USING BEHAVIOURAL SCIENCE TO PROMOTE VULNERABILITY DISCLOSURE
Customer vulnerability is a key focus of the FCA’s Consumer Duty regulation, and Behavioural Science has a key role to play in ensuring financial institutions can deliver good outcomes and enhanced consumer protection.
USING BEHAVIOURAL SCIENCE TO PROMOTE VULNERABILITY DISCLOSURE
- Jessica Taylor, Bianca Gabellini and Przemek de Skuba
Published: 23 November 2023
Defined by the FCA as "someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care”, the term ‘vulnerable’ appears over one hundred times in the Consumer Duty guidance. Vulnerability can be driven by health issues, life events, reduced resilience, or capability. Banks also need to consider that customers’ vulnerable states are volatile and therefore customer disclosure needs to be continuous throughout their relationship with the bank.
It is therefore imperative to be able to identify which customers are experiencing circumstances of vulnerability, and when. Our initial vulnerability whitepaper explores how retail banks should be managing transformation to meet the challenge of increasingly complex customer vulnerabilities. In this article, we look at how firms can encourage disclosure of vulnerabilities through the application of behavioural science.
When customers feel safe and comfortable self-disclosing details of their vulnerabilities, banks can provide more tailored support and foster stronger, longer-lasting relationships – and deliver the good outcomes mandated by the Consumer Duty. However, customers may be cautious about disclosing all their vulnerabilities, fearing they may be penalized in some way or simply wanting to feel they have control of their personal narrative. This clearly poses a challenge for financial institutions, who – left to infer vulnerability – will be perpetually on the back foot when it comes to meeting customers’ specific needs.
Behavioural science can be applied to identify appropriate techniques to encourage customers to self-disclose vulnerabilities as opposed to having them inferred. In the context of Consumer Duty, the applicable strategies that can be adopted by financial institutions are ‘nudges’, which encourage better decisions by making certain choices easier than others. Below we set out eight key strategies.
1. Building Trust
Any solution must establish an environment where customers feel encouraged to disclose potential vulnerability-driven financial problems before they occur. This precarious stage is sometimes referred to as ‘pre-arrears’. Examples could include employees anticipating a redundancy; the self-employed observing worsening market conditions and consequently the likelihood of work drying up; or one’s mental or general health worsening – all of which could ultimately lead to the borrower going into arrears.
Banks can use behavioural science to create trust through various means, such as transparent communication, consistency, and reliability in their interactions with customers. For example, training customer service employees to ensure that they are empathetic and able to handle sensitive customer interactions well.
2. Framing and Messaging
Additionally, there are biases that blind customers from negative information. For example, optimism bias pushes customers towards an overly optimistic evaluation of their circumstances – they believe that they are unlikely to experience a negative scenario, such as having a low savings, ageing, or deteriorating health. Leveraging this, the way information is framed and messaged can influence customer behaviour.
Banks can use behavioural insights to present information about disclosing vulnerabilities in a way that makes it clear, relatable, and non-threatening. For example, using language in communications that frame vulnerability disclosure as a responsible and supported action. Another technique could be the use of less formal writing when asking about the customer’s financial, family or health concerns.
More specifically the reduction of jargon terms and the use of plain language and icons can help the customer to feel safe. In this case, the customer is less likely to associate the share of their vulnerability with negative outcomes since they link the complexity and formality of the language to the harshness and seriousness of the repercussions.
3. Social Norms
Social norms are particularly relevant for vulnerability disclosure because individuals often hesitate to reveal their vulnerabilities due to perceived stigma or the fear of being judged. Banks can leverage the power of social norms by highlighting that disclosing vulnerabilities is a common and responsible practice.
People are more likely to take action when they believe it aligns with social norms, therefore if customers see others disclosing vulnerabilities it reduces their perception of risk. For example, banks can share statistics and testimonials regarding the percentage of customers who have successfully disclosed their vulnerabilities and the resulting assistance they have received.
4. Default Options:
Customers have an inertia when it comes to decision-making and are prone to ‘status-quo bias’, whereby they tend to stick with the existing choice rather than actively seeking or making a change. Therefore, setting default options that encourage disclosure can be effective. For example, banks can design forms or online interfaces with pre-selected options that nudge customers towards sharing their vulnerabilities. Additionally, online account setup forms can be designed with a default option to receive financial advice and support which customers can opt-out of if they don’t need them.
Personalisation is highly relevant in vulnerability disclosure because individuals often perceive that their financial situations are unique, and they may worry that their specific needs won't be understood. This relates to the egocentric bias, where people tend to overestimate the extent to which others share their beliefs and experiences.
Therefore, personalising communication and support would not only target this bias, but behavioural science also suggests that people are more likely to respond positively to personalised messages and offers. Data and analytics can be used to tailor online and email messaging to provide information relevant to customers’ specific financial situations.
6. Highlighting Advantages:
Omission bias describes how voluntary oversights are empowered by our inner belief that, all other things being equal, committing to an action is more dangerous than omitting an action – harm caused by commission (action) is viewed more negatively than harm caused by omission (inaction). On this basis, customers prefer to assume the risk of hiding important information rather than assuming the responsibility of disclosing something which may have a negative outcome.
Additionally, loss aversion explains how customers avoid disclosing negative information in fear that these may trigger negative consequences such as being excluded from offers, fidelity programs, better treatments. Banks can use the principle of omission bias and loss aversion to encourage disclosure. For example, they can frame the benefits of disclosing vulnerabilities as a way to prevent future financial losses, which can motivate customers to take action.
7. Information Provision:
When individuals are asked to make decisions or provide information, they tend to rely heavily on the first piece of information they encounter, even if it's arbitrary or unrelated. In the context of vulnerability disclosure, the initial information or context presented to customers can set the tone for their decision-making.
Providing customers with reference points, or anchors, can help them make more informed decisions. Banks can use behavioural science to provide customers with context for understanding the importance of disclosing vulnerabilities and the potential consequences of not doing so. For example, financial planning tools can be leveraged to demonstrate the long-term benefits of disclosure and the impact on the customer’s financial future.
8. Feedback Loops:
Feedback loops are especially relevant in the context of vulnerability disclosure because vulnerabilities are often volatile in nature, making continuous disclosure critical. Behavioural science has shown that immediate feedback can reinforce desired behaviours, and feedback mechanisms are effective in showing customers the positive impact of disclosing their vulnerabilities. For example, follow-up messages to customers who have disclosed which demonstrate the positive impact of their actions will encourage them to disclose again in the future.
Each of these proposed strategies plays a unique role in overcoming the barriers that often hinder customers from sharing sensitive information. However, it is important to acknowledge that the success of these interventions depends on the specific context, the target audience, and the nature of the vulnerabilities involved. What works for one group of customers may not be as effective for another.
Therefore, banks must carefully consider and tailor these strategies to their individual customer base, all while prioritizing trust, transparency, and ethical practices. Through the applications of these different tools, firms can establish with their customers relationship based on trust and that finally enhances both the firm’s results and the customer’s journey.
Capco’s Behavioural Science methodology identifies behavioural insights and designs tailored and ethical behavioural interventions that provide controls that protect customers and ensure they have good outcomes. The application of such an approach leads to increased customer satisfaction, improved customer loyalty and trust, better product or service adoption rates, increased sales revenue and profits and reduced complaints and refunds.
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