Collected Innovation Manchester

Thank you all for coming. So I'm going to dive right in. As we said really today is about understanding behavioral science and specifically behavioral science as it can be applied to collections. Now I want to start by just level setting as what is behavioral science. If you go and Google this term you'll find a lot of different definitions. So it's always nice to really make sure that everyone has a clear understanding. Now, behavioral science, put simply, is the study of human decision-making. Really, what it is is trying to understand how different contexts, the amount of attention that you're currently paying, other external factors are all going to influence that decision-making. For example, having this presentation in the afternoon versus in the morning will differ how much attention you're actually able to pay for it just because of are you a morning person? Did you just have lunch? Did you just get a really important email and you're a little bit distracted? So all these things actually factor in to how you make decisions and how you move about your day.

Now behavioral science itself relatively new as a concept. Early 2000s is around when it came into popularity. And so some people feel like oh well it's new. It's untested. What is it really based in? Now the reality is is that behavioral science is actually multidisciplinary meaning that it's very much founded in longstanding sciences like sociology, psychology, anthropology. And the more that we're able to really study and understand why do people make certain decisions that maybe seem suboptimal or to me don't make sense, the more we're actually able to engage and understand them and try to drive them to a better or more optimal outcome.

Now, one of the core concepts in behavioral science is referred to as the intention-action gap. You're all very quickly going to be able to hopefully resonate with this one. It's that we all have intentions for ourselves. I know that there are certain things that I should do that I'd like to do. They're beneficial for me. And then there is what I actually do, my actions. And there's often a little bit of a gap. So, I'll encourage you all to think maybe did you set a New Year's resolution? And what was the intention? Why did you think that that was an important resolution for you to set? Are you still following through on that resolution? Why or why not? No guilt, no shame. It's just that we all have intentions and we're not perfect about following through towards our actions.

Now, this is very very heavily influenced by what we call mental shortcuts. Those are cognitive biases. So, those are patterns of thinking that allow us to move pretty quickly through our day and make decisions pretty rapidly. And often they're very helpful, but in certain situations they end up being less helpful. We also have heuristics and those are really just shortcuts for us to again make those fast decisions. The average person is making about 35,000 decisions a day. So you have to think about the fact that you're not stopping and applying your thoughtfulness to each of those decisions. You'd never get through your day at the speed that you need to. So instead, we have these cognitive biases, these heuristics that allow us to move very effectively through our world. But unfortunately, sometimes they lead to an intention action gap that is not so beneficial to us.

Now, that's where the behavioral science really comes back into the picture. If we understand that someone has an intention for themselves or something we know to be optimal or ideal for them to do, but they're having trouble doing it, hence that gap. That's actually going to allow us to start to think of, well, what are those mental shortcuts, those biases, those heuristics that are maybe getting in the way of them committing that action? And how do we develop an environment intentionally to help them close that gap for themselves?

So, that's great. That's fine. That's behavioral science. But what does that have to do with collections? How is it relevant?

So, we have to think about what's currently happening in the world around delinquency. One in three have paid a bill late in the last six months. And we're often seeing this increasing to the point where a lot of people who have never before fallen behind on their bills are now falling behind and experiencing that for the first time. There are two in three who are living paycheck to paycheck. Again, a number that's actually on the rise. So there are a lot of people who are placed on a monthly or more often basis having to make very difficult decisions about what can I pay, who can I pay, in what order should I pay them, and then lastly, we've got 46% of consumers that are carrying debt because of an emergency expense. So we can imagine that the average person doesn't actually have enough in their bank account to deal with that random flat tire or that unexpected expense and that's putting them into this situation of delinquency.

So not only do we have the traditional group of people who enter into delinquency sometimes on a repeated basis or infrequently struggle over time, we also have an entirely new cohort of people who are experiencing delinquency for the first time. And so that's a lot of the situational factors that we're facing.

Prospect Theory Exercise

Now I want to help you understand what some of these people might be experiencing. So I'm going to ask you to play the world's strangest game show. All right? There is no right, there is no wrong. It is just what would you do in this situation? So, I'm going to give you a choice. I will give you 200 pounds right now or you decide you're going to flip a coin. If it's heads, 400 pounds. If it's tails, you walk with nothing.

The average person in this case is going to pick the guaranteed money - the risk averse choice. I had nothing. You offered me 200 pounds or you offered the chance to take a risk to get more. I'll take it.

Now let's play it again, but differently. I'm going to come up to you and say, 200 pounds, please - or flip a coin. If it's heads, you actually need 400. If it's tails, you lose nothing.

In this case, this is referred to as the risk-seeking choice. Now, as I said, nothing really changed. First, I offered money, but the actual values and absolute were the same. You could lose this, you could win this. But we see that people will actually change their answer in most cases. Now the rationale for that is really because losses loom larger than gains. We are predispositioned as humans to pick up, process and focus on the negative more than we do the positive. Meaning it hurts us more to lose something than it makes us feel good to gain something.

Now from an evolutionary perspective, it makes lots of sense. We needed to know that there were threats in our environment and therefore we had to focus on those things. But when we suddenly move into collections, we have to understand that often those of us who are involved in collections aren't actually experiencing it for ourselves. And it can sometimes seem like our consumers are making choices that don't make a lot of sense to us because we aren't in that context.

