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Fintech Nudges and Personal Finance Management

Studying the effectiveness of overspending messages in a money management app

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Nudges are a small cue to action, which does not involve any direct reward or punishment, and they have been found to influence individuals’ financial decision-making. Yet, critics of nudges cast doubt about the efficacy of this intervention. In this regard, if nudges are implemented in a fintech app, in which the app users can check the status of their finance on a regular basis, would they help them manage their personal finance?

In his paper, Sung K. Lee, a finance PhD candidate at NYU Stern, studies the effectiveness of a money management app serviced by a major commercial bank in Canada. He focuses on the feature of overspending messages, which are sent to the users if their spending on a day exceeds twice their daily average spending. In a nutshell, the paper compares the behavior of the message recipients to that of the non-recipients as the messages serve as a nudge for monitoring personal finance.

The paper finds that the app users who received an overspending message are estimated to spend C$8.15, which is 5.35% of daily average spending, less relative to the users who did not receive one, on the next day of receipt. The most notable reduction is in the shopping category. The cumulative spending gap seems to persist over a few days, and the effects of messages are more pronounced for individuals who are older, have higher liquid wealth, are more financially savvy, are new to the app experience, or reside in a city with higher education levels.

In addition, the paper documents suggestive evidence that there is spillover of fintech nudges from one user to another in the same household. In other words, two individuals in a family inform each other of their financial situations and reduce spending together. Hence, these peer effects can amplify changes in individuals’ spending.

Overspending messages carry one unintended result, yet. The message recipients are less likely than the non-recipients to make a log-in in the future. This tendency to neglect adverse financial information is known as the ostrich effect. Therefore, as long as the users confront their financial status by logging in and reading messages, they can monitor their spending more closely.

Read the full paper here.