Overcoming Consumer Inertia by Design

IDEO (mentioned at length in the article below from the WSJ) designed Bank of America’s “Keep the Change” program - the one that takes the difference of what you charge on your debit card and the next round dollar amount and automatically buckets it into a savings account.  e.g. you spend $4.50; it rounds up to $5.00 and then puts $0.50 into savings.

Although I think gamification has been overdone in some web services/mobile apps, I am optimistic about products that build in a deeper understanding of inertia and how to change behaviors. For me this falls in a few buckets: 

1) Keeping momentum on existing patterns.  For example: what if Runkeeper noticed that for the last 5 weeks you’d run 30 miles per week, that this week you’re on pace to only hit 5 miles…and sent you a push notification or email asking if you meant to go for a run and maybe even tentatively scheduling one for you and a friend that usually runs similar times of day and similar paces.

2) Breaking a habit by helping with the choice to do something new. For example: a foursquare app, that, seeing I’ve checked in to the same Italian restaurant for the last 5 Saturdays, suggests another Italian restaurant for me.

3) Combining something you usually do with the opportunity to try something new.  For example, a more sophisticated version of sampling that’s based on your purchase habits.  When I order shampoo from Soap.com, throw in 3 conditioner samples.

4) Using existing data structures to get you to do something you should be doing but aren’t.  For example, Billguard is in this category. I know I should be looking through my full credit card statement every single month, but I haven’t been - until I signed up with Billguard.  Getting an email every single month that flags suspicious activity is a great prompt for this behavior; even in the months when I get everything OK’ed, I’ll typically still go take a look on their site rather than on my credit card issuer’s site.

5) Using data visualization or reframing the data in a more relatable way.  Two examples here: first, Mint.com’s data visualization of your spending puts into perspective the fact that you spend 2x more on restaurants than groceries.  Second, I read an article recently about how someone posted signs showing how many minutes you’d need to spend on a treadmill to burn off the calories in various kinds of soda.  Soft drink sales plummeted in that store by 50% as a result.  Calories don’t mean much. Time at the gym is much easier to wrap your head around.

Enough from me — if you want to read more about how to change user behavior, check out Switch: How to Change Things When Change Is Hard by Chip & Dan Heath.

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WSJ Article: How To Keep Your Money Resolutions

Save more. Borrow less.

There’s a reason these two simple-sounding goals land on our lists of New Year’s resolutions year after year: We never seem to make any headway with them.

For help with how to break this cycle I turned to IDEO, a global design consultancy known for solving all kinds of puzzles. Its designers have tackled everything from computer mice to Pilates machines to homes for wounded soldiers.

But some of their most challenging assignments have come from financial-services firms, such as Bank of America, and government agencies, such as the Social Security Administration and the nascent Consumer Financial Protection Bureau, looking to help people do better with their money.

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“Behavior change is the hardest thing to design for,” says Ryan Jacoby, who co-leads IDEO’s New York office. Anyone who has ever tried to quit smoking or lose weight can attest to that.

So how do you design a way to boost savings and pare credit-card debt? The traditional place to begin is with a budget. But years of research into the minds of financial consumers have led Mr. Jacoby to conclude that budgets have a major design flaw. Because of their emphasis on self-denial (no more lattes!), we are not motivated to follow through with them, so we are constantly failing.

The solution? Think buckets, not budgets.

When it comes to saving, decide what specifically you want to save for. Then, set up separate pools of money, or “buckets,” for each goal and contribute to them on a regular basis. Mr. Jacoby says buckets are more in keeping with how people naturally think about their money. “We resonate with things that are more visual,” he says.

Saving more is abstract. Saving for a trip to Rome isn’t.

Another benefit to having smaller, goal-oriented accounts is that we are less likely to “borrow” from them than we are from a big lump called “savings.” Would you really raid the Rome account just to buy another latte?

Bucketing can work for managing credit, too. “One thing we hear all the time is people lose track of what they spent,” says Mr. Jacoby. A small credit-card balance becomes a huge pile of debt seemingly overnight, with “pizza debt” (or latte debt) indistinguishable from debt you intended to take on in the first place, such as to buy a new couch, he says.

One solution is to use your plastic the way it was meant to be used, paying for pizza and lattes with your debit card and putting the couch on your credit card. Beyond that, some credit-card issuers, such as Chase, let you separate out on your statement the charges you want to pay off right away with no interest (pizzas, lattes) from those you want to pay off over time or even in a certain number of installments (couches).

On the savings side, personal money-management tools, such as Intuit’s Quicken software and its newer online cousin Mint.com, let you set up and track your progress toward specific savings goals.

Online banking customers of bricks-and-mortar bank PNC Financial Services Group, an IDEO client, can identify and save for items they’d like to buy in the future by putting them on virtual “wish lists.”

Online banks, such as ING Direct and Ally Bank, let you open multiple savings accounts with no minimums and no fees, and contribute to them regularly—and automatically—from your checking account. You can even give them nicknames like “Big trip,” “Wardrobe” and “Rainy day” fund.

Then there’s Simple.com, founded by two Carnegie Mellon business school graduates and a former Twitter engineer. Here you set up one account and identify your various savings goals, and the site combs savings vehicles offered by its partner banks and allocates your money for you in (presumably) appropriate vehicles.

To me, bucketing harkens back to Christmas club accounts. If you are nursing a Yuletide hangover, it is worth considering the fact that we used to save money in advance to buy holiday gifts instead of financing our purchases with credit cards. Of course, these accounts often paid paltry interest—and hopefully the new services will do better by consumers—but their value was in giving you a modicum of control over your financial life. And control is what allows you to weather the market’s inevitable ups and downs.

“It’s not about being perfect,” says Mr. Jacoby, as conventional budgets seem to demand we be. It’s about being able to deal with life’s little financial shocks to get back close to center. And maybe even buying a latte from time to time.

Come to think of it, I’ll have a grande.