Challenges - Industry New Choice Architecture • MySuper SuperStream • Tax File Numbers • Electronic Funds Transfer • Increased costs & investment returns transparency Consolidation + commoditisation • Fewer, larger industry funds • Fewer company funds • Dramatic SMSF growth
Challenges - Consumer Lack of financial education Lack of price awareness Lack of interest (especially <35yrs) Heightened sensitivity to market fluctuations Failure to exercise choice • Product complexity • Switching frictions (paperwork, lack of comparability) • Inertia, passivity & status quo bias
Results? Low level of awareness or urgency • Devastating impact for consumers, who risk outliving their money Lack of coherent planning • Fragmentation of superannuation amounts across funds • Significant unnecessary reporting and compliance overhead Low perceived value and differentiation • Commoditisation • Retention challenges (job or career change or exit to SMSF) Outcomes: • Marketing & retention costs • Customer satisfaction • Margins
Guiding Principle 1 – Get ready for Gen X &Y 84%
Guiding Principle 1 – Get ready for Gen X &Y Live in a tech-savvy world • Digital Residents v. Digital Visitors Higher orientation towards autonomy and self-sufficiency • Lower expectations of government support Enter superannuation system much earlier than Baby Boomers • Challenge to get – and keep – them engaged
Guiding Principle 2 – Rational Economics Isn’t Many consumers are not rational and informed investors: • Some have a taste for immediate gratification and will avoid immediate disutility. • Some are clearly unengaged (esp. <30yr olds, though age isn’t the only factor). • Some are discouraged by complexity, and lack confidence. Compulsory nature of superannuation enhances passivity. Yet we know many people experience stress about their lack of command over their personal finances.
Guiding Principle 2 – Rational Economics Isn’tBehavioural Biases: Ambiguity aversion – We don’t mind risk but hate uncertainty. Choice overload – Too much choice tends to make us indecisive. Procrastination – We tend to prevaricate rather than make difficult decisions that only have a future pay-off.
Guiding Principle 2 – Rational Economics Isn’tBehavioural Biases: Framing – The way an option or question is framed can determine an individual’s response. Mental accounting – We divide money into different pots and treat them all separately. ‘Satisficing’ – We don’t try to solve problems and make judgements in an optimal manner, but merely in a way that was sufficient and satisfying (“good enough”).
Guiding Principle 2 – Rational Economics Isn’tLessons from Behavioural Finance: Providing ‘people like me’ contextual data helps correct behavioural biases by giving individuals greater clarity of focus and presenting ‘norms’ that direct people to a particular action. Pre-commitment strategies are effective for overriding preference for instant gratification at the risk of negative future consequences. Consideration of future circumstances (CFC) is a greater influencer of rational, long-term thinking than education.
Guiding Principle 3 –Super Isn’t SexyAustralians’ attitude to money: 55% of adults believe that money is just a means to buy things 48% say that dealing with money is stressful and overwhelming 40% say that thinking about their long term financial future makes them uncomfortable 31% say financially, they like to live for today 31% say dealing with money is boring Source: Financial literacy – Australians understanding money (2008)
The Great Tech War War between the titans of IT and Entertainment is going to ‘go nuclear’ in 2012. Primary battlefronts are mobile, tablets and apps. • These titans do not recognise industry borders: • Direct impact already felt in books, music, news, games, movies and telephony. • Collateral damage very likely in banking and finance. – Payment capabilities via Amazon payments, Facebook credits, Google Checkout/Wallet, Apple iTunes. Weapons are hardware, media and data. • All data intensive industries at risk.
Behavioural Economics in ActionThree-point plan to get consumers more engaged : A highly visual personal wealth dashboard to simplify choices and contextualise the future impact of today’s decisions. A mobile app to provide ubiquitous coverage and apply peer pressure via social media and ‘gamification’ strategies to spending decisions. A debit card to link personal spending to savings and investment goals.
One view of the FuturePERSONAL WEALTH DASHBOARD
Promote via social networksSocial peerpressure toremaincommitted tofinancialobjectives andcreate‘competition’
Empathy for future self How do I get mySliders use desired future?lifestyleelementsnot financia
One view of the Future‘CAN I AFFORD IT?’ MOBILE APP
Behavioural Finance in Action Sally is out shopping and sees a new pair of shoes that she quite likes. She wonders whether she can afford it. She checks her bank balance using her mobile phone, and learns she has more than the purchase price available in cleared funds. But can she really afford the shoes, given her other commitments and savings goals?
Behavioural Finance in Action Provides aggregate view of all accounts without login
Behavioural Finance in Action Check whether it fits your budget Nudges to encourage responsible behaviours
Positivereinforcementof responsiblechoices, withalerts sent tosocial networks
One view of the Future‘SAVE THE CHANGE’ DEBIT CARD
Behavioural Finance in Action Richard learns that he can make personal contributions to top up his superannuation. He signs up for a “Save the Change” debit card, which will allow him to round up the price of any purchase he makes and contribute the balance to his super account.
Behavioural Finance in Action He estimates that if he rounds up to the nearest $5 on his normal monthly purchases, he’ll save on average $100 a month. Using the online super calculator, he learns this amount could add an extra $100, 000 at retirement.
Behavioural Finance in Action He uses the “Save the Change” card instead of his regular debit or credit cards because he knows every purchase is helping contribute to his retirement. He also understands he can opt out at any time, but the extra debits are small so he doesn’t notice them.
Behavioural Finance in Action He can monitor the impact of his new retirement savings strategy online, and alter the rounding amount or redirect the savings to other financial goals.
In SummaryThree-point plan to get Gen X & Y consumers more engaged : Use the digital channel to provide consumers with an intuitive, holistic dashboard to understand their financial position. • Provide context (personal and peer group) for choices • Generate algorithmic guidance and info-graphic depictions of spending/savings outcomes • Contextualise major financial decisions (such as Super) within a wider understanding of their individual financial position • Create opportunities for education and marketing
In SummaryThree-point plan to get Gen X & Y consumers more engaged : Create a mobile and social presence to provide point-of- expenditure guidance and improve ‘Prosperity IQ’. • Help resist ‘instant gratification’ purchases • Place expenditure in the context of current obligations and desired future objectives (e.g. travel, savings). • Create peer-support mechanism and ‘friendly rivalry’ towards financial prosperity. • Use gamification concepts to encourage desirable behaviour.
In SummaryThree-point plan to get Gen X & Y consumers more engaged : Provide a point-of-expenditure opportunity to automatically contribute to superannuation. • Pre-commitment creates greater likelihood of future compliant behaviour. • Hidden savings in increments that most people won’t notice. • Enormous future value thanks to compound interest. • Ensure brand is always front-of-mind.