Behavioral Science in FinTech: Why Now?

Dan Ariely. Esther Duflo. Steven Levitt. Do any of these names ring a bell? These are some of the people who have spearheaded the field known as behavioral economics — a discipline that studies the effects of psychological, social and cognitive factors on economic decisions. Behavioral economics can be applied in a countless number of ways to improve the financial decisions that consumers make. I love that Cinch Financial has integrated nuggets of wisdom from the field into their work from the get-go with the end goal of users experiencing the benefits. I believe that by incorporating the discipline holistically within their app, they’ve gained a leading edge in the field. As I researched the marriage between FinTech and behavioral economics further, I noticed a growing trend in other FinTechs incorporating the field into their work.

Why now? A lot of the companies such as the ones highlighted below started out by building artificial intelligence technologies. Over time, they found that predicting customers’ behaviors using massive amounts of data only addressed half the challenge. They also needed to deeply understand how to improve customer engagement, and how to frame recommendations to get customers to change their behaviors.

Here are a few of these companies that are trending toward incorporating behavioral economic product features:

Qapital: Like several other FinTech companies, this startup wasn’t aware of the benefits of behavioral economics when they first set up shop. Qapital was started by two Swedish ex-bankers. The company was originally launched in Sweden, and they offered a personal finance dashboard to track customer spending, similar to Mint. It was only upon their relaunch in the U.S. in 2015, that they realized how much more successful they could be if they used gamification to encourage people to save more. Later that year, Dan Ariely, the famous behavioral economist joined the team as Chief Behavioral Economist.

Lemonade: This startup aims to lower the cost of homeowners and renters insurance through technology without the usual hassle. The company has raised $60 million. They started out analyzing massive amounts of customer data in an effort to replace traditional brokers with machine learning algorithms. At the end of 2015, they also decided to bring on Dan Ariely as their Chief Behavioral Economist to better understand their customers. Ariely says he was impressed with their technology, but was unclear of his role. It was when Lemonade told him they were trying to foster trust, not suspicion in the insurance space that he saw potential for his role as a behavioral economist. He now helps them to understand why customers might behave in a certain way, and how the company can help customers to make better decisions. One noticeable example: Lemonade’s decision to donate any surplus premiums to charities. Behavioral economics research shows that when customers know that part of their fee is going to charity, they’ll be less likely to cheat on their insurance claims.

 Digit: Digit is one of numerous savings apps that analyzes customers’ income and spending patterns. They then automatically set aside $2 to $17 in an FDIC insured account to encourage savings. The company launched in 2014, and has raised $13.8 million so far. However, it’s recent use of behavioral economics research has been getting lots of attention. The tax refund is the single largest inflow of non-salary cash Americans receive each year. Digit offers a way for customers to make a pre-commitment to saving a percentage of their tax refund. To track the effectiveness of this new approach, Digit is partnering with CommonCents Lab based out of Duke University. The group is using behavioral economics to identify ways that low- and middle- income Americans can improve savings habits. These findings can often be extrapolated to all income strata.

 EarnUp: The startup offers a way for people to pay off their loans and mortgages more quickly. EarnUp syncs paychecks and expenses, and automates payments to loans and mortgages. The company wasn’t aware of the tremendous potential behavioral economics could have on their work until they too began working with CommonCents Lab. They found that a very simple change in phrasing could get people to pay more toward their loans and mortgages each month.

 Behavioral economics is grounded in rigorous, real-world data, and Cinch has recognized its power in motivating behavioral change in the context of financial habits and recommendations. I’m happy to see others following suit.

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