We all make poor financial decisions sometimes.

Six behavioural flaws that make us stupid around money — and how banks could help

Being in debt can become an awful cocktail of fear and humiliation, and can lead to stories like these:

  • Facing eviction and seriously in debt, Lorna realised she couldn’t afford to give her 7 year-old son his lunch money. “I was too ashamed to send him to school without it, so he stayed at home with me instead.”
  • One of Chelle’s relatives left their car on her driveway for two hours. “There was a note pushed through my door saying bailiffs were repossessing it, because they thought it was mine.”
  • Harry and his girlfriend “took out payday loans to cover our bills and ended up with four companies chasing us for payments. We were suspicious of any knock on the door or unexpected phone calls. The debt caused arguments, tantrums, panic attacks, depression, and a lot of stress.”

11.6 million people in the UK are struggling financially. Every six minutes, another is declared bankrupt; whilst a further 12.7 million are described by the Money Advice Service as ‘squeezed’ meaning about half of the UK adult population are struggling to keep up with their bills and credit commitments.

Only 1 in 6 of those with debt problems seek help. The advice gap leaves many without the support they really need.

This financial predicament cuts right through society. It affects nurses, teachers, managers, drivers, public and private sector workers, students and graduates.

They’re people like us, our friends and our colleagues.

It’s not just the money. Financial fears cut deep: People who struggle to live within their means and fail to repay their debts appropriately are over twice as likely to experience a range of mental health problems.

The solutions seem simple. They aren’t.

Like obesity, financial problems can seem trivial to an outsider: Why don’t people just spend less money than they earn?

The answer is complicated. Humans aren’t rational, and they often make fast ‘heart’ decisions rather than slow ‘brain’ decisions (to simplify Daniel Kahneman.) Understanding how to make good decisions about money is difficult and daunting for many.

The six behavioural flaws that make us stupid around money

In 2015 the Royal Society of Arts published their Wired for Imprudence report explaining the behavioural hurdles that are responsible for the way people engage with their finances. Fluxx has been working with the RSA for the last couple of years.

They describe six behavioural flaws — fundamental human failings — that make it hard for us to be sensible around money.

  1. Cognitive overload
    Making decisions is hard. Financial services often include complex options and choices, so people seek the simplest option. Sometimes, this is a costly mistake. Paying the ‘easy’ default minimum payment on a credit card each month could leave you with growing debts and huge charges. And it’s a vicious circle; people in debt suffer stress, and face difficult and complex decisions about managing debts. They’re not well placed to make good decisions.
  2. Empathy gaps
    Have you ever been shopping while hungry and bought a load of unhealthy food? Psychologically, we aren’t one person, but many. Sensible decisions are forgotten when we’re in a different context. This great Buzzfeed piece on 20somethings and debt is full of examples like “I went through a break-up with a horrible bloke and decided to celebrate by spending money.”
  3. Optimism and overconfidence
    Overconfidence can lead people into traps like taking loans with huge penalty fees because they believe they’ll be paying them off early.
  4. Instant gratification
    The BBC’s Big Money Test found that people who buy on impulse are three times more likely to go bankrupt than people who don’t.
  5. Harmful habits
    This Buzzfeed piece is full of people who got stuck in patterns of debt: “banks literally threw money at me. Before I knew it I had three credit cards and two overdrafts.”
  6. Social norms
    Social pressures are remarkably powerful, and can send good sense out of the window. One study of lottery winners in Holland “found that after they win the lottery there is a greater likelihood that their neighbours will buy a new car.”

These behavioural hurdles are not personal character flaws. They are natural and common aspects of human behaviour. It’s just the way people are wired.

Just as unscrupulous banks and payday lenders use these traits to create addictive, profitable and ultimately damaging financial products, so they can act as a roadmap for product and service designers seeking to improve people’s financial lives.

Fix these traits and you’re well on the way to fixing people’s challenges with money.

At Fluxx we’ve been working with banks in the UK and the United Arab Emirates to design products and services that do just that.

Most recently we were in Dubai, talking to people about life in the Middle East and the challenges they face with money there.

Working with a bank that was determined to really look after their customers’ best interests, we designed and ran nine experiments over six weeks to help us understand how to solve those challenges and to see if people would use new products and services designed around their needs.

One of the experiments involved giving people ‘smart money suggestions’.

How to give people information they can really use

Being smarter about money isn’t actually difficult, there’s lots that can be done.

Want more money? Switch all your utilities and bank accounts to take advantage of better deals, use cashback sites and cashback credit or debit cards for purchases you’re going to make anyway, claim all the benefits and tax breaks you’re entitled to and make sure your tax code is right.

You can even sell your personal data, the contents of your shopping basket, or get rewarded for exercise; it all adds up.

It’s easy to say, but hard to do.

And with cognitive overload contributing to poor decision making, we wanted to design messages that would simplify people’s finances to make decision making as easy as possible, in order to…

  • Help them get a grip on their incomings and outgoings
  • Help them identify which outgoings are essential and which aren’t
  • Help them increase their income or reduce their outgoings to give them more disposable income, and…
  • Help them make the most of their disposable income.

We imagined an engine that was always working in the background to find the most relevant information to give to the person at the right time so that they didn’t feel cognitively overloaded.

