In recent years, numerous studies have highlighted the tangible business value of banks building strong relationships with their customers.
A recent Gallup report, for example, found that engaged customers generate 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 dramatically undermine their hopes of competing and remaining relevant in today’s financial landscape.
Leveraging behavioral science knowledge and implementing a financial wellness strategy could be a game-changer for financial institutions who want to take escrow banking seriously.
Customer engagement, a vital necessity in today’s banking
It is only relatively recently that customer engagement has been recognized as an absolute business imperative for banks. While banks have historically been fairly calm due to the lack of competition within the industry, the level of investment in the FinTech sector has increased over the past decade.
At the same time, technological advancements have continued to accelerate digital innovation and generate a growing consumer preference for easier access to digital services. This has created rather fertile ground for a new wave of challenger banks – which have excelled in both digital engagement and marketing capabilities – to grow and compete with traditional banks.
Since the increasing competitive intensity within the industry is far from slowing down, banks that fail to engage their customers could not only risk losing significant market share, but worse yet – becoming irrelevant at the expense of their customers. of these new agile fintech companies.
Moreover, with the next big intergenerational wealth transfer on the horizon, in which around £ 5.5 trillion of wealth is expected to pass out of hands to the UK (with much of that money going into the UK’s bank accounts). Generation X and Generation Y), the need for banks to attract the next generation of customers has become even more critical.
Despite the rather urgent nature of customer engagement, many banks still struggle to build meaningful relationships with their customers. According to another Gallup report, only 32% of Americans say they trust banks and only 21% of Europeans think their bank wants what is best for them, suggesting that there is still a problem with important trust in bank-client relationships.
The importance of financial well-being and behavior change in customer engagement
Customers have become much more demanding in recent years and place much higher expectations on their banks, while being much more critical of those that fail to provide services that meet their specific needs.
Customers no longer just want help managing their finances, but instead want the reassurance that their bank is doing what’s best for them, helping them take control of their finances and improve their well-being. general.
From this perspective, engagement cannot be deployed as a simple end goal. It must lead to improved financial well-being for it to be effective in helping customers change their financial habits for the better and become more confident in their bank. In other words, an engaging financial service shouldn’t just capture the attention of customers, but rather motivate users to adopt healthier financial habits.
Above all, it requires a radical change in the way banks approach engagement, and in particular a new focus on the end user and their behavioral profiles, as opposed to the product.
One of the main reasons banks often fail today in terms of effective engagement is that they overlook the importance of behavior change in improving financial well-being. In fact, there is a very common misconception that financial literacy is enough to improve well-being. While awareness, knowledge, and skills are certainly needed to help individuals make better financial decisions, they are not enough to improve overall financial well-being.
Both financial well-being and financial stress are caused by internal factors, which means that improving them must ultimately require behavior change and the development of healthy role models.
Just like other behavioral changes, such as improving fitness, eating habits, or sleeping habits, maintaining good financial habits can also have an extremely positive influence on happiness, productivity, and well-being. -be in general.
If we look at the health and fitness worlds in particular, what makes apps like Strava so appealing is that they manage to bridge the intention-action divide and keep users emotionally motivated to achieve their goals and objectives. adopt healthier habits.
This intention-action gap is also an issue that needs to be addressed in the world of personal finance. The majority of consumers are well aware of the importance of saving money, but only a small minority are really happy with their own savings.
When designing their own digital experiences, banks should first understand the mechanisms behind this intention-action gap, and then use that understanding when designing products to help customers bridge that gap.
Thus, banks need to create digital banking products based on a deeper understanding of human behavior in order to maintain user motivation and propel behavior change. And this is where behavioral science becomes vital.
Leveraging Behavioral Science Knowledge to Design Compelling Financial Services
One of the many lessons of behavioral science is that human beings make irrational decisions, especially in the context of financial decision making, and people have a very strong emotional connection to money and finances. .
One of the reasons that traditional models of personal finance management have often failed when it comes to delivering engaging and personalized services is that they ignore how financial decisions are driven by people. customer emotions.
Banks have traditionally thought about products and accounts rather than people and their needs, often prioritizing investing in the development of new technology over the challenge of understanding the psychology of their customers.
Instead, digital engagement needs to be sustained beyond the actual product, emotionally and psychologically. As mentioned earlier, engagement is not just about capturing people’s attention, but about motivating users, emotionally and psychologically, to change their financial habits for the better.
In this sense, intrinsic motivation is an essential element of an effective engagement bank. What we’ve learned from decades of scientific research is that goals related to internal motivation, such as inner values, needs, and wants, are much more likely to be achieved.
By helping customers associate positive emotions with their financial goals, for example, banks will be able to activate the intrinsic motivation of their customers and achieve lasting emotional engagement.
Another idea from cognitive science is the concept of instant gratification bias, which is the tendency to favor immediate rewards at the expense of long-term goals. As humans, we are swayed through instant gratification when making financial decisions, as these often require us to withhold immediate rewards for the benefit of future selves.
Banks can use this knowledge of instant gratification bias to make savings tasks more rewarding and thus reinforce this behavior in the future. For example, banks can provide instant positive feedback on savings stocks, design goal-based experiences that are tied to internal motivation, or allow clients to visualize the financial progress they are making, to immediately transform the business. savings process into a fun and enjoyable experience. and a rewarding experience.
Likewise, “nudges,” a behavioral science concept of using small suggestions and rewards to change behavior, can be used to help customers make better financial choices.
Ultimately, there are a plethora of ways that leveraging behavioral science knowledge can enable banks to unlock new dimensions of customer engagement. However, there is an urgent need for modern financial services to evolve beyond the traditional model of managing personal finance and for banks to truly connect with customers on an emotional level and ensure their overall well-being in order to remain relevant in this. increasingly competitive financial landscape.
It’s hard to predict how banks will fare in this new era of banking, although using behavioral science to design digital experiences that steer customers toward better decision-making is sure to be key to success.
About the Author:
Dr. Stina Söderqvist is Scientific Manager at Dreams.
Stina holds a doctorate in cognitive neuroscience from Karolinska Institutet in Sweden.