Most car owners know that regular oil changes keep their cars running smoothly. Every few months, they visit their local dealerships, service stations or Jiffy Lubes and drive off 15 minutes later with the maintenance complete. But what if places like Jiffy Lube didn’t provide direct services? What if instead they hosted one-hour informational seminars on how to change the oil, then sent customers off to struggle with the messy task on their own?
In a 2014 report, ideas42 pointed out that managing personal finances is at least as complex as changing the oil in a car. Yet, most American families only have access to services that mirror the nonsensical “oil-change seminar”. Even those who attend financial education classes and learn the principles of money management still have to go home and work through a laundry list of tasks to actually improve their finances. This homework – opening and closing accounts, adjusting payments, or changing spending habits – is potentially complicated, sometimes overwhelming, and generally tedious.
What results is a marked difference between what we know we should do – what we want to do, even – and what we ultimately act on. In other words, we face an intention-action gap that traditional financial education and counseling are unlikely to bridge, even with turbo-charged online tools. Researchers have found disconcerting evidence of this problem: across 201 evaluations of financial education, they measure a slight improvement in participant knowledge, but no noticeable change in behavior.
The good news is we can use insights from behavioral science to rethink financial education. By focusing on behavior, not just knowledge, we can generate tangible financial outcomes for consumers. For example, many people already understand the importance of savings. But to make a savings deposit every single month, they must remember their intentions, demonstrate self-control in spending, and follow through on administrative details. To get around these behavioral hurdles, we can work with consumers to simply automate savings transfers. Similarly, to help consumers pay down high-interest credit card balances, we set up recurring payments over and above required minimums.
ideas42 first explored these concepts in a 2010-2012 pilot known as the Financial Health Check (FHC). By the end of that study, participants who worked with coaches to take real-time actions – like automating transactions as described above – had savings balances that were 20% higher than similar peers who did not engage in an FHC session. These results indicate a measurable change in behavior and concrete improvements in financial resilience.
Now, with funding from the MetLife Foundation and in partnership with one of the nation’s largest credit unions, ideas42 is revamping the behavioral coaching session for a more scalable design and the potential for far greater impact. The new phone-based FHC will be easier to deliver and access, featuring behavioral “nudges” to promote improved financial health. By helping consumers build savings and achieve greater financial stability, the FHC could offer financial institutions higher deposit balances, lower credit risk and even expanded lending opportunities.
Most importantly, broadly available, light-touch services like the FHC can help low- and middle-income families bridge the intention-action gap to not only set, but achieve their financial goals.
For more on simple solutions to complex financial questions, see our work on financial heuristics.
Read more about what it takes to scale innovation in the financial services sector here.