Small nudges to improve financial health

Engagement Mechanisms

According to the IPA report, the commitment mechanisms that financial institutions can carry out to help their customers save are: “voluntary and binding agreements that people enter into to achieve specific objectives that might otherwise be difficult to achieve.”

Such agreements, when incorporated into the savings products that customers contract with financial institutions, prove to be an effective push to solve the challenges they pose. The main reason is that they force users to set aside part of their money according to the plans they have imposed on themselves. It’s true that the term ‘mandatory’ can make you back off, but do not be scared.

• The present is a priority: for many people there is nothing else but today, so the decisions that will benefit them in the future will be relegated in favour of those that have to do with the present. In this field there are different levels of demand: from ‘strong’ mechanisms that include financial sanctions for non-compliance, to ‘soft’ ones that are more psychological and focus on the disappointment one feels with oneself or with others when one does not comply. In all cases, the evidence shows that they work for reasons such as these:
• Social pressure: family or friends can be a source of expenses or financial pressures that affect savings.
• The future, what future?: keeping in mind what is going to come in, a while is complicated. Sometimes you save little because it’s not clear how much money you’ll need next month, next year, or a decade from now.
• Little self-control: one often thinks about saving money to meet a significant expense, but in the end one ends up spending on more tempting, rewarding... and immediate things.

The challenge is not only for savers, financial service providers must also take into account these considerations, although studies indicate that people prefer to be guided in the path of saving and not so much to be forced. Here are some ways to do this:

• Not saving is penalised: in products that are committed to saving, the monetary or psychological cost of not meeting the objective should be increased.
• Do not scare customers: with commitments that are too hard to keep and could make them back off.
• Less is more: it is not always necessary to impose sanctions in order to improve savings. Sometimes, the psychological commitments in which the person commits to others or to a certain end, can be of great help.

The Power to Do Nothing

What if, instead of having a person voluntarily sign up for a financial savings product, they are included directly in it and asked to opt out if they wish?

This practice, known as “opting out,” has increased the number of pension and savings plan customers in countries such as the United States. However, the financial institution must inform users about the product which they will be signed up for and give them the opportunity to choose another option or stop participating whenever they wish.

Why do people accept this kind of mechanism?

• First of all, today: users are usually very busy with the present, so it is difficult for them to make decisions for the future. This practice solves the problem for them.
• Postpone what’s difficult: the usual tendency is to delay actions that are more complex, also financially, such as taking sides for a savings product.
• Letting oneself go: there is a tendency to prefer the ‘status quo,’ the state of things as they are, regardless of the alternatives available, so people tend not to opt out of the financial product in which they are already involved to look for options.

Financial institutions can also take advantage of this practice to help their customers achieve the goals they want. How?

• Automatic deposits into savings accounts: automatically reserve a portion of the customer’s payroll in the savings account, unless the person does not want to.
• Automatic inclusion of savings supplements: put customers into additional savings programs, unless they don’t want to.
• Automatic payment of credits: the institution can make automatic monthly payments to help the customer pay for a loan, unless he or she opts for another solution.

‘Top of Mind’

Reminders are an affordable way to remind bank customers of good savings habits. Practice has shown them to be effective, both in increasing financial inclusion and in helping people achieve their goals. The reasons have much to do with those explained above: the general tendency of people to neglect future needs, prioritize today and procrastinate, i.e., delay action. How can financial service providers help through these reminders?

• Helping customers save: with bank reminders in the form of text messages or letters.
• A push to pay off loans: text messages are effective in increasing the timeliness of payments and the amount of loans paid off.
• To do what matters: personalized reminders are effective in collecting unpaid taxes and presenting urgent financial assistance documents in the case of the United States. They are also effective when it comes to helping people get down to work when opening or making deposits in savings accounts for items such as college or mortgage refinancing.

There is no doubt that these ‘little touches’ are an aid to saving, but it should be borne in mind that, with a good financial education to choose the right product and manage it properly, it will be much easier to achieve the goals you set and plan for the future.