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BEHAVIORAL ECONOMICS AND FINANCIAL SERVICES With Michael J. Meyer, VP Customer Experience and Operational Excellence, Greater New York Mutual Insurance

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Page 1: Behavioral economics anD Financial services · “In behavioral economics theory, easy trumps everything – even cost,” explains Michael. Pointing to the irrationality of human-decision

Behavioral economics anDFinancial servicesWith Michael J. Meyer, VP Customer Experience and Operational Excellence, Greater New York Mutual Insurance

Page 2: Behavioral economics anD Financial services · “In behavioral economics theory, easy trumps everything – even cost,” explains Michael. Pointing to the irrationality of human-decision

WHAT IS BEHAVIORAL ECONOMICS?In a time of great disruption, the Financial Services (FS) industry faces an increasingly diversified portfolio of threat and opportunity. Game-changing developments in technology and regulation have opened a Pandora’s Box of new customer demand and expectation. Meanwhile, the boom in digital challengers, places traditional brick and mortar institutions under intensifying pressure to introduce new ways of working in order to keep up with the ever changing times.

Sitting at the intersection of psychology and economics, Behavioral Economics (BE) provides a theoretical framework to the science of human decision-making. Often described as ‘the study of consistent irrationality’, it shines a light on the factors that drive consumer choices and exposes how many of these decisions are often not as logical as assumed. For FS providers, BE offers an opportunity to lift the lid on consumers’ minds, and design a customer experience that caters to a new age of finance.

Michael Meyer, VP of Customer Experience and Operational Excellence at Greater New York Mutual Insurance (GNY), is one transformation leader working to revolutionize his business through the introduction of BE principles. Currently focusing on the customer experience provided by the insurer’s underwriting arm, he is creating awareness of the value of finely-tuned customer interactions in the pursuit of operational excellence.

Here, we explore some of the pivotal elements of BE within the FS context while sharing an insight into Michael’s own experiences in introducing this new way of thought to GNY.

Page 3: Behavioral economics anD Financial services · “In behavioral economics theory, easy trumps everything – even cost,” explains Michael. Pointing to the irrationality of human-decision

“In our business, while speed is important, we also place a lot of value on having exploratory, meaningful interactions with our customers beyond just processing a transaction,” says Michael. For many FS providers, there is a natural tendency to design solutions that put speed and efficiency at the fore. From taking out an insurance policy to applying for a loan, great value is often placed on customer journeys that strip back the fluff to be as streamlined as possible. But, as logically beneficial as such an approach appears, there is a risk that the customer’s innate human need to feel cared about may be neglected and, in BE, it’s feelings that drive customer loyalty.

In the context of FS, opportunities to influence customer emotions arise at touchpoints such as phone calls and written correspondence. “Every time you talk to a customer and you end that contact point, you’re leaving them with an emotion that they will remember” Michael explains, “emotions can drive judgments and behavior more than rationality and logic does.” For some customers, these experiences may be the deciding factor as to whether they decide to initiate or continue a relationship with a company. “Our simple behavioral economics guiding principle is ‘Positive Customer Emotions = Positive Financial Impacts.”

BEHAVIORAL ECONOMICS IN ACTION: ANCHORINGIn BE theory, Anchoring refers to how the first fact, number or person that a customer encounters will bias their subsequent judgement and decision making. Below, Michael explains how simple changes to a letter’s structure, language and phrasing transformed the emotion that GNY’s customers experienced, influencing their proceeding engagement with the business.

“We had a system-generated letter that would go out to policy holders when they were late paying their premium. This can happen to any of us – a bill gets lost in the stack and you just forget to pay it. But, when I first came across the letter and read it as if I were a customer, I thought: This not good. The emotion it created was negative and almost threatening. So, we completely rewrote the letter so that it created a positive emotional impact. It went from a threat to: ‘Thank you for your business. We are waiting on your premium payment, so we can continue to provide service to you.’ It was a complete 180.

Similarly, with our new business quote letter, the original document began with the address of the property that was, potentially, going to be insured and then went straight into the relevant legal jargon. Of course, from a legal standpoint, it’s important that this information is included, but it wasn’t until the second page that the letter shared positive insights about the company. To improve this, we swapped them around so that the customer’s experience began with positive emotion, which went on to influence how they engaged with the rest of the letter. These aren’t complicated changes, but they can have a significant impact”

THE POWEr OF EMOTION

Page 4: Behavioral economics anD Financial services · “In behavioral economics theory, easy trumps everything – even cost,” explains Michael. Pointing to the irrationality of human-decision

“In behavioral economics theory, easy trumps everything – even cost,” explains Michael. Pointing to the irrationality of human-decision making, numerous accounts of BE research have demonstrated how individuals are more likely to opt for short-term ease over long-term gain, be that in cases relating to finances, health or relationships.

