Our banking habits show how the use of nudges can lead to both good and bad savings habits.

“Banker’s hours”:
working or being open for the shortest
and most inconvenient amount of time
(10 a.m.- 4 p.m.). Also includes a long
lunch break and every possible holiday off. 


There was a time in the 1960s and 1970s when the business of banking was simple and functioned like a utility: bankers funded their loans at 3 percent, lent money at 6 percent and left for the golf course by 3:00 p.m. From the banker’s perspective, there was a lot to be said for the 3-6-3 ”business model,” so much so that its essence was encapsulated by the idiom ”banker’s hours.”

For a customer, there was of course a downside to this simple but agreeable business model and the implied ”value proposition”: inconvenience. Banks were effectively closed 82 percent of the time over the course of a week — closed before 9 a.m., closed after 3 p.m., and closed on weekends. Never mind statutory holidays.

From a nudging perspective, there are two interesting things about this model. First, the saving (3 percent) and borrowing (6 percent) decisions were simple. You didn’t have to shop around all that much because you couldn’t. Second, it forced people to engage in sensible money management behaviour if they wanted to avoid the hassle of leaving work and standing in line to get at their savings. People had to plan their cash flow depending on how frequently they got paid. If someone came up short, they might turn to friends and relatives for the kinds of short-term loans that, the research tells us, almost always get paid back before other forms of debt.

As a result, a kind of ”financially literate” behaviour arose naturally from the ”choice architecture” implicit in the banking system: people didn’t take on risky debt because they couldn’t, people paid their debt because they felt they should (i.e., it was owed to family/friends), and people didn’t normally spend beyond their means because it was too inconvenient. From a macroeconomic perspective, the combination of the structure and the resulting behaviour probably helps explain the period’s relatively high saving rates and low household debt, although strong income growth, low unemployment and activist governments also help explain it.

pigeon june 2013

Fast-forward 40 or 50 years and it’s hard to imagine a more different world. Most of us hold one or more credit cards that allow us to spend more than we earn. We use debit cards tied to home-equity lines of credit that allow us to draw down on the accumulated equity in our homes whenever we need or want to. We still don’t like going to the branch, but that’s okay because we have access to online and mobile banking 100 percent of the time. Meanwhile, household savings rates are at historic lows and debt at historic highs.

Under the rubric of ”financial literacy,” the policy response to this shift has been mostly to make sure that people have better and more information, the assumption being that we are generally rational beings. We know what we want. We just lack the full set of necessary information.

In an effort to get people to exercise self-discipline, task forces have been created and reported back. Hundreds of Web sites have popped up, some more reputable than others. Seminars have been launched, curricula developed. Financial fitness gurus emerged, all designed to help us take control of our behaviour much as we might like to take control over our diets, our exercise or our smoking.

There is one major drawback to this approach and it’s obvious to anyone who has ever reflected on their own efforts to alter an entrenched behaviour: it often doesn’t work.

In the profit maximizing world of banking, the shift in the underlying choice architecture of banking was greeted mostly as a good thing. Enabling consumers to borrow now and pay later created a shift to on-demand credit that helped fuel record bank profitability and steady increases in dividends.

From a policy-making perspective, it also seemed to vindicate the ”more and better information” claim. Many touted the ”democratizing” effects of expanded access to credit tailored specifically to different market segments and facilitated by hyperrational and efficient market mechanisms. These allowed financial institutions to slice and dice their products and sell them to those most willing to bear the risk.

And then came the meltdown of 2008.

Through it all, however, there was a group within the financial services sector called credit unions, which were less enthusiastic about the impact this structural shift was having on people’s saving and borrowing behaviour. In credit unions, customers are members. They own the institution that provides them their financial services. As such, each member is entitled to exactly one vote for the purpose of electing a board of directors, which then guides the credit union’s practices. In Canada, there are 348 credit unions outside of Quebec’s Desjardins system, each one owned by people who use the institution’s services.

From inside the credit union culture, where I now sit after many years of studying financial services, I can see how behavioural issues have made credit unions sensitive to the destabilizing effects of this structural shift in banking. The first credit unions were formed more than 100 years ago as a community response to another kind of choice architecture problem: there were regions of the country and segments of the population that were exploited, ill-served or not served at all by mainstream financial institutions, all situations that contributed to challenges around money management.

In these early credit unions, member as owners volunteered time as tellers and managers, looked after the credit union’s books, sat on loan committees that decided who got loans and who didn’t, and educated each other about good spending and borrowing habits. When that kind of involvement was layered over a system that worked with the same kind of predictable borrowing and lending costs as the banks, your average credit union member was likely to behave in a fiscally conservative fashion.

