How banks can use Mental Accounting to help customers reach financial goals.

Many banks offer a variety of checking options for checking and savings accounts.  Some have higher interest rates if you use an ATM card and others have free online banking if you keep a minimum balance.  Unfortunately, many of these options provide little additional value for customers.  Most people have a single checking account that is used to pay for leisure activities and necessities and they must constantly make sure that they set aside money for bills that are due latter in the month.  If any money is left over, then it might get added to savings.

To improve value to customers, banks should use the Behavioral Science concept of Mental Accounting to offer accounts that are more in line with how people think about their money.

Most financial planners advise clients to prioritize spending so that the necessities in life like long term savings and housing are paid for first and whatever is left over can be used for less important things.  The banks should mimic this system.

Here is how the program would work:

First, you would define your repeating expenses such as rent and car payment, and then you define your financial goals.  Second, the bank would create multiple accounts with descriptive names such as Necessities, Savings and Leisure.

The Necessities account would only allow online banking payable to a fixed number of expenses, the Savings budget would be a savings account with limited access, and the Leisure would have ready access to cash in the form of a debit card.  When you deposit your paycheck each month, the bank would automatically make deposits into each account depending on your preferences.  A fixed amount would first go into the Necessities account, then another smaller fixed amount would go into the Savings account then whatever is left over would go into the Leisure account.

Under this plan, you could consistently spend all of the money in you leisure account and still be confident that you could pay your bills even if they were due several weeks after you receive your paycheck.  This system works because people spend based on what is in their account.  At the end of the month when your Leisure account is low, you would act like you were out of money yet still have confidence that you will reach your financial goals.

This program would shift the relationship between banks and their customers.  Today banks only offer security and convenience, which the customer views as a commodity.  By creating physical accounts that reflect people’s Mental Accounting and prioritizing deposits, banks can start to act as financial partners.  This would increase customer retention, reduce delinquency on mortgage and credit card payments and help customers reach their financial goals.