Humans Are Not Calculators

Using Behavioral Science to Design Fintech Nudges That Work

If humans were as rational as economics assumes we are, then financial education could make many of us better off. More information, better financial literacy, better choices. Of course, we’re not very rational, especially when it comes to money. That’s one of the big takeaways from behavioral science: knowledge is not enough.

In fact, financial health surveys of American households show that on average “people know they are not financially secure, and they want to be,” reported Wendy De La Rosa, who’s the principal at Common Cents Lab. “So, we thought to ourselves: maybe people just don’t know what they need to do in order to become financially secure.”

But when Wendy’s team asked people to list things they could do to improve their financial security, 92 percent could list three or more actions, such as opening a savings account or working more hours. “People know exactly what they need to do,” Wendy told us at Flourish’s behavioral science session at this year’s SXSW. “Information does not change behavior.”

She also cited a 2013 analysis of 200 experiments that tried to link the impact of financial literacy on financial behaviors. “What they found,” she said, “was that financial education accounted for 0.1 percent of the variance in financial behaviors.”

Financial literacy is still necessary to help consumers get ahead, but not sufficient. What else can companies do? “We can create behavioral interventions to improve our financial well-being,” said Wendy.

The ‘Three B’ Framework

At Common Cents Lab, Wendy works with fintech companies to design products using the best insights of behavioral science. Building a customer experience that accounts for all the irrational ways we deal with money. Her approach is called the ‘Three B’ Framework.

First is behavior. Rather than knowledge, Wendy advises companies interested in financial health to measure behavior change — it’s behavior that will ultimately make a difference.

Second, barriers. “Every click, every signature, every step, every field, every form, is a barrier,” said Wendy. In finance, consumers fill out lots of forms. While there’s a strong incentive for data-driven companies to ask lots of questions on a signup form, that only creates barriers for customers.

The need to hold lots of numbers in your head can also be a barrier. Most customers probably do not know the balances in all their accounts or what bills are due when. The time it can take to transfer funds is a major barrier. And one of the most famous nudges, opting in vs. opting out, is about barriers.

Finally, companies should think about benefits in psychological terms, not just economic terms. As a benefit, “financial health is in the future and it’s not something that makes me feel good,” sad Wendy, “it’s something I know I should do.” That’s a weak incentive.

Removing Barriers

Using this framework, Common Cents Lab recently worked with one of our portfolio companies, Chime, a mobile-only bank helping consumers build financial health.

Together, they identified a number of barriers to automated savings transfers. One of the most salient is the risk of overdraft fees after money is transferred from your checking to your savings account.

Think about all the irregular deposits and withdrawals for your checking account: you get a biweekly paycheck, make a monthly house payment, a credit card payment is due at another time of the month, and at some point, you go the ATM.

With this irregularity, the most common form of automated savings — monthly transfers of a fixed dollar amount — are out of reach for many liquidity-constrained consumers. So, Chime offered consumers the chance to automatically save a percentage of their paycheck every pay period.

“When you get paid more, you save more,” said Wendy. “This type of program can actually create meaningful savings and it’s become one of the most popular options for Chime.”

Designing Products for Humans

Another way to help consumers improve their financial health is to reduce the amount of information presented to consumers — at least all on the same screen or at certain times.

For example, Wendy’s team worked with Even on an experiment where consumers could opt-in to “hide” their savings balance. Of course, they could unhide it with a few clicks, but creating the gentle barrier was a nudge, and it subconsciously helped consumers avoid spending that money.

“Humans are not calculators,” Wendy said. Showing customers where all their dollars go doesn’t necessarily help them stick to a budget. Instead, Common Cents worked with another of our portfolio companies, Propel, whose app helps food stamp recipients check their balances and get discounts, to show consumers “frequency budgets.”

Many monthly expenses are fixed in the near term, such as your rent, car payment, student loans. Day-to-day, “those things are not budgetable,” said Wendy. So Propel shows users how to budget for the things they could control. For example, they could afford to eat at restaurants three times a week.

The biggest lesson from behavioral science for fintech entrepreneurs is to “be maniacal about designing simplicity,” said Wendy. Most people want to make better choices. By removing barriers, and understanding human biases, nudges can make a real difference and help people achieve financial health.

(For more insights from Emmalyn Shaw, follow her on Twitter and Medium)