In a previous post, we explored how creative naming systems might be used to inject a sense of individualised relevance and personal ownership over a set of otherwise standard sub-accounts. Because they are intangible, engaging sub-account names may become hooks onto which people can project their own financial mental models and goals.
But the least intuitive part of banking is not the uses that customers may want to project into each account but rather the features embodied in them. An account is a vessel onto which a set of rules are attached, typically relating to rewards, programmed transactions (automatic sweeps and recurrent deposit obligations), and especially liquidity frictions. The problem with most accounts is that those frictions and rules, desirable as they may be in and of themselves, appear arbitrary. That makes them hard to remember and comprehend. Two free withdrawals a month, minimum withdrawal sizes, penalties on early withdrawals: why, oh why? When you need money desperately and a seemingly arbitrary rule stands between you and your money, the result is going to be frustration and rejection of the product.
Informal savings options also have a number of liquidity frictions, but somehow they make sense to us. A cow, for instance, has at least seven frictions: (i) a waiting period, as it cannot be sold immediately; (ii) indivisibility, as you can’t sell only a leg; (iii) a financial penalty, as there are transaction costs involved in buying and selling a cow; (iv) mental labeling, as the cow invites clear associations to the kind of purposes one may save for; (v) the fact that it produces milk puts in people’s minds in the category of a productive investment rather than mere savings which raises the (mental) stakes of selling it; (vi) peer pressure, as the whole town will get to know if you sell a cow; and (vii) social meaning, as cows often represent divinity or fertility or completeness of family in various cultures. Notice how some of these frictions are merely economic, some purely psychological, and others entirely social.
That’s a lot of friction features on cow-savings. But the remarkable thing is how intuitive it all is. It’s not that the frictions are attached to the cow; the collection of frictions is what gives a sense of cowness to the cow. The cow doesn’t come with an account user manual, a set of terms and conditions. Likewise, pigs and goats are different bundles of these frictions: more divisible, faster to sell, less socially conspicuous, etc. A key advantage of informal savings instruments is precisely how intuitive they are in terms of what they might be used for and especially what are the liquidity conditions they embody. Digital accounts appear, in comparison, as arbitrary jumbles of rules.
Can we come up with sub-account names that are evocative not only of purpose and intended use pattern but also of the features of the account, and in particular rewards and liquidity frictions? At a rudimentary level, it’s easy: the I’m feeling lucky account doesn’t pay interest but has a lottery mechanism; the elephant account does not allow for partial withdrawals. But this may not be so intuitive either: you can’t just pull out one of the frictions in an elephant and expect customers to find that intuitive.
The following might sound very odd, but imagine that the sub-accounts were named after the days in a week: Sunday (for the family), Monday (the big hairy goal), Friday (me!). These accounts would only offer liquidity on their name day; you might not even see them when check balances on other days. That doesn’t mean the user would necessarily liquidate Monday money next Monday; it only means that every week you have an option of unlocking money in case you really need to, but you won’t be exposed to decision fatigue the rest of the week. The name here is doing double duty: as a suggestion of purpose and as a reminder of the degree of availability of liquidity.
Another type of friction is the time lock-up. Accounts can be named simply after the month when they become liquid.
Take another type of friction: minimum transaction denominations. You could have accounts called chicken, goat, pig and cow, in which you could only transact in multiples of $3, $30, $100 and $300 respectively. This would permit using the language of buying and selling stuff rather than the language of saving and dis-saving.
Now consider frictions around the notion of peer pressure. Imagine that you could send money to a friend who you designate as your money guard. The money physically leaves your account and goes into his; it shows in his balance rather than yours. But your friend can’t withdraw it or otherwise dispose of the money. He can only do one thing with that money: send it back to you – when you him ask for it.
Imagine that when you came across a little money you could send it to August 15th, or to Fridays, or to November, or to money guard Pete; or you could buy the equivalent of one goat with it; or you could send it to banana yellow (which has no frictions other than mental labeling). There need be no mention of sub-accounts at all; it’s just money that you’ve pushed aside, maybe ear-marked for a purpose that only you know, and which becomes available under specific, easy-to-remember conditions. (There would always have to be a way of advancing any locked up money in case of emergency, through a secured loan for instance; a kind of reset button.)
We usually talk about the need for formal financial services to be simple. Actually, that’s not right. What we need is for services to be intuitive. As we just saw, there is nothing simple about the cow as a savings vehicle. Yet it is abundantly obvious what sorts of constraints or frictions you are getting yourself into when you sink your money into a cow. Many formal or digital offerings are very simple in comparison, but offer no intuition. The account rules seem like an arbitrary imposition, you have to learn them, and you feel cheated when you get caught by a friction you didn’t remember. Not so with the cow. To compensate for this intrinsic lack of intuition, the name of digital products needs to convey first and foremost the key liquidity features they embody.