I'm at the third annual Underbanked Financial Services Forum, sponsored by the Center for Financial Services Innovation, a ShoreBank affiliate (full disclosure: I also work for ShoreBank and chair CFSI's board), along with my New America colleague Alejandra Lopez-Fernandini. As usual, the agenda is chock full of people and firms innovating in the responsible provision of financial services to underbanked and unbanked consumers.
The conference opened last night with a presentation by Richard Thaler, the University of Chicago professor who is in many ways the father of behavioral economics as applied to financial services. Thaler was one of the authors (with Shlomo Benartzi) of the Save More Tomorrow Program, which encourages employees to sign up to automatically have an increasing portion of any raise put into their retirement accounts and which was one of the critical pieces of research leading to the "opt-out" provisions of the Pension Protection Act of 2006.
Thaler spoke about his new book "Nudge," written with University of Chicago law professor Cass Sunstein. The book builds on the concept of "libertarian paternalism," and adds the concept of "choice architecture." Simply put, the concepts remind us that:
- We are constantly forced to make choices, including choices about how to manage our finances
- "Doing nothing" is not only a choice, it is the most common choice people make
- The structure or "architecture" of choice influences the choices we make, and in particular since we often choose to do nothing, the portion of that architecture relating to the "default" is critical
- Consciously choosing the "default" to be beneficial to the consumer can encourage asset-building behavior while still allowing consumers to choose other options
Much of the work the Financial Services and Education Program at New America is doing anticipated what Professor Thaler has given a new name to. For example, our Assets and Transaction Account is a proposal to change the choice architecture of tax refunds to default those who do not direct deposit their refund into a bank account into a pre-paid card, with a default savings "bucket" rather than automatically sending them a check. With a team from MDRC and support from the Rockefeller Foundation, we are developing a pilot of AutoSave, the concept of defaulting workers into non-restricted savings, helping them build assets as well as respond to emergencies without having to borrow.
In our financial education work, we are exploring concepts such as "just in time" education, which is related to Thaler's concept of "expect error," namely assuming the user of financial services will sooner or later do it "wrong," so it's essential to help them avoid that result. One example of "just in time" financial education is the whole system of text messaging alerts so that a consumer who is in danger of, for example, overdrafting an account or going over a credit limit, knows that's going to happen before making the "error," thus enhancing the likelihood of avoiding the mistake. Working with states to make personal financial management an essential element in K-12 education also alters the "choice architecture," but from the consumer's perspective. Our proposed Financial Services Corps aims at a similar result for adults. If consumers are more financially literate both as they make their initial financial decisions as young adults and as they go through their financial lives, they will see (and seek) a different range of choices, and hopefully make better decisions.
These policies are all designed to push consumers toward building and holding on to assets and enhancing.their financial stability. In other words, to give them a nudge.