Bank marketing materials focus on the dreams, anxieties and goals of consumers. Risk management processes don’t — but they should. Most audits and regulations of banks are focused on certifying the integrity of data and controls. The truly critical issue, though, is the integrity of banks’ assumptions about consumer behavior. A better understanding of the drivers of behavior is needed for both banks and consumers to understand risk, and for the financial system to provide timely and targeted interventions.
Here, the protocols from other industries can provide some insight. The pharmaceutical industry also creates products with complex interactions and potentially dangerous side effects. Yet unlike in finance, where distributing risk across institutions is the goal, in drug development the focus is on isolating risk. Although new drugs are developed for those with a particular disease, they are tested in a healthy population before they are distributed and assessed in a vulnerable one. Just as importantly, the warning label details the potential interactions and provides guidance on when to seek help, regardless of how remote the risk is believed to be.
Banks can simulate the pharmaceutical approach, and learn much about consumer behavior and its evolution — without putting customers at risk. The gaming industry has created much of the infrastructure required for both the learning and monitoring required. Creating immersive environments provides a chance for both consumers and financial institutions to make decisions on a real-time basis, rather than relying on pay stubs and historical data. The use of gaming has the potential to provide win-win solutions for both consumers and financial institutions in the following ways:
Consumer Insight: The most obvious benefit to gaming is the ability for both banks and consumers to learn at low cost. Gaming applications can help in understanding individual risk by revealing not just capacity but attitude towards obligations. Mobile platforms allow for these applications to be offered to virtually any population to learn about needs and preferences, and could be structured to preserve anonymity.
These concepts may be particularly useful for learning about new entrants into the financial system — from young people to the unbanked. The success of platforms like Mint.com suggests that there are large numbers of consumers who would like to have better control and tracking of their finances, but are waiting for simple and practical tools to do so. Games can be used to understand consumer tastes and aspirations, as well as to tweak existing products and services. They may also create a comfort level and familiarity and help consumers understand new products. Over time, many Wii users, for example, tried the activities they enjoyed in their living rooms in the real world.
Financial institutions must find innovative ways to understand their consumers’ aspirations and actual behavior. Watching them play may yield as much insight as looking at their work. Banks may also be better able to differentiate between consumers who miss payments due to genuine hardship versus those who are doing so to pay for purchases beyond their means.
Risk education: Gaming enables risk education for both banks and users. We’ve all been given generic guidelines on appropriate levels of savings and how to evaluate new purchases. Data suggests that these are not sufficient. What if consumers who were pre-approved for a loan had to log on and play an interactive game that allowed them to see the kind of lifestyle adjustments that they would have to make in order to support the lifestyle they aspire to? What if people were given their salary virtually and an immersive environment like Farmville as part of the pre-qualification process? They would be able to see the true cost of homeownership beyond the monthly payment — homeowner’s fees, garden maintenance, utilities and taxes, extra gas mileage — and how it would affect the choices available to them. Popular games also tend to spawn communities who share information and strategies about how to overcome hurdles, suggesting that peer to peer education is also possible (this has been seen in microfinance). The impact of social networks on individual behavior can also be observed.
Interdependencies: Insufficient understanding of interactions remains a critical issue in financial innovation. Gaming allows banks to get an understanding of scenarios when a product is adopted by a large population and understand what happens when multiple offerings are used. In the recession, many bank consumers have flirted with check cashing centers, for example. These and other undocumented obligations such as loans from friends and family will influence a consumer’s behavior — but the patterns will be individual. Understanding these patterns will help both banks and consumers tailor or even co-create appropriate products. It can also help identify particularly toxic combinations. In the words of Warren Buffett, “sewage mixed with good water makes everything go bad.”
Innovations: Data from the scientific community has also shown that gamers can not only help in understanding a problem, when co-opted creatively, they may also help solve it. A recent study published in the journal Nature Structural & Molecular Biology details how competitive groups of non-scientists played a game called Foldit to unravel the crystal structure of a protein involved in AIDS. The discovery was made in a few weeks although scientists had been struggling with it for more than a decade. The gamers are credited in the paper for their role. Researchers also observed increased cooperation and effort among individual players. The response and engagement of the players may also offer an indication of the commercial viability of various offerings.
The challenge of better risk management cannot be achieved through regulation alone. More must be done to ensure that the instruments that are created are rooted in an understanding of human behavior. This will help to ensure that new offerings are as geared toward risk mitigation for the individual as they are for the firm.