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How can banks leverage behavioural science to mitigate the financial stress caused by the cost-of-living crisis

The cost-of-living crisis is becoming real in one way or another for most of us. Global instability and skyrocketing inflation bring devastating consequences for people and companies all around the world. The time when people could afford a more relaxed approach to their consumption and finances is gone. 

This shift in financial urgency will force people to become more aware of their finances and has the potential to motivate people to change their consumption habits.

According to the behaviour model discovered by B.J. Fogg, three components need to be in place for a behaviour to occur. These are motivation (the willingness to take action), ability (the ability to take action) and prompts that initiate the action.

While consumers in today’s financial context can be considered more motivated to handle the increasing financial stress, the financial industry has a lot to win by consciously boosting people’s ability to take action.

Important facts about ability 
  • Information is not enough. Banks often default to a strategy of providing information and education. It is usually the right starting point and can boost motivation if delivered in the right way. However, what enables change is a seamless connection to concrete actions.
  • Motivation and ability can be compensatory. The more motivation a person has, the less ability to take action is required and vice versa. However, since motivation is prone to fluctuate over time, it is rarely sustainable to rely on motivation alone when it comes to goals requiring persistence, such as saving money. If our motivation for a behaviour is not strong enough, or of the right sort, then we need to find ways to make the behaviour easier to perform. 
  • Financial decision-making and the role of ability. Customers need to believe in their ability to conduct a behaviour. When it comes to finances, our ability is not only determined by our environmental conditions, but also by our cognitive abilities. These abilities, such as self-control and working memory, are what allow us to come up with a financial plan and stick to it. 
  • The impact of stress on ability. Being financially constrained, with the accompanying psychological stress, causes significant decreases in cognitive functioning. In fact, just being reminded of a potential financial hurdle reduces the cognitive capacity to the same degree as losing one night of sleep.
  • Both real and perceived ability are powerful. Outcome expectancy is a powerful variable to improve the perception of what a person is capable of. Seeing is believing regardless if it is a simulation of a future state or an actual outcome.

To conclude, the banking industry has an important role to play in combating their customers’ financial stress generated by the cost-of-living crisis. While one can argue that the motivation to care for one’s finances has increased – regardless if it is forced on people or not, it is now time for banks to become true change makers and pin down how to best boost their customers’ ability to take positive actions. 

With 76% of the world population connected to a bank, this industry’s impact is significant. A positive change in behaviour has the potential to move the needle for both social and environmental sustainability. From my perspective, most banks are still struggling to get this right, however, the timing to invest in this area could not be better. 

Are you interested in hearing more about why now is the right time to invest in your customers’ financial wellbeing? Stay tuned for part 2 on the topic of boosting customers’ ability.

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