The power of nudging in the financial sector
Advances in behavioral science are gleaning new insights into how customers can be nudged to optimize certain parts of their lives. Nudging in the financial sector is unlocking new possibilites for better finanical and planetary health that are set to revolutionize the field.
Nudging. It’s the latest evolution of a trend previously known under the catch-all buzzword Quantified self. Think fitness trackers, smart watches, baby health trackers and plenty of other wearables flooding the consumer market. Thanks to IoT (Internet of Things) and the latest technological advancements, humanity has reached a point in evolution where well-being and health are enhanced and, ideally, improved with the help of smart devices and apps. And the benefits of nudging
How does nudging and behavioural science relate to the financial sector?
It’s clear that nudges and tips from a sleep tracker can help consumers improve their sleep quality and that they can reap certain quantifiable health benefits in the mid/long term.
If the financial sector seeks to tap the full potential of nudging, we first need to take a closer look at how nudging works. One of the most influential publications in the field of behavioural economics was written by economists Richard H. Thaler and Cass R. Sunstein. Their book ‘Nudge’, written in 2008, dives deep into how rapid and instinctive behaviour vs. conscious and deliberate actions influence both humans and, on a larger scale, societies and governments as well.
Implementing nudging for sustainable banking
Our wallets are powerful tools for climate action. Imagine you wake up in the morning and check your bank account over breakfast. As you sip at your coffee, you get a positive awareness boost from seeing that your online banking app shows a reduction of your CO2 impact. Just like your fitness tracker, your online banking app encourages you to steadily improve your climate fitness: fintechs such as Novus, the UK’s first B Corp certified neobank, have embedded a nudging feature into their green banking products, thereby offering customers a whole new way of conscious consumption. The Novus banking app uses the ecolytiq software to provide their customers with personalised information on their carbon emissions. The integrated feedback loops help customers better understand their impact and contextualise personal sustainability data, with the goal of helping them reduce their overall environmental footprint.
The nature of consumers is shifting – long gone are the days of a passive consumer base doing everything that brands and companies want them to do. The power of technology – not only fitness trackers, but also the huge amount of information available on the internet – have made possible the transformation of passive consumers towards enlightened prosumers taking more conscious purchasing decisions with the swipe of their card. Decisions that – despite a more conscious way of spending – ultimately help reduce the environmental cost of their lifestyles.
The market potential for conscious consumption driven through banking is huge: According to a McKinsey estimate, the global revenue potential of impact accounts amounts to $50-60 billion. Hyper-personalised financial products that put sustainability at their core increase a financial institution’s value proposition and thus render it a lot more attractive to today’s sustainability-conscious consumers. According to Cone (2017), approx. 85% of GenZ and Millennials prefer to buy from companies that address social and environmental issues.
Unlike older demographics, the younger generation is well-informed about climate change since it will be the first generation that is directly hit by the effects of global warming.
The pitfalls of nudging in the world of green banking
Let’s face the uncomfortable truth: people don’t like to be told what to do. “Stop eating meat! Become a vegan!” won’t do any good. Even less so if it appeared as a prompt in your online banking app. This is an example of the automatic system that Thaler/Sunstein were referring to. There are better approaches for educating consumers towards more sustainable spending and, ultimately, conscious consumption.
A method that will help banks to leverage behavioural economics through nudging people in their online banking can simultaneously incentivise sustainable spending.
The secret power inherent to sustainability data-enriched online banking is that the content is a) hyper-personalised, b) leverages the well-known trend of the “quantified self”, as seen with fitness trackers and other IoT wearables.
Sustainable banking is safe, easy to implement and, first and foremost, it meaningfully helps to engage consumers through nudging/promoting the conscious use of their money.
Originally featured on Digileaders
Co-written by Yuki Hayashi and Shruti Rai