Nudging households towards financial resilience

This article is co-authored by Ruth Stephen, Director of the Behavioural Finance Lab and Dave Hayes, Senior Researcher at the Financial Consumer Agency of Canada.

• The problem: The global pandemic and a challenging economic environment have left many households with low levels of financial resilience.
• Why it matters: Building financial resilience allows individuals to weather financial adversity and take advantage of opportunities to build a better financial future.
• The solution: Low-touch interventions using behavioural design delivered at the right moment can help improve the financial resilience of individuals and households. In this case study, we demonstrate how tax refunds can provide an opportune moment for low- and moderate-income consumers to build savings and improve their financial resilience.

At the Behavioural Finance Lab within the Financial Consumer Agency of Canada (FCAC), we conduct research and behavioural science interventions and develop digital products to simplify financial decisions and nudge consumers to adopt positive financial habits. Using behavioural science to nudge consumers towards strengthening their financial resilience is more important than ever in today’s challenging and changing economic context.

FCAC is constantly seeking examples of new and effective interventions that can be implemented and tested to improve Canadians’ financial literacy and wellbeing. One recent example is our Refund to Savings (R2S) experiment.

This pilot experiment resulted in a $1.3 million increase in self-reported savings.

Building savings is an important part of strengthening and maintaining financial resilience. Everyone knows they need to save — just like everyone knows they need to exercise — so telling people to do so is not very useful or effective. Instead, behavioural science research tells us that we need to capitalise on people’s existing motivations, prompt them at just the right moment and then simply make it easier for them to act.

If you get a tax refund this year, what will you do with it?

A federal tax refund may provide households with the single largest amount of money they will receive in a given year, which presents an opportunity for many households to boost savings.

Given that daily life presents its share of economic uncertainty — from vehicle or home repairs, to medical expenses, to changes in employment — it makes sense to save all or a portion of one’s tax refund for a rainy day.

Nonetheless, as of November 2022, only about half of Canadian households had set aside funds sufficient to cover expenses for three months in case of sickness, job loss, economic downturn, or other emergencies, and one in four Canadians are unable to cover an unexpected expense of $500. Even worse, a recent poll from Abacus Data revealed that “if they lost their job tomorrow, 20% of Canadians would only be able to live for a week on their savings”.

Good behavioural design can help consumers

Tax filing provides a just-in-time opportunity to provide motivational and educational information about savings and can make it easy for consumers to start or build their emergency savings.

The R2S initiative was started in the US by researchers from Washington University in St. Louis. They collaborated with an industry partner, Intuit, to embed a savings intervention into their tax filing software. Following years of testing and refining, the positive effects were so significant that key R2S components are now a staple of Intuit’s tax filing experience.

FCAC collaborated with these stakeholders from 2019 to 2022 to test the R2S intervention in the Canadian context. We focused on embedding three components within the tax filing software experience:

1. a nudge to encourage filers to pre-commit to saving their refund
2. educational messaging about the benefits of saving their refund
3. the opportunity to change their direct deposit account to a savings account

A small but motivated sub-group of the over 600,000 participants reported that they would use their savings account as the direct deposit location for their refund. This amounts to a 17% increase in savings rate (compared to the “control”/no-treatment comparison group) and more money saved overall (averaging $1,448, compared to $1,368 for the control group).

This pilot experiment resulted in a $1.3 million increase in self-reported savings, suggesting that if these patterns hold in a future scaled-up version of the intervention, for every 1 million Canadians exposed to the R2S intervention, it could be possible to see as much as $23 million in additional savings deposits!

Our next steps are to continue scaling and testing this intervention with industry partners in the coming years to produce an even greater impact on the financial resilience of Canadians. We encourage other countries to consider testing this intervention in their jurisdictions and to join us in advancing the vision of our National Financial Literacy Strategy 2021-2026, to help everyone build financial resilience in an increasingly digital world.

FCAC will be publishing the full R2S report on our Research Reports and Studies page in the coming months.

The Financial Consumer Agency of Canada has a mandate to strengthen the financial literacy of Canadians and supervise federally regulated financial institutions. Check out Canada’s National Financial Literacy Strategy 2021-2026, which demonstrates how all financial literacy stakeholders (e.g. government, for-profit organisations, community groups, academics, etc.) can reduce barriers, catalyse action and work together to help individuals build financial resilience.

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