Data ➡ Information ➡ Knowledge ➡ Wisdom

Inspired by Paolo Barbesino from Bank Austria, we applied the classic DIKW pyramid to banking information. Raw bank statement data is at the bottom and actionable wisdom at the top.

Most customer-facing innovation in banks over the last few years has been an effort to move up the pyramid; Lunar Way show future transactions on statements so customers can see what’s coming not just what they’ve spent.

HSBC has been experimenting with nudge theory so that for example, if a customer normally spends £15 a week on coffee and last week they spent double that, HSBC would alert them. They also let them know how their spending or saving behaviour compares to other people like them.

But being told how much you spent at a particular retailer or on a certain category of spending is still of limited use.

Is spending £100 a week on food shopping too much, or is that being a thrifty food shopper?

Who really knows?

At the wisdom stage, we’re taking all the information we have, and combining it with our experience to turn it into insights that are personal, relevant, timely and actionable.

A probably fictional Bank Manager, yesterday. [Source]

During the probably fictional Golden Age of Retail Banking, everyone got this kind of wisdom from their Bank Managers. Today, it’s the kind of service that a few wealthy people might expect from accountants or financial advisors.

Our challenge was to try and bring applied wisdom to everyone; democratising insightful financial information so people can make informed decisions without having to do the heavy lifting which we’re not — on the whole — wired to do.

The cleverest examples we’ve come across of this are from Brett King’s Moven. Its smart watch app encourages ‘impulse saving’ when it identifies a customer is under budget and by gamifying the saving experience it’s designed to make it a gratifying habit to have. These nudges are accepted 80% of the time — with no interest rate mentioned at all! The ‘break the glass’ feature also adds a psychological barrier to dissuade its customers from accessing their savings. And Moven’s ability to predict when a customer might need some transparently priced short term credit is exactly the sort of forward thinking insights we wanted to be experimenting with.

Testing smart money advice. In Dubai. With a chatbot.

Not all money advice in Dubai is smart

We recruited 20 customers to receive our ‘smart money suggestions’. They gave us permission to look into their finances over the last 6 months.

Each customer received at least three different messages over two weeks.

Customers believed the messages were coming from the bank’s new Artificial Intelligence chatbot. In reality, they were researched and written by hand, like a personal banking concierge service.

We’d let them know they were about to go overdrawn and offer to transfer funds. We’d find discounts at stores they used, suggest they switch their utilities, and — as it was Dubai — provide them with trend analysis for foreign currency and Gold prices.

It was a ‘Wizard of Oz’ experiment. For the customer, something magical was happening, but it was all powered by human effort behind the scenes. It’s unscalable without investment, but it let us understand how customers would respond to the idea.

Sample screens from our experiments

Did the experiment work?

All customers were given the option to opt out, and none did.

We saw real changes in behaviour too.

In Dubai, much like the UK, it’s generally expensive to withdraw from cash machines when abroad. After we explained that using their card for purchases was cheaper, we saw customers stop withdrawing cash and using their card instead. In another example, after receiving a message about how they could be smarter with their surplus money, several customers asked to overpay on their credit products or find out more about savings products.

At the end of the experiment, customers told us the messages helped them understand their finances better, felt personalised to their circumstances, and, crucially, made them feel the bank was on their side.

Doing the right thing for fun and profit

The experiment was good for customers — helping them avoid charges and look after their money — but was it good for the bank?

On the surface, it’s risky. For example, UK banks earn £1.2bn from unauthorised overdrafts every year. Why would any bank help their customers avoid such charges?

Banks in the UK are being told to make it easier for customers to switch current accounts. The Competition and Markets Authority recently said that it will require banks to put in place an open API banking standard, meaning customers can securely give third parties permission to access their data. This has big implications for smart services that could sit on top of a customer’s bank accounts and help them make the most of their financial situation or switch them to better accounts. Banks will also have to start sending smarter notifications to their customers too.

At the moment, customers don’t change banks because they think all banks are the same. And they’re right. Banks differentiate themselves with stupid ads, joining bonuses, cashback schemes and interest rates.

To really stand out banks need to offer distinctive products. And they need to prove that they have their customers’ best interests at heart.

In our experiments, people told us that they’d switch bank accounts in order to take advantage of the products and services we gave them to try.

This is a real acquisition strategy — more than just buying customers with a switching bonus. It also helps keep customers through loyalty rather than apathy. People also told us that they valued honest suggestions that sought to help them save money.

They trusted their bank — not just to be secure, but to look after their interests.

Research from Gallop in the U.S concluded that “demonstrating an interest in improving the customer’s financial wellbeing is the biggest driver of consumers’ confidence in their banks.”

Customers who thought that their banks cared about their financial well-being took out 13% more credit products and 22% more investment and insurance products with them than those that didn’t.

When customers strongly agree their primary bank cares about their financial wellbeing, those banks have a much higher total share of wallet — 72.5% said that bank would be the only one they’d need for their financial needs.

So what’s good for customer’s prosperity is good for bank account providers too.

At Fluxx we’re continuing to experiment in this area, working with banks around the world to help them help their customers manage their money better. If you’d like to take part in our next bunch of experiments around financial wellbeing, or are a bank that would be interested in having some of your customers involved, get in touch with me at nic.gray@fluxx.uk.com

Nic Gray is a consultant at Fluxx, Vice-Chair of Waltham Forest Citizens Advice and a former Financial Ombudsman.