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BEHAVIORALFINANCIAL PRODUCT DEVELOPMENT:Primer, Progress, FrontiersJonathan ZinmanDartmouth College andIPAs U.S. Household Finance Initiative(also J-PAL, NBER)A. Primer

Symptoms and Causes:Behavioral (Household Finance) Economics 101

Applications:MarketsYour employees

Scope todayMore about architectureMuch less about marketing, persuasion

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. PrimerFinancial Illness: Causes(Behavioral Economics 101a)

Cognitive biases that stack deck toward spending/borrowing, away from saving/accumulating

In preferences: costly self-control, loss-aversionIn expectations: things will get better (or at least not worse)In price perceptionsUnderestimation of compound interestUnderestimation of borrowing costsLimited attention

# 1

A. PrimerFinancial Illness: Causes(Behavioral Economics 101b)

Mistakes borne of misguided heuristics, other cognitive limitations

Information/choice overloadAnchoringLow (financial) literacy, numeracy

# 2

A. PrimerFinancial Illness: Causes(Behavioral Economics 101c)

Limited opportunities for learning

on high-stakes decisionsMortgage/houseJobMarriageCar (and financing it)Even high-frequency decisions can have uncertain long-run implicationsCredit card use (whats right debt load for me/my family)?Changing life circumstances creates moving targets

# 3

A. PrimerFinancial Illness: Causes(Behavioral Economics 101d)

Markets sometimes exacerbate consumers cognitive bugs

Advice markets are a mess and limited in scopeWho covers the household balance sheet?For the mass market?Price competition in product markets helps, but only partly

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A. PrimerCross-cutting biases/heuristics/ limitationsAnchoringLimited attentionInnumeracyA. Primer

Taxonomy of Behavioral Factors (see DellaVigna JEL)A. Primer

Alternate TaxonomyB. Progress

By way of examples:3 completed pilots7 in-progress pilotsAll with retail financial service firms (D2C)Wholesale particularly through employers is another promising channel (E2C)

B. Progress

Completed Pilot 1: Performance Bond for Smoking CessationBy way of examples:Put Your Money Where Your Butt Is!Bank offered in PhilippinesBank account offered to smokersDeposit money you were spending on cigarettesAgree to a urine test in 6 monthsIf nicotine free: get your money back (no interest)If not nicotine free: your money goes off to charityResult: 11% opened an account30 percentage point increase in smoking cessationExample of a commitment contract

Commitment Options

B. ProgressCommitment contract = voluntary restriction, or self-provided added incentive, in service of goal attainmentPerformance bondsLiquidity restrictions (e.g., spending limits)Cut me offsPeer support/social reputation (stickk.com, other models)(Also automation; e.g., auto-deductions)

Completed Pilot 2:Messaging as a Product Feature

Pilot With savings account holders at 3 different banks in 3 different countries Reminders raised balances by 6% Now extending todebt reduction, budgeting,and planning goalsSMS Reminders for Goal Attainment

B. Progress13Completed Pilot 3:Borrow Less Tomorrow (BoLT)

B. ProgressBehavioral Kitchen Sink for Debt ReductionDecision AidEscalating RepaymentsPeer SupportReminders/Feedback(Monitor progress using credit reports)Save More Tomorrow as a guideHigh-touch pilot test at free tax prep site in Tulsa41% take-up rate37% plan escalating repayments; 26% enlist peer supporters51% on-schedule after 12 months (is this high or low??)

Pilots 4-10: Financial Products Innovation FundThe Financial Products Innovation Fund was created as a joint effort between IPAs 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 demandWill also be doing some analysis of demand determinants

Pilot tests currently underway (Apr Dec 2012); results by May 2013

B. Progress

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 LSSMNs Debt Management Plan program MCUCD launch date: May 1, 2012; LSSMN launch date: May 23, 2012

B. Progress

Pay Back Yourself Get Saving!

B. Progress

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

Frictionless Savings Two Pilots

B. Progress

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. Progress20

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. Progress21

The Trust Card Credit Card

B. Progress22

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 USAs Community College Initiative (smooth disbursement of student loan payments)

Expected Launch: August 2012

B. Progress

The Now & Later Account

The Now&Later AccountB. ProgressProgress: How We Make it

A Virtuous Cycle:B. ProgressC. 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!

Idea: Personal Loan ShopperProblem: consumers pay too much for loansmortgages (Hall&Woodward); cards (Stango&Zinman)Why? Distaste, lack skill, inattention, procrastination, over-optimism, etc.Solution: shopping engineConsumers passively input informationCredit report accessAccount accessEngine outputs product recommendationsAnd/or general guidelines: dont pay more than thisAnd/or fills out application forms?And/or negotiates for the client?Skinny: Search is where the money is

C. FrontiersBigger Idea: Private Banking for Main Street

Huge asset management industry

Wheres 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. FrontiersPrivate Banking for Main Street(continued)

Opportunities for enhanced products/features:Advice: how make attractive, credible, effective?Delegated implementation (by rule, by active management) Commitment contractsOffset accounts (running leaner)

Skinny: Own the balance sheet! (Especially the liability side)

C. FrontiersSumming Up

Behavioral insights can help guide how you help people (customers, employees) deal with money Product DesignMarketingPricingProcess (e.g., on-ramps)Communication/Engagement Etc.