Personalization technologies enable Behavioral Economics interventions in online banking

Personalization is a hot topic when talking about digital channels optimization. Technologies, such as Optimizely’s personalization offering, are developing quickly into a mature offering which has the potential to enable quite serious efforts on the front.

Though it’s a hot topic, I’ve had many discussions with clients who are looking at examples of possible use of this technology. They can see the promised benefits in theory but are looking for concrete ideas of possible projects that will deliver robust improvement in direct revenue generation or direct/indirect customer satisfaction.

So let’s look at how personalization technologies could be used in banking to improve customer satisfaction. We’ll look at a simple and a more complex example, both based on the insights from Behavioral Economics.

Simple application: online banking imagery personalization

Online banking dashboards are almost the definition of customer touchpoints that have enormous potential for behavioral intervention. They’re where clients will be provided new information and where they will make choices. In that context, they’re the perfect place to shape a client’s choice.

The main goal here would be to make it easier for a client to stick with her or his own goals, be it saving for a mortgage deposit or saving for their kids’ college education. Through behavioral economics we know that one of the most robust way to shape human choices are what is called priming effects.

Described succinctly, priming effects occur when people are reminded of something or put in a specific state of mind on purpose. This state of mind then has an influence on the choices they will make. Here, a simple way to prime online banking users to stick to their goals would be to use a specific image as the background of their digital banking area. I have already written on this but are some quick examples of imagery that should have a significant impact on behavior:

  • photo of their kids if they save for their education
  • photo of a house they like if they save for a deposit
  • photo of a holiday house they like if they save for a secondary residence
  • photo of a piece of gear for the single person to save for it
  • photo of vacation destination to save for holidays
  • etc.

Priming effects are robust scientifically and but are also intuitive. So how to implement this using personalization technologies? You could use personalization to prompt clients to upload the best imagery they would benefit from. Pull data from your CRM on people that are saving for college, then prompt these customers to upload a photo of their kids. For customers saving for a mortgage deposit, prompt them for house photo, etc. Personalization allows you to prompt them in the most efficient way using the data you already have in your internal systems.

The benefits in terms of customer outcomes and satisfaction should be significant and the bank would also be seen as more caring. Loyalty should of course be increased.

Now let’s look at a more advanced, but also more impactful, use of personalization.

Advanced application: reduce Myopic Loss Aversion using digital  personalization

The real power of personalization can be seen in this potential application. Myopic Loss Aversion (MLA) is a very well established human behavior tendency that has significant impact on the net return of investment accounts. A detailed definition is here, but in a nutshell, MLA is the combination of loss aversion and frequent evaluations of risky returns:

  • pleasure felt after observing a gain is inferior to the pain experienced after a loss of an equivalent amount
  • losses are experienced more frequently at narrow time scales

What it means it that given a stable and positive but risky investment performance (gets you +10% per year but half of the daily performances will still be negative), the investor will see a stable yearly performance of +10% if she only checks her accounts once a year. If she checks them once a month, some months will have a negative return for the month. And if she checks daily, then many days will have a negative performance for the day.

Of course in this context, the more often she checks, the more emotional pain she experiences, even though the performance is the same. The risk here, which is documented as a real risk occurring in practice by academic research, is that the more often investors check risky investment, the more often they will see a painful return performance, and the more likely they will be to sell this investment in favor of a less risky but inferior one.

Personalizing the way their online banking dashboard is displaying their performance information would significantly prevent the negative effects of MLA. Private banking clients are always assessed by their bank on their risk aversion profile during their first or second meeting. This categorization could then be used to personalize their online banking experience. For example, people assessed as more prone to succumb to MLA could be presented with yearly performance updates only, more frequent updates requiring them to dig deeper in their dashboard. This has actually worked for retirement accounts in Israel.

The best aspect of using a platform like Optimizely to personalize their experience is that Optimizely would also be able to monitor the impact of each design using A/B tests. Do people trade less? Do their net performance increases when using those personalized dashboards?

Imagine if you could actually state the personalized digital dashboards you are pioneering are boosting client’s investment performance of 1 basis point in average? How much easier would it be to get private banking clients to switch for your organization?

If you want to discuss this theme further, ping me for an intro call.