In an age where customer expectations reflect a culture of instant gratification, institutions should attend to this demand for ease. Switch the focus from making arguments as to why a customer should part with their money to removing the friction and barriers that may deter them from doing so. “Personally, if something’s easy I’ll pay more for it, because time is money,” says Michael.

Those integrating BE theory into the design of their customer experience can likely find numerous opportunities for improvement in the communication options they provide. “We have found that if we provide too many options, our broker customers can become confused, especially when they are also interacting with other carriers. As a result, one of the things we talk about is understanding how customers prefer to interact or communicate with us, and us with them, which simplifies things for the customer.” Alongside creating a more pleasant interaction for the customer, re-assessing preferred customer touch point methods will inherently remove communication obstacles and barriers.

BEHAVIORAL ECONOMICS IN ACTION: FRICTION COSTSFriction costs is a BE term for the idea that people can be deterred from taking action by seemingly small barriers. Here, Michael explains how customer opinions received by GNY helped them to reassess a self-service function to improve the customer experience.

“A while back, we received some feedback indicating that it was a somewhat cumbersome process to determine the status of a claim in our broker portal. Brokers wanted an easier way to see the status of a claim in a quick snapshot. We took this feedback to heart and have since redesigned our broker portal and created a single page policy level claims status page that is easy to get to. If additional detail is desired, it is also easy to drill down from policy to individual claim, and then to claimant level.”

EASy TruMPS EVErYTHING

Page 5: Behavioral economics anD Financial services · “In behavioral economics theory, easy trumps everything – even cost,” explains Michael. Pointing to the irrationality of human-decision

With legacy companies like GNY, an institution established over 100 years ago, it’s common that many of the instilled approaches to customer experience are somewhat outdated. As Michael explains, introducing a behavioral economics mindset into such an environment requires a significant change management effort.

In the FS industry in particular, it’s critical to create an awareness of why customer experience is important to begin with. “People don’t really think about touchpoints and how important they are,” Michael explains. At GNY, customer experience awareness workshops have helped to provide employees with a critical understanding of the value of applying BE principles and a BE mindset. This has not only improved customer experiences, but has contributed to driving these changes in the back-office as well

In BE, Heuristics refer to cognitive shortcuts that simplify decisions. There are several types of heuristics, however the Availability Heuristic emphasizes how individuals make judgements about the likeliness of an event based on how easily an example case comes to mind. Here, Michael explains how the availability heuristic was used to introduce BE into the culture of GNY through the creation of a type of ‘proof of concept’ to encourage the company’s various branches to adopt a BE-centric mentality

“On the front-end of rolling out our new underwriting operating model across our 6 branches, much thought was given to the change management and behavioral economics aspects. We started with a branch with an enthusiastic leader who was totally on board with the new way of doing things. We had some long-term employees that we knew would need to learn to think differently. For example, not just focusing on a submission that they were presented with but the person and relationship behind it.

During the rollout workshops, when we initially asked employees ‘where do you touch a customer?’ they had to really think about what that meant. The workshops provided an opportunity to demonstrate the difference between a bad and good experience through ‘real-life’ stories, videos and role playing where emphasis was placed on the importance of ending every touchpoint with a positive message and tone. With each branch rollout, I did a change management exercise that shows the cost of process handoffs, not understanding the process from end to end, and not knowing the customer, which helped to set the stage for the change.

While a few individuals struggled with the change at first, most have since become strong proponents of the new operating model. Armed with a successful first branch rollout and vocal supporters, momentum and buy-in increased as the remaining branches were rolled out in a planned sequence. The resulting behavioral change has in turn contributed to a significant economic impact in the form of profitable growth for GNY.”

BEHAVIORAL ECONOMICS IN ACTION: HEURISTICS

INTrODuCING THE CHANGE

Page 6: Behavioral economics anD Financial services · “In behavioral economics theory, easy trumps everything – even cost,” explains Michael. Pointing to the irrationality of human-decision

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