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Understand the what and why of their current banking

For most customers, a mortgage is a loan with a fixed term and regular, required payments.  Many are not even aware that there are other kinds of mortgages. Before you introduce them to Manulife One, it can be helpful to first understand how their banking is set up.  Start by making a listing of their bank accounts, loans, credit cards, mortgage(s) and any other banking products they have.  For many clients, this could be a fairly long list.

Next, ask them to talk about why their banking is set up the way it is. They may have set things up in this way for a specific reason. Or, they may simply have accumulated various banking products over time as different needs or offers arose.

As the final step of the information-gathering phase, ask them to talk about what they like about their current method of banking, and what they don't like.

Understanding why their banking is set up as it is, and what they like or dislike about this setup will help you develop and position a customized solution later in the conversation.

Introduce the idea of non-traditional banking

Let's start with a couple of definitions.

• Traditional banking refers to addressing each saving and borrowing need with a separate product.  This can be thought of as an account for every need and for every need an account.
• Non-traditional banking refers to addressing most of your savings and borrowing needs with a single, integrated banking solution, such as Manulife One.

There are generally two ways to help customers see the value of non-traditional banking – rational or emotional.  Both speak to very real benefits – but most customers will connect more to one than the other. If you've worked with a client before, you may already know which approach will resonate with them.

Below, we look at the first of these – the rational argument.  In the next article, we'll tackle the emotional argument for non-traditional banking.

The rational argument – more bang for your buck

When most people think about the cost of banking, they think about the fees they pay and the interest rate on their mortgage and other loans.  They're much less likely to think about the efficiency of their banking overall.  Stated simply, the rational argument for non-traditional banking is that, over time, it can cost a lot less than traditional banking.

Non-traditional banking can reduce the overall cost to your client by:

• Consolidating their debt at the lowest rate
• Using their low-earning deposits and savings to help reduce their debt - and therefore their interest costs
• Automatically using all excess cash-flow to reduce debt

While the concept intuitively makes sense, a lifetime of traditional banking may make it difficult for clients to get their heads around this new concept. And, there may also be some less obvious behavioural biases holding them back.

Here are two relevant biases, and suggestions for how to overcome them: 
 

1. The zero-price effect
   Zero price effect refers to a phenomenon whereby the demand for a good, service, or commodity is significantly greater at a price of exactly zero compared to a price even slightly greater than zero. In other words:  People love free stuff. Something that's free is much more appealing than something that's simply inexpensive.
   
   But here's the problem: Something doesn't actually have to be free to trigger this effect. People just have to think it's free. And, when people get a no-fee chequing account, or get their account fee waived, they may believe they're getting their banking for free.
   
   In fact, if they also have debt, keeping their money in a savings or chequing account is costing them a lot. They're effectively paying extra interest on their loan for each dollar of their savings they don't use to reduce that debt.  The challenge is getting customers to understand that their no-fee account may not, in fact, be free.
   
   Tactic: Leverage loss aversion
   To overcome the zero-price effect, use a simple example to show customers a how, if they also have debt, their no-fee account may not, actually be free.
   
   For example, $10,000 in a savings account at 1% simple interest would earn $100 in a year before tax. $10,000 of debt at 4% simple interest would cost $400, after tax.  That's a difference of $300.
   
   While this difference may be easy for the client to understand, they may find it more or less compelling depending on how it's framed.
   
   The Loss Aversion Bias states that the pain of losing is psychologically about twice as powerful as the pleasure of gaining. In other words, people are more motivated to avoid a loss than to make a gain.
   
   If you're using this simple example to dispel the myth of “free banking”, describe the difference in terms of what it's actually costing them.  In the example above, clients may be more motivated to act if you explain that their current setup is “costing them $300 a year” rather than stating that “switching could save them $300 per year.” It's the same math, but, due to loss aversion, they may be more motivated to avoid this loss than pursue a potential gain.
    
2. Mental accounting
   Mental Accounting refers to our natural tendency to divide our money into separate accounts based on subjective criteria, like the source of the money and the intent for each account.  Traditional banking is widespread not only because it's more profitable for banks (and therefore it's what most banks offer), but because it aligns with our inherent desire to put our money into different buckets.
   
   To help customers feel comfortable with non-traditional banking, they may need to see how they can still track different parts of their money separately.
   
   Tactic: Create a structure that aligns with their need and comfort level
   As compelling as the savings from non-traditional banking may appear, some customers are still reluctant to merge everything into one big pool of money/debt.  Fortunately, they can use tools both inside and outside of the account to keep track of different parts of their finances. 
   • Fixed-term sub-accounts. Clients who want to maintain a regular paydown schedule and predictable interest rates can allocate a portion of their debt into a fixed-term sub-account. They can even choose to make it non-readvancing, so repayment doesn't increase the borrowing room in their line of credit. This can give them confidence that their debt will go down over time.
   • Tracking sub-accounts. If clients are comfortable having their debt at a variable rate and just want to track different parts of it separately (like the money they used to buy a car), they can allocate money to a tracking sub-account. That way they can see how much interest is attributable to that part of their debt, and even set up automatic transfers to pay down that debt over time. Clients will be able to set up tracking sub-accounts after their account funds.
   • Balance schedule. If clients have a specific goal for paying down their debt, help them create a schedule that shows what their debt should be at the end of each month, in order to be debt-free by a specific date. Each month-end, they can compare their actual balance to their target balance and immediately see if they're ahead or behind on their plan. This can act as a motivator for them to pay down debt, and also help reduce stress associated with spending, since they can feel confident they're still on track.

