Us humans are not as rational as we’d like to think.
We’re all prone to biases, or ‘errors in thinking’ that have the potential to negatively affect our ability to make good decisions. They are predictably irrational, and hundreds of them affect our decisions daily.
Recognising how these biases affect the way we communicate with each other is a key aspect of Behavioural Economics, which provides a framework for understanding how psychological, emotional and cultural factors affect people’s financial decisions.
Closing the customer experience gap
Behavioural Economics has been around for a while, and its application in one form or another is pretty widespread across sales and marketing in the Financial Services (FS) sector.
“Financial decisions usually have too many moving parts for the average person to make a rational decision. And that’s where Behavioural Economics fits in.” Martin Wheatley – Former CEO of the Financial Conduct Authority
However, we believe there is a massive area (certainly by volume, and arguably by importance to the customer), where the principles and practices of Behavioural Economics are pretty much universally ignored – the world of Mandatory & Regulatory (M&R) communications. We’re calling it the Cinderella Syndrome.
Every moment matters
The way a brand handles bad, complex and mundane news is often the truest test of its commitment to customer service, satisfaction and experience.
So although it may seem counter-intuitive, M&R communications can have a bigger impact on customers than discretionary marketing.
The big TV ad or the billboards they drive past on the way to work, even some of the perks you offer, really matter very little compared to being told that they – your loyal customers – are going to pay more interest, or lose benefits of their account that they’ve become accustomed to.
How you treat customers at critical touchpoints = your brand
Behavioural Economics reinforces this point in the principle of ‘loss aversion’. Studies on the topic repeatedly prove that people feel losses much more acutely than they do similar-sized gains. Each M&R communication could potentially spark negative emotional reactions that customers will forever associate with your brand.
In this context, it’s unfortunate that most banks’ marketing teams spend so much time and effort on their above-the-line activity and other discretionary marketing, while neglecting M&R communications almost entirely.
The business benefits of transforming M&R communications
No wonder that these letters or emails with their dry, impersonal headings like ‘important changes to your terms and conditions’ followed by pages of dense copy and text, invariably end up being ‘filed away’ somewhere to gather dust.
Even the most conscientious customers might only have a vague idea what the important changes are after reading them, never mind what the long-term impact is likely to be.
However, we’ve seen first hand with our clients in the Financial Services sector that the application of Behavioural Economics within these communications can drive significant benefits across brand, customer and business metrics, for example:
A 19% increase in NPS (Net Promoter Score) following the rewrite of a savings communication
Positive customer action improved by 35% in savings maturities with customers staying and taking up a better interest rate
Calls to the call centre reduced by 92% in comparison to a very similar communication prior to applying Behavioural Economics
Costs have been significantly reduced through enabling delivery through a customer’s channel of choice, but also by redesigning the layout, and the production of the communication.
The 8 biases that can make all the difference
From our experience, reducing the negative impact of biases is the best starting point for brands who want to improve their customer experience and make cost savings.
We begin by focusing on 8 key biases that have the biggest impact when it comes to M&R communications. Read short summaries of all 8 below.
Present Bias – We focus on our immediate wants and needs and give less attention to the future. For example: Not putting any money into a pension because we have immediate costs to cover, like childcare.
Defaults – A pre-set course of action that will take effect if the customer does nothing. It’s a really effective tool where there’s inertia. For example: Staying with a provider that gives poor service – even when we complain about them.
Reference points – We don’t evaluate things on their own merit but tend to assess them against false reference points. For example: Estimating the value of our house based on what we paid for it, not the latest market value.
Framing – We react differently to the same scenario if it’s presented to us in a different way. For example: Switching bank accounts because of an attractive offer without checking if it has the features we need, or how much the overdraft charges are.
Limited attention – We only pay attention when it’s grabbed, or if we force ourselves to concentrate. For example: Not transferring your savings balance at the end of a promotional interest rate because you didn’t read the maturity letter you received in full.
Mental accounting – We treat money differently in our minds, based on what we’ve decided it’s for. For example: Taking out a loan instead of dipping into savings. The interest we pay on the loan will be more than any we earn on our savings.
Loss aversion – We feel a loss much more deeply than we do a gain, so we try to avoid them. This can lead to us putting off more difficult decisions. For example: Taking out insurance we don’t really need – but we’d rather pay than face regret.
Social influence – We want to belong and be like everyone else. This means we might buy things based on social factors rather than whether a product meets our needs. For example: Using the same mortgage provider as our parents instead of shopping around for the best deal.
Knowing these principles is only the beginning however. Applying them consistently to your M&R communications is another matter entirely.