Of course, and as noted earlier, credit unions were not immune to the changes that subsequently took place in financial services; competitive pressures sometimes led them to adopt practices similar to those of the profit-maximizing banks, albeit grudgingly and often belatedly. Credit unions also introduced their fair share of innovations. They were the first to lend to women in their own names in the 1960s, and the first to offer personal lines of credit and ATM service in the 1970s, telephone banking and ethical mutual funds in the 1980s, interactive TV-based home banking in the 1990s and mobile cheque scanning in 2013.

But their fiscally conservative roots were never far below the surface. Enabled by a cooperative structure that delivered a ”profit for service” model (as opposed to a service for profit model at the banks), credit unions have naturally gravitated toward experimenting with behavioural interventions that could benefit their members.

Consider, for example, the case of Mount Lehman Credit Union, a one-branch credit union in the Fraser Valley community of Mount Lehman, British Columbia. In 2009, it created a unique customizable real-time text/email alert system that members can use to detect fraudulent activity on their debit card, remind themselves to make mortgage payments or to notify themselves when their account balance falls below a certain member-specified threshold. This tool, unique among financial institutions in Canada, builds on a well-known behavioural insight: namely, that a well-timed nudge can make all the difference.

Or consider credit unions in Manitoba. Ten years ago, they pioneered the concept of using a ”best pricing” model or ”no haggle” mortgage that treated all members equally rather than providing better rates to some members who just happened to be better at research and negotiating. This of course greatly simplifies what can otherwise be a complex decision — it’s a classic behavioural intervention that has helped make Manitoba credit unions among the most successful in Canada, holding almost 50 percent of the market.

At the national trade association level, Credit Union Central of Canada has used behavioural economics to help affiliated credit unions sift through more than 60 financial literacy programs by ranking their effectiveness based on the degree to which they employ behavioural insights. Those that use information-only approaches or make heroic assumptions about an individual’s ability to make purely rational decisions get a low grade; those that deliver just-in-time information or use defaults and other interventions get high marks.

Credit Union Central of Canada has also helped to make cutting-edge behavioural research accessible to affiliated members through a partnership with the Filene Research Institute, a think tank that specializes in credit union research. Through that effort, it has connected credit unions to research by well-known behavioural economists like the University of Michigan’s Michael Barr, whose behavioural economics ideas helped shape some of the Obama administration’s consumer protection legislation, and Princeton University’s Eldar Shafir, whose work on the ”packing problem” has opened up new insight into how the stress of making trade-offs, which are numerous in low-income households, can undermine anyone’s ability to make strategic and rational decisions.

The financial service industry needs to get better at putting nudge insights into practice.

In its work with Dean Karlan, a Yale University behavioural economist, Filene is helping credit unions offer their members a tool called StickK, which helps bind people to their commitments — weight loss, fitness, savings or other — by getting them to agree to a penalty for failure: for example, a donation to a political party or cause that the member might not agree with.

In the past, the structure of banking helped people save and avoid excess debt. Since the late 1980s, the reverse has been mostly true: the safe, sound and boring world of 3-6-3 banking, with its built-in disincentives to reckless financial behaviour, is no more and probably will never be again.

Some, like banking guru Brett King, are even predicting the demise of traditional branch and ATM-based banking as the demand for physical cash disappears and new entrants — travel agents, telecom companies or hardware stores — begin offering core banking services such as loans and payment services. If this were to transpire, then ”banking” may come to resemble a true utility once again, with financial institutions merely acting as intermediaries for other organizations.

Unlike the banking ”utilities” of yore, however, banks and credit unions would no longer easily ”own” the relationship with the customer or member. This too would represent another major choice architecture shift that could further weaken people’s resolve to save and avoid debt. Will people resist the impulse of taking on more debt when talking to their travel agent, signing up for a deluxe cable package or buying a gold-plated high-efficiency furnace? The research would seem to suggest that unless there’s some sort of circuit breaker — some kind of behavioural intervention that replicates some of the default inconvenience of the early postwar period — we can expect more people to find themselves in more financial trouble.

So the question then becomes, who can or will offer the next generation of financial services behavioural interventions and how will they do it? Will it be financial institutions, regulators, customers or all three? Will it be about more information faster or more structured nuggets of useful information? Will it have opt-in or opt-out approaches? Will it use active choice techniques?

None of these questions has an obvious answer but one thing is clear: the financial service industry needs to get better at consciously putting nudging theory insights into practice. The future will not be kind to those who make it up as they go along, who ignore at their peril the fact that our behaviour is more often than not determined by a set of nested and interacting nudges designed by someone somewhere, knowingly or not, hard to see or plainly obvious. Just ask the modern banker who dares leave work for the golf course at 3 p.m.

Photo: wk1003mike / Shutterstock