BEHAVIORAL FINANCIAL PRODUCT DEVELOPMENT: Primer, Progress, Frontiers

1. BEHAVIORAL FINANCIAL PRODUCT DEVELOPMENT:Primer, Progress, Frontiers Jonathan Zinman Dartmouth College and IPA’s U.S. Household Finance Initiative (also J-PAL, NBER)

2. A. Primer • Symptoms and Causes: • Behavioral (Household Finance) Economics 101 • Applications: • Markets • Your employees • Scope today • More about architecture • Much less about marketing, persuasion

3. Financial Illness: Symptoms Widespread low financial resiliency • Little savings for many households • High debt reliance: expensive • High “money on the table” • Poor shopping, mediocre management • Low financial sophistication • Problems => Opportunities A. Primer

4. Financial Illness: Causes • (Behavioral Economics 101a) # 1 Cognitive biases that stack deck toward spending/borrowing, away from saving/accumulating • In preferences: costly self-control, loss-aversion • In expectations: “things will get better” (or at least not worse) • In price perceptions • Underestimation of compound interest • Underestimation of borrowing costs • Limited attention A. Primer

5. Financial Illness: Causes • (Behavioral Economics 101b) # 2 Mistakes borne of misguided heuristics, other cognitive limitations • Information/choice overload • Anchoring • Low (financial) literacy, numeracy A. Primer

6. Financial Illness: Causes • (Behavioral Economics 101c) # 3 Limited opportunities for learning • … on high-stakes decisions • Mortgage/house • Job • Marriage • Car (and financing it) • Even high-frequency decisions can have uncertain long-run implications • Credit card use (what’s right debt load for me/my family)? • Changing life circumstances creates moving targets A. Primer

7. Financial Illness: Causes • (Behavioral Economics 101d) # 4 Markets sometimes exacerbate consumers’ cognitive “bugs” • Advice markets are a mess and limited in scope • Who covers the household balance sheet? • For the mass market? • Price competition in product markets helps, but only partly A. Primer

8. Taxonomy of Behavioral Factors (see DellaVigna JEL) • “Cross-cutting” biases/heuristics/ limitations • Anchoring • Limited attention • Innumeracy A. Primer

9. Alternate Taxonomy A. Primer

10. B. Progress • By way of examples: • 3 completed pilots • 7 in-progress pilots • All with “retail” financial service firms (D2C) • “Wholesale”– particularly through employers– is another promising channel (E2C)

11. Completed Pilot 1: Performance Bond for Smoking Cessation • By way of examples: • “Put Your Money Where Your Butt Is!” • Bank offered in Philippines • Bank account offered to smokers • “Deposit money you were spending on cigarettes” • Agree to a urine test in 6 months • If nicotine free: get your money back (no interest) • If not nicotine free: your money goes off to charity • Result: • 11% opened an account • 30 percentage point increase in smoking cessation • Example of a “commitment contract” B. Progress

12. Commitment Options • Commitment contract = voluntary restriction, or self-provided added incentive, in service of goal attainment • Performance bonds • Liquidity restrictions (e.g., spending limits) • “Cut me offs” • Peer support/social reputation (stickk.com, other models) • (Also automation; e.g., auto-deductions) B. Progress

13. Completed Pilot 2: • Messaging as a Product Feature SMS Reminders for Goal Attainment • Pilot • With savings account holders at 3 different banks in 3 different countries • Reminders raised balances by 6% • Now extending to debt reduction, budgeting, and planning goals B. Progress

14. Completed Pilot 3: • Borrow Less Tomorrow (BoLT) • Behavioral Kitchen Sink for Debt Reduction • Decision Aid • Escalating Repayments • Peer Support • Reminders/Feedback • (Monitor progress using credit reports) • Save More Tomorrow™ as a guide • High-touch pilot test at free tax prep site in Tulsa • 41% take-up rate • 37% plan escalating repayments; 26% enlist peer supporters • 51% on-schedule after 12 months (is this high or low??) B. Progress

15. Pilots 4-10: Financial Products Innovation Fund “The Financial Products Innovation Fund was created as a joint effort between IPA’s US Household Finance Initiative and the Ford Foundation to support the development of scalable, market-tested products that help households make better financial decisions, escape cycles of debt, build assets and achieve financial resiliency.” • Emphasis on product development informed by behavioral research • Theory, evidence, principles • Competitive call for proposals launched in August 2011 • Seven projects awarded funding in January 2012 • Product development and “alpha-testing” for feasibility and level of demand • Will also be doing some analysis of demand determinants • Pilot tests currently underway (Apr – Dec 2012); results by May 2013 B. Progress

