning ahead. Knowing this about ourselves as a species, we need to make it exceptionally easy for people to make good decisions.?

Email reminders are one of the simplest ways to nudge. They’re inexpensive and extremely effective. A large-scale study found that email reminders, “which emphasized resolving current delinquencies in some treatments and preventing future delinquencies in others — were effective at reducing payment delinquency rates in general, and also reduced rates of severe delinquencies.”

As Richard H. Thaler and Cass R. Sunstein put it in Nudge: The Final Edition our aim is “to help people make the choices they would have made if they had paid full attention and possessed complete information, unlimited cognitive ability, and complete self-control” (8). Wouldn’t it be nice if everything in our lives had such an aim?

3. Ask for specifics.

Specificity is another powerful tool. When we name a specific savings goal or repayment goal, or name when, where, or how we’re going to do something we’re more likely to follow through. It’s the difference between “build my savings” and “save for a five-day trip to the beach in August” or “pay my debt” and “pay off my computer.”?

It’s a mind trick in a way: When we name what we’re doing, our awareness increases, and so does our perception of progress, which encourages us. A large field experiment found that specificity in repayment increased payments 12%. Researchers also found that asking credit union members to get specific about when they were going to make their next payment, using the simple phone prompt, “If you are going to pay within the next 24 hours, press 1,” significantly helped people get out of delinquency.?

4. Apply dynamic incentives.

Access to future financial products or services can also create motivation. If someone takes out a small loan and knows if they repay it on time they’ll have access to a larger loan in the future, for example. The same applies to savings products: a member joins a Savings Wheel at $10 a week, and when they successfully complete it, they unlock access to larger Savings Wheels. In one study, borrowers “whose repayment was linked to preferential future interest rates were 13–21% less likely to default on their loan.”?

5. Make it easy to pay.

When it’s easy to pay, it’s a lot easier to pay. One easy way to do this is to sync payments with paydays. Duke’s Common Cents Lab ran an experiment that encouraged members to align their due dates with their income, in addition to sending text reminders and auto-filling their forms, and saw a “69% reduction in loan charge-offs year-over-year in a rising subprime auto loan default environment.” They also saw an increase in the number of people making more than one payment a month: “from 6% to 25%.”?

6. Tap into the power of community.

At Sawa, we’re not quiet about the fact that we believe there is untapped power in the community. We believe that there’s uncounted capacity in the community and that belonging to a community increases motivation and engagement. We know our belief is also backed by research. Community interaction reduces default risk and having the option to chat with an expert or peer decreases anxiety and increases trust — even among those who don’t use the feature. When we feel less alone, we make better decisions and we feel better about those decisions along the way.

What if we could say yes more often?

Yes to more new homeowners. Yes to more new business owners. Yes to groceries this week and rent this month. Yes to having an option when financial shocks hit so they don’t expand into sinkholes. Yes to future generations with a stronger financial foothold built on the foundation of community. Yes to all this and more.?