AI Brings Customer Behavior and “The Nudge” Back into View

(This article written by Scott Nelson was posted on the MonitorDaily.com on November 1, 2024)

AI is reshaping how equipment finance companies manage customer behavior risks, leveraging ‘The Nudge’ to guide customers towards better financial wellness. Through empathetic, AI-enhanced nudging, Scott Nelson explores how equipment finance organizations can build stronger, more proactive relationships, creating success for both lenders and borrowers alike.

Customer behavior and risk have always been synonymous in equipment finance, which is one reason why customer relationships and customer empathy are always central to an equipment finance company’s culture. Making payments, or not, is a first order risk to the return on any lease and is a choice that customers make. A reduction in creditworthiness during the period of a lease, often a hidden risk in a portfolio, is usually the result of unwise financial behavior elsewhere in a customer’s life that has an immediate impact on the risk of default on other commitments. And, of course, misrepresenting financial information or situations before or during a contract are always unwanted behaviors, sometimes fraudulent, that every lender tries to avoid or mitigate.

None of this is new, but AI is bringing into focus a new perspective of a past idea on dealing with customer behavior risk that is returning to the finance world from which it originated.

“The Nudge” elevates proactive customer management

First published in “The Nudge” in 2008, economists Richard Thaler and Cass Sunstein abandoned the long-held economics tenant that consumers are both efficient and logical in their decision making. Instead, they introduced the idea of providing a choice architecture within which consumers can operate and then helping them, i.e., nudging them, to make better decisions in the context of financial wellness. Nudging has become the term for providing an environment in which consumers are gently encouraged to make better choices leading to better financial wellness. “Easy and cheap to avoid” help guide nudge designers.

Around the same time, digital health startups were discovering how wearables could measure patient behavior. The first Fitbit (2009) was quickly followed by a variety of tracking devices and smartphone apps like Stava which measured and encouraged fitness training behaviors. Omada Health, Noom, Headspace, Carrot Fertility and Livongo all integrated nudging into their therapy applications for chronic conditions like diabetes, weight-loss, infertility and general heart wellness. Apple saw a consumer need emerging and quickly consolidated its position as a market-leader by adding physiological sensing, e.g., heart rate, blood oxygen and heart rhythms to their iPhone platform with the introduction of the Apple Watch (2015).

Banking and finance were not as quick to pick up on nudging, but Thaler continued his work combining economics and psychological analysis for individual decision making. In 2017 he won the Nobel Prize in Economics for what is now known as behavioral economics. Behavioral economics — the name sounds like the domain of a collections team who spend their time trying to figure out which customers are going to pay overdue bills and how to encourage those who are delinquent to change their mind and pay. That is just one of the opportunities for nudging.

New tools for old ideas — AI automates and elevates nudging efficacy

Today digital banking and lending platforms like Chime, Betterment, Monzo, Acorns and Digit all effectively use nudging to promote financial wellness by automating savings, encouraging timely payments to avoid overdraft fees and guiding customers toward better spending habits. They use subtle reminders, simplified payment processes and personalized messaging tailored to each customer to help comply with their own financial goals while not giving up the freedom of choice.

Practitioners have seen up to a 74% reduction in customers only paying the minimum on credit cards and almost 15% reduction in continued delinquency for delinquent borrowers. A utility company study used simple messages about due dates, amounts due and easy payment options combined with consumer segmentation for different nudge types to reduce delinquency rates. These strategies leverage psychological insights to make the payment process more appealing and less of a hassle for customers resulting in behaviors that are better for both the borrower and lender alike.

This is where AI enters the picture to make Thaler’s behavioral economic theories more practical and effective. A properly designed and architected operating platform automatically gathers the data necessary to reach a “relationship-level” understanding of each customer’s behavior and financial health status. An AI-enhanced nudging platform can efficiently experiment with a wide array of messages and timings for customer segments and individuals and then leverage successes to personalize and adapt engagements with specific outcomes in mind. Nudging is naturally a learning process and a natural fit for AI.

Empathy: Equipment finance’s edge in nudging:

As a young collections specialist my instinct was to learn as much as I could about both the customer and their business. I wanted to know how they were doing so that I could best tailor my messaging to get payments. But at the time I was mentored to avoid relationships that might confuse or complicated difficult collection messages and actions.

In the quote above from Tamarack’s director of SaaS Products, Timothy Appleget, describes his experience working in collections at a larger finance company. Appleget’s instincts are common in the equipment finance industry and reveal a nudging superpower: customer empathy. Originators and lenders alike have an instinctive interest in the people and cultures behind the deal. At the time Appleget’s relationship-based approach required too much time and added an emotional factor to what was supposed to be an objective function of the organization. His mentors wanted him to remain a little more distant in the interest of efficiency. Personalized reminders had to be delivered manually — verbally or written. The analysis necessary to take advantage of the relationship required both years of experience and good judgement skills; human traits that are challenging to scale.

But now, personalized communications are both asynchronous and automated via emails, texting and app-based connections. Data aggregation and business analysis systems can not only profile customers and market segments, but they also document behaviors and preferences that drive business success. Digital channels make it possible to implement “relationship centric” processes at scale. The organization can leverage the empathy of specialists like Appleget and nudge customers to better financial wellness at scale.

Expense-generating customer behaviors are clearly a target for nudging and one with many examples from which to learn. Collections fees are reported to cost a leasing company as much as 15% of the outstanding debt payments, typically 2% to 3% of the portfolio, so if nudging can reduce delinquent payments by 10% it could save a mid-sized ($300 million assets) company as much as $100,000 of operating expense annually.

But the bigger opportunity for nudging, like that in healthcare, is wellness. Customers who are financially healthier are more likely to become repeat customers and increase their business with the organization. If they were to attribute their wellness to their finance organization in the same way patients attribute wellness to providers, they will feel better about their relationship with the lender and recommend them to others. Nudging can help equipment finance practice its natural empathy skills in a way that creates more success for both customers and lenders alike.

Customer behavior has always been at the core of successful business relationships, but the time has passed for passive, wait-and-see tactics to managing behavior-based risk. The digitization of transactions and workflows now provides the data necessary to implement AI-based nudging to help customers achieve better financial wellness. The economic upside of wellness is broad and deep.

What examples of “nudges” have you seen or implemented? What examples would you like to see? Share your ideas with us here by November 30th, 2024 and you will be entered for a chance to win either a copy of “The Nudge” or Tamarack merchandise.