Financial Industry regulators and operators in banking, asset management, securities trading, pensions etc. are all pushing the agenda of financial inclusion and rightly so, trying to get as many people who are typically outside the ‘net” (especially the informal sector) to start to participate in the financial system – to save, invest, access credit or make payments through the formal financial system. In trying to do so, one of the biggest lessons my colleagues and I have learned from other jurisdictions around the world trying to achieve the same with varying levels of success is that psychology plays a very big role in ensuring better results.
Already, some of the psychological perspectives are in play in our own financial system, but there are quite a few lessons that regulators and industry operators can learn from the psychology of financial inclusion and I will try to advance some of these arguments to stir the thinking in the financial services community in Nigeria, and where possible, propose some policy direction for both regulators and operators to consider.
One of the most dominant psychological influences on financial inclusion is the concept of the “Power of Why”, made popular by Social Scientists like Simon Sinek.
The concept is simple, but very powerful – that people respond more passionately to the reason and rationale behind things – the WHY, much more than the what and how. According to Sinek, the best and most inspirational leaders and organizations influence people by selling the “WHY”, and also by extension by selling the consequences of not accepting the “WHY” – something we refer to as the Principle of Scarcity. This psychological perspective is relevant to both regulators and operators, especially when trying to get people to do new things – to change from a status quo.
For example, participating in contributory pensions, writing a will, or taking up health insurance. Selling the WHY is important, but in my experience highly overlooked. Sales professionals too busy and afraid of failing to meet their targets sell this as the WHY, and in many cases also sell “the law says so”. Selling the inappropriate WHY is even more dangerous than not selling the WHY at all.
Shlomo Bernatzi, a renowned scholar in financial literacy has also identified three powerful psychological influences on financial inclusion that are worthy of reflection. According to Shlomo and his colleagues, “present bias”, “inertia” and ‘loss aversion” are very strong psychological influences on financial inclusion that should affect policy and product development.
Present bias is the reality that self-control is not a problem in the future, it is a problem of the present. When we think about the future, we will always imagine we will do the right things like save more and spend less, but in the present, most of us will make the wrong choices and keep spending.
Financial products should encourage people to save more when they earn more in future, and possibly create incentives for people who commit to making such future savings today. The use of direct debits, and brand awareness (continuous subliminal messaging and marketing) also helps to respond appropriately to the present bias.
Inertia, taken from Newton’s Laws of Physics is the reality that most people when asked to do something are too lazy, and are more likely to do nothing. For example, if people are asked to tick a box to indicate that they want something, most people will not tick the box. However, when asked to leave the space blank if they want something, more people will leave the space blank, because doing nothing (not ticking) is easier than doing something (ticking). Forced enrolment in pension schemes and health insurance or getting everyone to complete a basic will by default is a powerful way of responding to this psychology.
Loss aversion is the reality that people hate to think that they are letting go of anything. If you give a child one toy, the child will be happy. However, give the same child two toys and try to retrieve one, you will find that same child will become very unhappy in spite of the fact that they still have one toy.
This works the same with people saving or setting aside money and feeling that they have “lost” the ability to enjoy themselves or spend today. A possible policy or product recommendation will be the use of incentives for people – what do people get for saving today? What incentives can financial institutions, government and regulators offer to replace the sense of loss. Product bundling as well as Loyalty Programs are perhaps an effective way of overcoming this psychological trap.
Regulators and operators in Nigeria’s Financial Industry should pay attention to the psychology of financial inclusion more in their bid to attract more Nigerians especially those in the informal sector into the formal financial systems and products.
In developing policies and products, they should be mindful of these psychological influences, and explore deeper and more meaningful ways of overcoming them so that indeed we can grow the base of participants in formal financial systems, increase individual and national saving and investments and bolster the economic fortunes of our country.