Here at Oakam, we believe in the power of technology to build better businesses and in turn, help people build better lives. For micro-lenders like Oakam, technology offers access to insightful customer data that not only helps us better predict their future behaviour, but also find ways to positively influence it. Our chief product and marketing officer, Julie Haugen, recently penned a piece for CCR Magazine to share Oakam's perspective on how gamification and other technology-enabled behavioural tools can drive financial inclusion forward and spark a new generation of businesses whose objectives are more closely aligned to their end users'.
*This article first appeared in the [July] issue of CCR Magazine.
For decades, consumers have shared in the upside of their brand loyalty, earning air miles, credit card points and other perks for their repeat business. And with the global loyalty management market set to reach $4.59 billion by 2021, most would agree that the application of this early form of gamification to retention and engagement strategies has been good for bottom lines.
But for customers, the choices they’ve been rewarded for making have often left them financially worse off. In today’s era of conscious capitalism though, gamification is being redesigned to better align the interests of customer and business.
Consumer finance is one industry that stands to be transformed by this new approach to gamification, while at the same time opening doors to greater financial inclusion.
In the UK alone more than 1.7 million people are without a bank account and 40 percent of the working age population has less than £100 in savings, according to The Select Committee on Financial Exclusion. The reason that so many consumers remain financially excluded is because traditional institutions find their risk profiles too high or hard to measure. This represents a loss of potential income for some lenders, a challenging underwriting environment for others, and an expensive solution that often leaves borrowers in a debt trap. The CFSI estimates that the poverty premium paid by financially excluded individuals is £1,300 per year.
Gamification offers a way to solve these problems.
Firstly, gamification helps lenders make up for a less robust upfront risk assessment when dealing with borrowers that have little or no credit history. While character screening and evaluation of available data is still critical, gamification allows lenders to reduce the upfront risk they’re taking on over time by offering borrowers positive financial incentives for good repayment behavior.
The difference between this approach, and for example, the structure of credit card reward programmes is that the latter incentivises more spending rather than on-time repayment. These borrowers then face a second hit in the form of interest charges on the higher balances they’ve been encouraged to accumulate. This makes it clear that it’s about profit first, consumer well-being second.
In the first three weeks of launching Oakam Grow, our own app-based gamification feature in April, the prospect of earning points resulted in a 16 percent improvement in on-time repayment among our borrowers.
From the borrower’s perspective, beyond the prospect of rewards like the ability to skip an occasional payment, cash-back and better terms on future loans, it also represents an opportunity to build credit history and graduate into credit products with lower rates.
This is already being successfully applied in health insurance, where individuals can lower their premiums by sharing data from wearable fitness devices that helps insurers more accurately evaluate their risk.
Why is now the opportune time for consumer lenders to embrace gamification? The rapid pace of smartphone penetration in lower income communities and the growing sophistication of AI and data analytics. In the UK alone, smartphone penetration increased from 52% of the population in 2012 to 81% in 2016. This paradigm shift will enable lenders to reach more consumers and more effectively apply behavioral science and data analytics to developing more efficient operating models and richer, customer relationships with more potential for growth.