16. “Pay Back Yourself” – Two Pilots • Problem: Hard to get started saving • Solution: Seamless conversion of loan/DMP payments to savings once loan/DMP • is paid off • Behavioral approaches: Harness habit formation, redirect mental accounting, • easy on-ramp (use existing accounts) • Key Features: Upfront commitment, back-end automation • MCUCD target market: members of 3 participating Montana credit unions • LSSSMN target market: graduates of LSSMN’s Debt Management Plan program • MCUCD launch date: May 1, 2012; LSSMN launch date: May 23, 2012 B. Progress

17. Pay Back Yourself– “Get Saving!” B. Progress

18. “Frictionless Savings” – Two Pilots • Problem: Easy to spend on impulse, but not to save (on impulse) • Solution: Clear path to saving at times when you are most liquid • For example: at the check cashing window • Approaches: Redirect impulsivity, meet people where they prefer to conduct • business, streamline bank account sign-up • Key Features: MicroBranch: Upfront commitment, back-end automation; • RiteCheck: “impulse saving” • Target Market: Low-income check cashing customers in San Jose & New York City • Launch dates: April 15, 2012; June 1, 2012 B. Progress

19. “Frictionless Savings” – Two Pilots B. Progress

20. “TGIF: The Goal is Freedom” Loan • Problem: Small dollar loans are expensive, and have high default rates • Solution: Borrowing accepting 5-day delay in disbursement gets 28% - 69% • discount • (Sister product: emergency line of credit with “frictionful” drawdowns) • Approaches: Incentivize planning, risk screening-by-sorting • Key Features: Delayed disbursement, frame interest as savings to incent • improved financial planning; (voluntary liquidity restriction) • Target Market: Roanoke credit union members, 61% designated low-income • Launch Date: May 17, 2012 B. Progress

21. “The Trust Card” Credit Card • Problem: Yield-maximizing strategy for many households is to pay down high- • interest debt, but many only make minimum payments each month • Solution: Behavioral Credit Card for debt consolidation • Approaches: Decision aid; default option; commitment options • Key Features: default to accelerated payment plan; built-in planning tool; restricted access to liquidity going forward; option of further voluntary restriction • Target Market: Low-income credit union members in Washington Heights, NYC • Launch Date: April 2, 2012 B. Progress

22. “The Trust Card” Credit Card B. Progress

23. “Now and Later Account” Restricted Withdrawal Account • Problem: The temptation of lump sums (some jobs, many tax refunds) • Solution: Voluntarily restrict own access to lump sums • Approach: Decision aid, commitment, and automation bundled with savings • account • Features: Budget  commitment to withdrawal schedule • Target Market: Students via Single Stop USA’s Community College Initiative • (smooth disbursement of student loan payments) • Expected Launch: August 2012 B. Progress

24. “The Now & Later Account” The Now&Later Account B. Progress

25. Progress: How We Make it A Virtuous Cycle: B. Progress

26. C. Frontiers 2 big ideas in need of development, piloting, testing/refinement • (Getting to scale is key here: not claiming these are brand-new ideas) Looking for partners!

27. Idea: Personal Loan Shopper • Problem: consumers pay too much for loans • mortgages (Hall&Woodward); cards (Stango&Zinman) • Why?Distaste, lack skill, inattention, procrastination, over-optimism, etc. • Solution: shopping engine • Consumers passively input information • Credit report access • Account access • Engine outputs product recommendations • And/or general guidelines: “don’t pay more than this” • And/or fills out application forms? • And/or negotiates for the client? • Skinny: “Search is where the money is” C. Frontiers

28. Bigger Idea: Private Banking for Main Street Huge asset management industry Where’s the debt management industry? • Trillions of dollars in U.S. household debt • “Return” (cost) dispersion much bigger on liability than on asset side of household balance sheets • Helping consumers reduce borrowing levels, costs is where the money is: hundreds of basis points on table • Existing solutions limited in scope, value C. Frontiers

29. Private Banking for Main Street • (continued) Opportunities for enhanced products/features: • Advice: how make attractive, credible, effective? • Delegated implementation (by rule, by “active management”…) • Commitment contracts • Offset accounts (running leaner) Skinny: “Own the balance sheet!” (Especially the liability side) C. Frontiers

30. Summing Up Behavioral insights can help guide how you help people (customers, employees) deal with money • Product Design • Marketing • Pricing • Process (e.g., “on-ramps”) • Communication/Engagement • Etc.