Finance & Markets
Data: The buried treasure by Naomi Muggleton & Neil Stewart
norms – telling customers that most people repay their loans on time and encouraging them to do the same – was the most effective. Late-paying customers who received that message were almost 7 per cent less likely to miss their next payment. We were also able to use financial and administrative data held by the bank to assess the effect of different messages on borrowers from various socioeconomic backgrounds. Those who benefitted most were men with a larger monthly income, a better education, a job, higher credit scores, and less debt overall – in other words, a higher socioeconomic status. We observed that these wealthier customers responded more to messages outlining their moral obligations, while those with lower socioeconomic status were more likely to be influenced by financial contract reminders and messages about social norms. Our findings also suggest that delinquent borrowers with unsecured loans (such as credit card debt or consumption loans) are more likely to change their behaviour in response to text messages than those with secured loans (such as mortgages). As one of the most comprehensive studies of its kind, our work could help financial institutions to reduce late payments using carefully designed text messages for different borrowers. Meanwhile, financial organisations that are unable to deliver customised messages or prefer to send the same message to all borrowers would be well-advised to send text messages. After all, if other institutions are offering that support to borrowers, perhaps they should too.
N ew rules set out tougher consumer protections for more than 50,000 firms providing financial services. The Consumer Duty Policy obliges firms to deliver ‘good outcomes’ for retail customers, taking into account their characteristics and their ‘vulnerabilities’. That is a challenge for firms at a time when the cost-of-living crisis is stretching personal imposed by the UK Financial Conduct Authority (FCA) finances. Data from consumer organisation Which? revealed that 2.5 million households – 8 per cent of all UK homes – missed at least one mortgage, rent, loan, credit card or other bill payment in March 2023. “Our lives are mapped out in a trail of digital interactions” Our research suggests that financial services firms already have access to an underexploited trove of transactional data that could be used to discharge their regulatory duties. As we spend more time online, our lives are mapped out in a trail of digital interactions, from grocery shopping to booking a holiday, banking to
healthcare, work, and leisure. This provides valuable information that many organisations fail to make the most of. Collecting and storing these details constitutes routine administration for most companies. To unlock its value, they simply need to understand the right questions to ask and what patterns might be hidden in the data. We investigated whether an individual’s spending habits might be used to predict their likelihood of defaulting on payments and getting into financial distress. The idea being that people who have chaotic, complicated lives and unpredictable purchase patterns – known as ‘spending entropy’ – may struggle to stay on top of their finances and be more likely to get into difficulties. We found a clear association between high spending entropy on one month and missed payments in the following month, as well as three months down the line. This shows how firms can use routinely collected data to gain a better insight in the lives of their customers, identify the most vulnerable, and deliver better outcomes. Spending entropy offers an additional tool for firms, instead of intrusive customer surveys that rely on self-reported responses or more opaque black box machine-learning models. This creates potential opportunities for firms to help their customers avoid getting into financial distress – a use case that should interest managers at financial firms and their regulators alike.
“Sending text messages in
A growing body of research has tried to identify effective strategies to influence the actions of specific social groups. The aim could be ensuring more people are vaccinated or attend regular check-ups to detect health conditions early. Equally, it could be encouraging consumers to make sustainable decisions that lower energy consumption or reduce pollution. In a financial context, behaviourally motivated interventions could be used to nudge people to pay their taxes, or repay their loans, on time. The latter has potential benefits for financial companies and their customers. Reducing late payments would prevent borrowers racking up huge debts and improve their credit scores. One promising intervention to reduce late payments – and defaults – involves sending targeted text messages designed to positively influence people’s behaviour. Sending text messages in bulk
is both easy and affordable, given that most financial organisations already send regular texts to their customers and thus have the necessary infrastructure in place. But what kind of message would be most effective and would that vary for different groups of customers? My recent research, working with Juan-Camilo Cárdenas and Nicolás de Roux at University of the Andes, set out to explore this with one of the biggest banks in Colombia. We wrote six messages that appealed to different motivations for repaying bank loans on time. These included a reminder of the financial implications, reciprocity, moral obligation, social norms, and socially responsible investing, with a link to learn more about the bank’s Environmental, Social and Governance (ESG) practices. The bank sent one of these messages to six groups of borrowers every week for three consecutive months. A seventh group received no messages. The first trial sent involved 7,029 borrowers who were late with mortgage or credit card payments. A
bulk is both easy and affordable”
second sent the same messages to a further 8,040 borrowers who made repayments on time, allowing us to test whether different types of messages also encouraged borrowers who met their deadlines to continue doing so. Remarkably, we found that sending borrowers who were behind with their payments any of the six messages reduced their likelihood of missing future deadlines by 4 per cent. However, customers who previously made their payments on time were no less likely to fall behind with future repayments if they received one of the six messages. This suggests that text-based interventions are most suited for borrowers who are later with their payments, rather than as a preventative measure. The message relating to social
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