Open Banking or FedNow: Where to Start?
September 14, 2023 | 2 min read
We met up with Nancy Harhut, Behavioral Science Marketer, to talk about the field of behavioral economics. It's a field that can bring big results to financial institutions, enabling them to make real use of data.
You can watch the interview and read the full transcript below, which includes examples from Merrill Lynch and Cornell University.
Why should financial institutions care about behavioral economics?
The reason financial institutions should care about behavioral economics and social science is that there’s been a lot of research that behavioral economists and social scientists have done into how people make decisions.
And what they have found is people, all of us, men, women, rich, poor, young, old, highly educated, less highly educated, B2B environment, B2C environment, makes no difference. All of us rely on decision making shortcuts.
So in bank marketing, obviously we’re trying to get people to make decisions, right? Whether the decision is to open an account, to switch banks, to invest more, whatever it happens to be, there’s a series of decisions we are asking people to make and if we know, if science has told us that people rely on decision making shortcuts, we would be so smart as bank marketers to tap into those decision making shortcuts, because it will increase the likelihood that people will engage and respond to our messages.
What examples have you seen of an institution using this well?
So there’s actually a really good one, I wish I had worked on this but I didn’t. Merrill Lynch was trying to overcome something known as temporal discounting.
The idea is that we prefer short-term rewards vs. long-term rewards. So if you’re talking about investing for your retirement, saving for your retirement, you think I’ve got plenty of time for that, right? There’s a long time horizon, so instead of taking this $100 and putting it in my retirement account, I’m going to go out to dinner this week, or I’m going to go on vacation. Blow it in Vegas, right?
So you have to overcome that and Merrill Lynch did something really interesting.They found that the key is to get people to imagine their present selves in the future, and so what they did is they allowed people to upload a picture of themselves and run it through this age progression software so you could see what you would look like 20, 30, 40, 50 years later.
And what they found was, once you saw yourself, once you saw what you would look like in the future, you were much more likely to start saving. It made it that much more real. At the last agency I worked at we ran a similar experiment and we found a less expensive way to do it actually. We found a way to do it with copy, where we could kind of prime people with certain language that helped them think about themselves in the future. Imagine themselves in the future, and then act accordingly, which we were really psyched about because while the age progression software was really cool, it was a little bit more expensive than just having some copy written. But very interesting things going on in this space.
How else have financial institutions used behavioral economics?
They really hit it hard. It wasn’t necessarily like the catchy headline, or the big concept, but it was a strong support point on everything they did. For the same bank we also created a direct mail package that was hands down, in their words, the best checking acquisition package they had ever done. And what we did is we tapped into something known as the commitment and consistency principle.
Once you can get a small yes, you’re much more likely to get a second yes, a third yes, a fourth yes. You just have to get that first yes, and then you can build from there. So we looked at the bank’s customers, people who had something other than a checking account, and checking accounts can be great because once you get that checking account it’s kind of sticky, you’ve got some hooks in there and they don’t leave.
But we looked at people who had maybe taken out a student loan, or an auto loan, or maybe they had an IRA, some small thing. And we wrote to them and said, “Listen. Because you already do business with us, we would very much like to do more business with you. We’d like to make you aware of this special checking account that’s available. Here are some good reasons why we think you would like it.” But just leading with that reminder that they had already said yes to us before, they didn’t need to think about us the way they would think about a brand new bank.
Just think, we got that first small yes, and then we are upping that ask for the second larger yes. It worked really really well for them.
Anything you'd like to share about behavioral economics more broadly?
Well there are some interesting things in behavioral economics. There was a Cornell University study, and they found that if you have a chart or a graph accompanying your text or your copy, it provides instant credibility. It’s interesting. Cornell ran a study, and it didn’t have to do with banking, but I believe we can extrapolate it into finance.
Theirs was they had asked people to read about a new drug that was coming on the market, and they said to people “Okay, you’ve just read this. What do you think, and do you believe it?” 67% of people said “Yeah, I believe it. It seems to make sense.” They repeated the study, only this time it was the same copy but they also had a graph and the number jumped from 67% to 97%. And what the researchers found was it wasn’t that the graph added additional information, it wasn’t that it made the information more clear, it was that it lent it scientific truthfulness. Scientific veracity. It must be true. There’s a graph! I’m not really going to read the graph, but there’s a graph there! It just signals that oh, it must be true.
So that’s a perfect thing, I mean I would never suggest that you make up a graph, but if your content lends itself to a chart or a graph, and very often financial copy does, use it. Because it’s that decision making short cut. “Okay, this just seems more believable.”
Going forward the financial vertical can tap into behavioral economics and social science to their advantage the way many verticals can. It’s something that is becoming more and more embraced, and we are seeing the results and the results are positive. And I would encourage any financial institution to check it out.
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