Nothing in life is free

Helping your customers understand the true cost of traditional banking could show them that their no-fee account may not actually be free. And structuring their non-traditional banking in a way that helps them continue to track different parts of their money separately will help them make the mental shift to this new, more efficient, way of banking. If the rational argument for Manulife One resonates with your customer, take the next step and use the Manulife One calculator to show them how switching could benefit them personally.

Want to share Behavioural Economics insights with your customers to help them make better financial decisions? Visit the Plan and Learn section of manulifebank.ca and search on "Money Hacks". 

What is that low fixed-mortgage rate costing your clients?

When most Canadian homeowners shop for a mortgage, their decision criteria begin and end at rate. This isn't surprising, since one traditional mortgage looks pretty much like the next. To most people, a mortgage is a commodity. And, as any first-year economics student can tell you, the sale of a commodity is driven by price.

The problem is - traditional mortgages are relatively inflexible. And the cost of choosing a mortgage based strictly on rate is that it forces homeowners to take on risks that they might not even be aware of. 

In the previous article, we discussed the rational argument for non-traditional banking. Here we'll discuss the emotional argument: What if something bad happens?  

The risk of traditional mortgages

Traditional mortgages have fixed payments.  Every couple of weeks, homeowners need to repay a specific portion of their mortgage, plus interest, or risk going into default.  A fixed payment schedule can help ensure debt is repaid over time - but it also assumes that the borrower's situation will remain relatively unchanged.  In other words, it assumes their income will stay the same. It assumes their family situation won't change. And it assumes they won't encounter any large, unexpected expenses. 

Unfortunately, that's not how life works.

People get laid off. They have to take time off to look after a family member. Their small business has to close for weeks or months due to a pandemic. Life has lots of ups and downs, but traditional mortgage payments must still be made. This is the risk of a traditional mortgage – if the borrower's circumstances change, they can't easily change their payment, much less access the payments they've already made. And, while failure to make mortgage payments can ultimately lead to foreclosure, the impact may first be felt in less dramatic ways: Clients may take on high-cost credit-card debt. They may stop contributing to their retirement savings. And their health may suffer due to the added stress.

The power of Manulife One is that it provides homeowners with a tremendous amount of flexibility so they can easily adapt to change.  When things are going well, they can use their extra money to pay down their debt more quickly and reduce their interest costs.  And, if things take a turn for the worse, they can reduce their payments or even re-borrow money from the account, as long as they have borrowing room available. In other words, Manulife One banking can buy them the time they need to get back on their feet.

The emotional argument may be hiding in plain sight

The emotional argument for non-traditional banking, then, is that it allows a homeowner to easily adapt to life changes.  But this isn't immediately obvious to most people. In fact, there's a common behavioural bias that may be preventing them from seeing the risk associated with fixed, inflexible mortgage payments:  The availability bias.

The idea behind the availability bias is this: We make judgments about the likelihood of an event based on how easily an example comes to mind.  In other words – if we can easily think of an example of something, we may believe it's more likely to happen. This is why we see people selling their investments after a market correction – a deeper correction suddenly seems much more likely. 

Now consider something that could make it difficult to make a fixed mortgage payment: a job loss. Most of us would acknowledge that a job-loss is a possibility. But if we haven't experienced one recently, we may see it as very unlikely. And the same might be true for other things that could threaten our ability to make a fixed mortgage payment.

Availability bias may lead us to underestimate the likelihood of negative life changes, and consequently undervalue the importance of flexibility when it comes to mortgage payments.

Help your customers understand the risks that come with a traditional mortgage

There are two behavioural biases that you can leverage to help customers better assess the risks associated with fixed mortgage payments:

1. Salience bias refers to the fact that we respond to concrete images and people in a much stronger manner than we do to abstract ideas. This creates a bias in favour of things that are striking and perceptible. In other words, we're more likely to pay attention to things that seem vivid and real. 
   

   Tactic: Ask clients to imagine a specific situation where they've encountered a financial difficulty, such as a job loss or being forced to take time off to care for a sick relative.  Ask them to describe how they would manage their fixed mortgage payment. What if the situation lasted for six months or a year? How this would impact their level of stress?  

2. Social proof, as discussed in the first article in this series, is the idea that people are influenced by, and will modify, their behavior based on information about what others like them are doing. In other words, we tend to copy the behaviour of others.

Tactic: If you've already introduced non-traditional banking to other clients, share their stories (taking care to change any identifying details). Describe the financial challenges they've been able to overcome or opportunities they've been able to take advantage of. And, if you've got your own Manulife One account, share your own story.

Help your clients prepare for the unexpected

People who have never encountered difficulty making a fixed mortgage payment may feel it's unlikely they'd ever find themselves in that situation. The value of payment flexibility may not be apparent until it's needed - and by then it may be too late. Help your customers think through common financial challenges that may interrupt their ability to make a fixed mortgage payment.  And tell them about other customers who have benefitted from financial flexibility.  This will help them overcome the availability effect and better understand the value of building flexibility into their mortgage.

Want to share Behavioural Economics insights with your customers to help them make better financial decisions? Visit the Plan and Learn section of manulifebank.ca and search on "Money Hacks".