Has COVID-19 been the most effective behavioural nudge to kickstart a savings habit?

Our latest research shows that the coronavirus situation has forced consumers to refocus on their financial well-being and fuelled a desire to feel financially secure

For many years, the financial services world has been trying different ‘behavioural nudges’ to encourage a savings habit. Social norm nudges (describing how other people behave), apps enabling the visualisation of savings into ‘pots’ and ‘rounding up’ purchases to build up savings gradually are a few examples.

Our research clearly shows that COVID-19 has exposed a ‘savings vulnerability’.

However, success has been limited. Research into the psychology of saving has found that the human brain naturally avoids it. First, it is perceived as a loss – people have to cut spending to save more. This can require a change in habits and we naturally are eager to spend cash now rather than save for tomorrow. Second, there is a tendency to procrastinate – to want to save but put it off because it is easier to stick to the status quo. On top of this, the low interest rate environment – where effectively savings ‘lose’ value in real terms over time – has meant even those who do save are not seeing their savings work for them.

But in 2020 the world changed. COVID-19 hit and people have been forced out of their status quo. The job market seems perilous, millions are furloughed, income has dropped and the ability to spend money is drastically reduced.

Savanta conducted research to understand the impact of this on how consumers think and feel about their financial situation:

The research clearly shows that COVID-19 has exposed a ‘savings vulnerability’. The majority of consumers – across all age groups, genders and social grades – agreed that having some savings has become more important to their peace of mind since the COVID-19 crisis hit. While the situation has forced people to become savers rather than spenders, there is clearly a greater desire to have a financial safety net and to pay off debt than there was before. Peace of mind has become a bigger driver than making money work hard.

The other behavioural shift we are seeing is an increased focus on control: more consumers are saying they are spending time budgeting and planning their finances. This is particularly the case for younger consumers – Gen Z and Millennials:

Engaging consumers in their finances has been a challenge for financial services providers for years, but the current situation has stimulated interest. This represents an opportunity for providers to reach consumers while they are more open and receptive to communication, approaches and information.

But what about when the crisis is over? Are consumers intending to head back out and enjoy spending all the money they’re saving or is there a desire to continue the savings habit?

On the whole, most people are not likely to spend all the money they’ve saved. This is particularly true if they have been put into a more difficult financial situation through being furloughed or a pay reduction. However, as can be seen in the following graphic, the younger age group – particularly Gen Z – are the most likely to spend what they have saved:

COVID-19 has fuelled a desire to save more irrespective of interest rates. This represents an opportunity to create other differentiators and drivers; however, the savings desire could be short-lived among many younger people. The challenge therefore will be what can providers do to cement the new habit and shift mentality longer term?