Economists coined the term homo economicus to describe humans as consistently rational and narrowly self-interested agents, making the "right" money decisions at any given moment. The behavioral economics revolution that started in the 70s put a big question mark on the idea of homo economicus. Research proved that people make "irrational" money decisions regularly. The banking system was designed to serve homo economicus instead of aiding people.
Overdraft late fees is a prime example of a system built for homo economicus. The Consumer Financial Protection Bureau (CFPB) estimated that the banking industry made $15.47 billion in revenue from charging overdraft and non-sufficient funds fees in 2019. Is it possible to design a system to help people avoid the non-sufficient funds fees?
The answer is yes. In 2022 it's possible to design a banking system that helps people avoid late fees. For example, bank clients' default setting will be to opt out of being able to use a credit card or debit card when their balance hits a min. Still, most banks find non-sufficient funds fees too lucrative to give up.
When the bank doesn't offer a solution to people, people look for solutions outside the banking system. The current offers to help people make better financial decisions are personal finance apps (mint.com or YNAB.com) or finding a financial coach on your own. Personal finance apps are an excellent tool for presenting data. Users can pull their financial information 24/7 with mint.com or ynab.com, create a budget, and set alerts to avoid instances like non-sufficient funds. The bigger question is, are personal finance apps proven to help people set and achieve financial goals?
Finding research-based evidence that personal finance apps help people meet their financial goals is challenging. There have been randomized control trials on the effectiveness of financial coaches. Those trials proved the effectiveness of financial coaching. A randomized control trial of personal finance apps will let a group of users use version A of the app, then allow group B to use another version or financial coaches, and see which group performs better over time.
The help people reach their financial goals, there is a need to build services and systems for people, not for homo economicus. Or let's cut on what we think works, personal finance apps, and promote what we know works, financial coaching.
Why is financial coaching effective?
Financial coaching works because it's based on how people behave in reality, not models designed in a lab. Two factors that make financial coaching effective are the accountability factor and motivation.
When working with a financial coach, there is an accountability factor towards another person. That accountability factor increases the motivation to meet goals. For example, if a financial coach and the client plan to cut cable TV by the next billing cycle, the fact it's a specific goal with a timeline and a layer of accountability increases the chances for the clients to meet the goal. The same is not valid with a personal finance app. With an app, a user can set goals and procrastinate because of the lack of accountability.
Given that we know that financial coaching works, Savings Jar's goal is to increase access to financial coaching. A financial coach and a client can decide to use a personal finance app to track progress, but access to data by itself does not equal progress.