Other Cognitive Biases in Debt

Now there are lots of other pieces that make it difficult, but some of these other biases, these heuristics as we call them are also optimism bias. Now to counteract the fact that we focus on the negative quite heavily in our environment, we also have a precursor to think we'll be in a better position in the future. So if we take that back to collections, the individuals who find themselves in a situation where they can't pay their bills will often think, well, in 2 weeks, 30 days, I'll have a new job or I'll have sorted out this difficulty that I'm in. So I'm going to be okay.

They also may sometimes actually do what's called the ostrich effect, which is I'm going to stick my head in the sand. I'm not going to deal with it because I think I'll be in a better place in a couple weeks and then I'll deal with it.

The last one here is weak deterrence. Weak deterrence is really the concept that as society we've kind of normalized being in debt. Lots of people carry debt on their credit cards. Lots of people purchase something they don't yet have the funds for because we have lines of credit and we have mortgages and we have buy now pay later and all these other opportunities.

Key Takeaways

Context is key. Lots of you actually changed how you would have dealt with a gain situation versus a loss situation. When people are dealing with loss, they'll actually take on more risk and behave in a more risky way because they want to avoid that loss as much as possible.

Lastly, something that's very important for us all to recognize is that once someone is in delinquency or past due on their bill, they're experiencing stress, anxiety, and often they perceive that they are being shamed for being someone who could not pay their bill on time. That further reduces their ability to make those decisions effectively because their cognitive load is very high emotionally. So it's really important to understand that we don't have bad customers. We don't have bad consumers. We have people who are put in a situation where the deck is a little stacked against them.

Behavioral Science Tactics

Behavioral science can also help these people overcome some of those barriers in trying to resolve their debt. Just like we talked about cognitive biases and heuristics, these mental shortcuts, the more that we understand those and the more that we know what might be getting in the way of that intention action gap - intention: pay my bill, action: I don't for a variety of different reasons - the more we can start to bridge that gap through behavioral tactics.

Mental Accounting: 60% of interest and late charges could actually be avoided entirely with minor changes. A lot of people put money mentally into pots or sections. They may have funds available somewhere but are unwilling to move that from a savings or rainy day fund because that money is potted. When we start to send out those delinquency communications, we can start to help people understand that it might be more beneficial to use some money they have stored away to avoid the late fee or additional interest charges.

Education: Three out of four fall below the benchmark for financial literacy in the UK. Three out of four actually admit they don't fully understand their energy bill. Two in five don't actually know the APR rate that is currently charged on their credit card. Education is incredibly powerful to just provide simple snippets of information.

Self-Agency: One in two don't feel confident managing their finances. One in eight actually admit that they just don't open letters or emails if they know that it's probably from their service provider because they're kind of scared of what's on the other side. Self-agency is as simple as some of the messages we send, which is: you've got this. We're here. You have control in your situation. You can take the next step and here are what the next steps are.

Perverse Incentives Warning

Behavioral science, if not done properly, if not done intentionally, if not designed well, can lead to something called perverse incentives - where you introduce a behavioral science tactic and actually get an unintended and most of the time the exact opposite of the behavior that you really wanted. The Spider-Man principle applies: with big power comes big responsibility. If you're going to implement a change for someone, that means that you are in some way influencing them.

Applying Behavioral Science at Scale

One of the most critical pieces is to actually apply behavioral science at scale. Make personalization really easy - not just "Hi, first name" - but segmenting by behavior. How often is this person in delinquency? When they do come into delinquency, what's their balance? How often do they stay there?

It's also important to iterate and learn very quickly. Even if you get it right for a while, people change. Their environments change. You need a system that's going to attune and learn that their behavior has changed and then change your engagement strategy with them.

Reciprocity and Urgency

Reciprocity is essentially how you treat this person is how they're going to want to treat you. For that person in their most difficult moment, by you showing up and saying, "We get it. You're struggling. We're sorry to see this. Here are all the solutions that may be available to you" - that creates that tighter customer relationship.

Typically, how we like to better reference urgency is by putting a positive frame on that. Imagine dealing with this today and no longer having that stress. Imagine how quickly you could pay. It's three clicks and you're done.

Choice Architecture

Choice architecture is really how you intentionally construct that environment. In collections, this really comes down to how we are positioning the calls to action and the choices that we're giving people. We'll always have the preferred method first in your CTAs before you're starting to go to those other options.

On Manipulation

You cannot move an elephant to water. If your consumer has no intention, no desire, will not engage, no amount of behavioral science will completely convince someone otherwise. What it can do is help people actually follow through on their intentions. It is influence absolutely, but it is influence that really can't push someone to the bounds of doing something that they wouldn't otherwise do.

Getting Started

Keep it simple. Start small. The ways in which I've seen behavioral science go very wrong is when a group goes all of it at once and just kind of throws things without a hypothesis and an intention. Start with very small changes in how you're currently interacting with your customers. Think of the point where it's going to make the most difference - usually that's early in delinquency. Constantly test because as soon as you've gotten it right, a person's behavior or situation can change.