Why the key to effective engagement banking lies in behavioural science

Written by Dr Stina Söderqvist, science manager, Dreams
10th January 2022

Over recent years, many studies have highlighted the tangible business value brought to banks that form strong relationships with their customers.

Banks should look to utilise behavioural science when designing digital experiences

A recent Gallup report, for instance, revealed that engaged customers bring 37% more annual revenue compared to disengaged customers. Yet far too many banks still have inadequate engagement strategies in place, which in the long run, could significantly undermine their hopes of competing and staying relevant in this current financial landscape.

Leveraging insights from behavioural science and implementing a financial wellbeing strategy could well be a game changer for financial institutions that want to be serious about engagement banking.

Customer engagement as a vital necessity in modern-day banking

It’s not until relatively recently that customer engagement has been acknowledged as an absolute business imperative for banks. While banks have historically been fairly untroubled due to the lack of competition within the industry, the level of investment within the fintech sector has multiplied over the past decade or so.

At the same time, technological advancements have continued to accelerate digital innovation and prompt a growing consumer preference for easier access to digital services. This has produced a rather fertile ground for a new wave of challenger banks – which have excelled both in terms of their digital engagement and marketing capabilities – to grow and compete with traditional banks.

Given that the growing competitive intensity within the industry is far from slowing down, banks that fail to engage customers could not only risk losing significant market share, but worse – become irrelevant at the expense of these new agile fintech companies.

What’s more, with the next big intergenerational wealth transfer on the horizon, in which an estimated £5.5 trillion of wealth is set to move hands in the UK (with much of this money flowing into the bank accounts of Generation Xers and Generation Yers), the need for banks to attract the next generation of customers has become even more critical.

Despite the rather pressing nature of engaging customers, a large number of banks are still struggling to create meaningful relationships with their customers. According to another Gallup report, only 32% of Americans report feeling confident in banks and only 21% of Europeans feel that their bank wants what is best for them, which suggests there is still a significant trust issue within bank-customer relationships.

The importance of financial wellbeing and behavioural change in driving customer engagement

Customers have become a lot more demanding in recent years and are projecting much higher expectations onto their banks, while being a lot more critical of those that fail to deliver services that meet their specific needs.

Customers don’t simply want help with managing their finances anymore, but rather they want to be assured their bank is doing what is best for them, helping them take control of their finances and improve their overall wellbeing.

With this in mind, engagement cannot be deployed as just an end-goal. It must lead to improved financial wellbeing for it to be effective in helping customers change their financial habits for the better and become more trustful of their bank. In other words, an engaging financial service should not simply capture customers’ attention, but rather motivate users to sustain healthier financial habits.

Crucially, this requires a radical shift in how banks approach engagement, and in particular a newfound focus on the end-user and their behavioural profiles, as opposed to the product.

A key reason why banks nowadays often fail in terms of effective engagement is that they neglect the importance of behavioural change in improving financial wellbeing. In fact, there’s a common misconception that financial literacy is enough to improve wellbeing. While awareness, knowledge and skills are certainly necessary to help individuals make better financial decisions, they are not sufficient to enhance overall financial wellness.

Financial wellbeing and financially related stress both stem from internal factors, meaning that improving these must ultimately necessitate a change in behaviour and the development of healthy behavioural patterns.

Much like other behavioural changes, such as improving fitness levels, dietary habits or sleeping patterns, maintaining good financial habits can also have an overwhelmingly positive influence on one’s overall happiness, productivity and wellbeing.

If we look at the worlds of health and fitness in particular, what makes apps like Strava so engaging is that they manage to bridge the intention-action gap and keep users emotionally motivated to achieve goals and build healthier habits.

This intention-action gap is also a problem that needs to be addressed in the world of personal finance. The majority of consumers are well aware of the importance of saving money, yet only a small minority are actually satisfied with their own savings.

When designing their own digital experiences, banks first need to understand the mechanisms that are causing this intention-action gap and then use this understanding when designing products to help customers close this gap.

Thus, banks need to create digital banking products based on a deeper understanding of human behaviour in order to keep users motivated and propel behavioural changes. And this is where behavioural science becomes vital.

Drawing insights from behavioural science to design engaging financial services

One of the many learnings from behavioural science is that human beings make irrational decisions, especially in the context of financial decision-making, and that people have a very strong emotional connection to money and finances.

One of the reasons why traditional personal finance management models have often been unsuccessful when it comes to delivering engaging and personalised services is that they fail to take into account how financial decisions are driven by customers’ emotions.

Banks have traditionally thought about products and accounts rather than people and their needs, often prioritising investment in the development of new technology over the challenge of understanding their customers’ psychology.

Instead, digital engagement must be sustained beyond the actual product, on an emotional and psychological level. As mentioned earlier, engagement isn’t just about capturing people’s attention but actually motivating users, emotionally and psychologically, to change their financial habits for the better.

In this sense, intrinsic motivation is very much a vital component of effective engagement banking. What we have learned from decades of scientific research is that goals that are linked to an internal motivation, such as inner values, needs and desires, are much more likely to be achieved.

By helping customers associate positive emotions with their financial goals, for instance, banks will be able to activate their customers’ intrinsic motivation and achieve long-lasting emotional engagement.

Another insight drawn from cognitive science is the concept of instant gratification bias, which is the tendency to favour immediate rewards at the expense of long-term goals. As human beings, we are influenced by instant gratification bias when making financial decisions, as the latter often requires us to turn down immediate rewards for the benefit of our future selves.

Banks can leverage this knowledge of instant gratification bias to make savings tasks more rewarding and thereby strengthen this behaviour going forward. For example, banks can provide instant positive feedback to saving actions, design goal-based experiences that are linked to internal motivation or allow customers to visualise the financial progress they’re making, to immediately turn the process of saving money into a fun, enjoyable and rewarding experience.

Similarly, ‘nudges’, a behavioural science concept of using small suggestions and rewards to affect behavioural change, can be used to help customers make better financial choices.

Ultimately, there are a plethora of ways in which leveraging insights from behavioural science can enable banks to unlock new dimensions of customer engagement. There is an urgent need, however, for modern financial services to evolve beyond the traditional personal finance management model, and for banks to actually connect with customers emotionally and look after their overall wellbeing in order to stay relevant in this increasingly competitive financial landscape.

It’s difficult to predict how banks will fare in this new era of banking, although the use of behavioural science to design digital experiences that steer customers towards better decision-making will most definitely be the key to success.

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