Financial Literacy Isn’t Enough: Make Room for Behavior Change

 

Financial literacy remains a global challenge, not only in developing nations or among those with limited education, but also among university graduates, even those with degrees in economics. Despite access to financial knowledge, people consistently make irrational decisions: overspending, under-saving, mismanaging risk, or ignoring better alternatives.

For decades, the default response from governments and institutions has been education. The theory goes: if people understand money better, they’ll make smarter choices. But the data tells a different story. While education can raise awareness, its impact on long-term behavior is often marginal and short-lived.

The truth is simple: knowledge alone rarely changes behavior. People change when they have a reason to, i.e. a financial incentive, a social signal, or an emotional trigger. To truly improve financial health, we need to focus not just on teaching, but on changing behavior.

Fintechs and banks are beginning to understand this. They’re moving beyond education to develop tools that guide users toward healthier financial decisions, not just to increase product uptake or cross-sell, but to genuinely improve financial well-being.

We consistently make a wide range of poor financial decisions that cost us dearly:

• Not saving enough or at all

• Failing to compare prices or shop around

• Forgetting to cancel unused subscriptions

• Leaving money idle in low-yield accounts

• Panic-selling investments during downturns

• Taking excessive or unsuitable risks

• Over- or under-insuring

• Using expensive overdrafts or short-term credit

• Choosing inappropriate mortgage structures

• Missing out on tax benefits or inheritance planning

• …​

Some of these missteps stem from a lack of knowledge. Others are driven by behavioral biases (how our brains are wired) or simply from being overwhelmed, busy, or indifferent.

These are exactly the areas where behavioral science can make a difference. By applying insights from psychology and behavioral economics, financial institutions can design smarter tools, user journeys, and interactions that nudge people toward better financial outcomes, e.g.

• Boosting saving rates

• Encouraging long-term, diversified investing

• Reducing financial stress

• Preventing debt spirals

• Improving subscription hygiene

• Avoiding unnecessary fees

• Promoting retirement planning

• Strengthening overall financial literacy

• …​

In this blog, we focus on three immersive, digital approaches that can complement (or go beyond) traditional advice, coaching, and training. All of these intersect with the domain of gamification (cfr. my blog: "Gamification - A good idea for a serious topic like financial services?" - https://bankloch.blogspot.com/2021/02/gamification-good-idea-for-serious.html), which uses gameplay mechanics and design to increase user engagement, make financial decisions more rewarding and sometimes even addictive (in a good way).

1. Simulators That Empower Decisions

Interactive financial simulators, especially when tailored to personal data, can simplify even complex financial decisions. Presented visually and intuitively, they help users compare, plan, and act with confidence.

Use cases include:

• Comparing financial products (e.g. Capilever’s CompaRate solution)

• Simulating budget outcomes (e.g. visualizing the long-term impact of inflation, savings, or investments)

• Evaluating housing options: buy vs rent, mortgage terms

• Evaluating mobility option: car purchase vs car leasing vs car sharing vs car renting vs public transport

• Evaluating energy upgrades like solar panels or insulation

• Estimating loan eligibility or renovation budgets

• Assessing the impact of tax optimization strategies

• Understanding long-term trade-offs (e.g. pension contributions vs liquidity)

• Simulating how a new investment affects portfolio risk or diversification

Key success factors: user-friendliness, personalized data integration (e.g. using bank data), compelling visuals, and potentially even AR/VR capabilities to make insights tangible.

2. Automation That Prevents Mistakes

Smart automation, through AI, alerts, and digital assistants, can act as a financial co-pilot, helping users avoid common pitfalls and irrational decisions without having to think in real-time.

Examples include:

• Low balance alerts or overdraft warnings

• Notifications for unused subscriptions or better deals

• Robo-advisors suggesting rebalancing or tax-smart strategies

• Automatic budget adjustments during income drops or unexpected expenses

• Bill reminders that consolidate and simplify payments

• Emergency fund monitoring with refill prompts

• Alerts for unusual or duplicate spending patterns

• "Too much cash" nudges to move idle funds into interest-bearing accounts

• Year-end tax optimization prompts, e.g. increasing pension contributions

• Debt snowball automation: proposing repayment strategies that minimize interest

Additionally those tools can add protective friction to reduce impulsive or risky behavior, e.g.

• Cooling-off timers before risky investment withdrawals or high-cost transactions

• Panic-sell alerts with historical market context and long-term impact reminders

• Alerts when nearing a spending limit, offering to pause discretionary spending

• Risk profile mismatch warnings before executing unsuitable investments

• "Think again" prompts for high-cost credit products or payday loans

• Delayed activation of new subscriptions to curb impulse decisions

• Reconfirmation steps for emergency fund withdrawals

• Extra validation for late-night spending, when decisions are more emotional

• Highlighting sunk-cost risks and asking: "Do you really need this now?"

These friction points aren’t barriers, they’re digital guardrails designed to protect users from their worst impulses.

3. Behavioral Design That Nudges for Good

This is where behavioral economics can be used not to manipulate, but to empower. The same psychological tactics used to drive conversions can be ethically repurposed to support healthier financial behavior.

Some key techniques:

• Anchoring & Reference Points: Help users compare fees and prices more transparently by showing industry benchmarks or previous costs, e.g. Benchmark your ETF cost against the industry average, Show how much a user saved by cancelling redundant subscriptions…​

• Framing Effects: Make numbers more digestible, e.g. "Save €3/day" feels easier than "€90/month", "High fees cost €27,000 over 30 years" beats "0.7% expense ratio"

• Choice Architecture & Defaults: Guide people subtly without forcing, e.g. Auto-enroll in diversified portfolios unless opted out, Offer fewer, clearer choices to reduce decision fatigue…​

• Loss Aversion: Frame nudges in terms of potential losses, e.g. "Skip this month and you fall behind your savings goal", "Pay today to avoid a €15 late fee"…​

• Social Proof: Show what peers are doing, e.g. "People like you save €220/month", "72% of users choose this investment plan", "When making a major purchase, show insights like: “80% of people with your profile spend less on similar products — still want to proceed?"…​

• Scarcity & Urgency: Use ethical urgency, e.g. "Upgrade by Sunday to keep your €30 bonus", "Your mortgage offer expires in 10 days"…​

• Fear of missing out: Leverage users’ aversion to missed opportunities to encourage positive financial behavior, e.g. Reward each saving action with a lottery ticket for a chance to win a cash prize (Prize-linked savings), Use prompts like "By not saving today, you missed out on a chance to win €500" or "Others saved and earned, don’t be left behind."

• Complexity Reduction: Simplify decisions to reduce inertia, e.g. Aggregate total fees into a monthly view, Use icons and progress bars to show investment diversification…​

• Decoy Effects: Guide users toward better options by making them the obvious choice among others, e.g. Introduce a weaker high-risk investment to highlight a better diversified one.

• Endowment & Progress Motivation: Build habits through momentum, e.g. Show progress toward goals ("70% of emergency fund reached"), Reward small wins, like consistent savings streaks…​

All of these techniques have long been used to boost sales and engagement. But when applied with the right intent, they can drive real, positive change in people’s financial lives.

This approach, often called "benevolent nudging" or "choice architecture for financial health", aligns users' natural behaviors with their long-term interests. It’s a win-win: customers achieve better outcomes, while financial institutions build stronger, trust-based relationships.

Fintechs and financial services providers have both the opportunity and the responsibility to lead this shift. By combining behavioral science, thoughtful design, and ethical automation, they can move financial literacy beyond classroom theory and into real, lasting impact.