How do banks manage to increase both customer satisfaction and their own profitability at the same time? Behavioral banking is the key to a new understanding of finance – with technologies that change customer experiences and open up new opportunities.
Behavioral banking for more customer loyalty and income
Financial well-being: Win-win concept for consumers and banks
Written by Dr Christoph Rösch, Managing Director Banking, SAP Fioneer
Financial stress is a burden for many households. A reason for banks to take a closer look at the financial health of their customers. Studies show: Banks that implement this kind of thinking successfully have more satisfied and loyal customers – and generate higher revenues. Technologies such as behavioral banking focus on customer well-being by combining financial products with psychological behavioral patterns. This enables banks to offer customized, hyper-personalized services and products that increase their customers’ financial well-being and their own profitability.
Achieving financial health with behavioral banking: The win-win formula for banks and customers
The financial world is at a crossroads. While traditional banking structures are still firmly entrenched, a new era is emerging that is more closely aligned with the behavior and financial health of its customers. Banks need to rethink their business models in order to meet the changing needs of their customers. The question is: How can the bank of tomorrow prioritize the financial well-being of its customers and increase its own profitability at the same time?
The financial confidence gap: A reality that banks must face up to
Behavioral economics show that people often act irrationally – especially when it comes to financial decisions. In Germany, 50 percent of people say they feel financial stress, while a third can barely make ends meet2. The younger generation is plagued by financial worries.1 Loss aversion, the desire for instant gratification and spontaneous spendingare deeply rooted in human psychology. Banks that understand this can use technology to intervene in a targeted manner.
Behavioral banking: What banks can do now
For many people, financial well-being and banking sounds like eating fast food while going to the gym – they don’t seem to go together. Studies show that banks that actively look after the well-being of their customers benefit from this approach. Satisfied customers are less susceptible to credit defaults and tend to be more loyal. Now the question is: How can banks promote financially positive behavior? Behavioral banking – a technology whose potential has barely been tapped in Germany – offers an answer to this. Behavioral banking focuses on the needs of customers and positively influences their behavior through targeted banking services. This stems from the findings of behavioral economics, converted into actions that educate customers on how to adopt healthier financial habits.
A win-win for customers and banks
Behavioral banking leads to a real win-win situation: Customers who improve their financial health not only become more financially stable, but are also motivated to fully exploit their financial potential. With every saving, every investment goal and every good financial decision, their willingness to use a variety of banking products and delve deeper into the bank’s range of services also increases. This can result in a commitment that goes beyond mere account management, creating huge cross-selling and upselling potential for banks. Studies show that customers who feel financially secure use up to five times more financial products and are three times more likely to recommend their bank to others 3 – the perfect balance of customer satisfaction and growth for the bank.
Five use cases of behavioral banking
To succeed in the new world of behavioral banking, banks need to invest in technology that enables hyper-personalized customer service 24/7 – from automated financial management to real-time incentives and personalized offers.
- Automated everyday financial management: Today, modern personal finance management (PFM) tools can go beyond the retrospective evaluation of expenses and their categorisation. Sub-accounts create transparency for budgets and savings targets. These can be individually configured using automated rules and help consumers make the right financial decisions in everyday life.
- Gamified engagement and incentives: Gamification motivates consumers to achieve financial goals by rewarding progress and encouraging regular interactions. Rewards and status levels support long-term goals in particular, such as pensions savings, and promote customer loyalty to the bank. Incentives are particularly helpful when it comes to less glamorous savings goals, such as saving a “nest egg”.
- Real-time human-like interactions: As soon as an account is at risk of falling into overdraft, the user receives an real-time alert. These alerts coupled with the use of artificial intelligence allows banks to extend their “opening hours” and become available to customers 24/7. It’s also possible to generate more personalized notifications (e.g. “Your car insurance is due on January 3rd”), prompting users to take action.
- Predictive and hyper-personalized experiences: Currently, banks segment traditional target groups by relatively basic criteria like gender, age, income, etc. But an advanced user experience is helpful for customers to receive customized support and offers. Relevant data is often already available and it is now a matter of linking it with advanced analytics and AI so that customer needs can be understood and predicted in a better way. For example, a personalized cashflow forecast shows the impact of today’s financial decisions and suggests tailored actions that create an outstanding customer experience.
- Integrated services beyond banking: Financial health is a holistic approach and puts the customer at the centre. This significantly expands the requirements for a traditional account. Multi-banking and data from ecosystem partners such as insurers provide clarity regarding the individual needs of the consumer and contribute holistically to financial health.
Banks that become early adopters of these technologies focus on the needs of their customers and can become pioneers in behavioral banking.
Behavioral banking: Two practical examples from around the world
- Commonwealth Bank of Australia: Customer transparency through forecasting
The Commonwealth Bank of Australia regularly analyses the financial health of its customers. It offers a number of tools to make financial management easier. With cash flow forecasts and the “Bill Sense” function, customers can keep track of upcoming bills and direct debits. Based on the analysis, the bank offers proactive recommendations for action, for example, if the customer is faced with an expected account overdraft. Customers can use automation to simplify their day-to-day financial management and achieve their savings goals more easily. The “Smart Savings” function recognizes surplus funds in the account and can automatically allocate them to a savings target.
- Discovery Bank in South Africa: The world’s first behavioral bank
With “Vitality Money”, Discovery Bank focuses on behavioral banking and rewards customers’ healthy financial habits through a points system and personalized banking conditions. The better the financial behavior, the higher the level and the rewards, e.g. discount codes or fitness vouchers. Non-financial factors such as fitness goals and consumer behavior are also part of the system and promote holistic development. This model strengthens customer loyalty and enables the bank to achieve its own goals through dynamic discounts and optimized banking conditions by motivating customers to reduce debt or increase deposits.
Financial well-being and banking – behavioral banking brings together what belongs together.
Banks that actively look after their customers well-being benefit from the new approach. Customers who feel that they are in good hands with their bank are more financially stable and tend to be more loyal.
Banks should no longer rely only on their traditional business, but should instead look to break new ground. Those who decide to use behavioral banking and invest in smart, modern technologies not only have more satisfied customers and higher profits, they also have the opportunity to set standards in terms of financial health.
1Jugend in Deutschland Trendstudie, 2024
2OECD/INFE, 2023
3Financial Health Network, 2020