Case Studies

Low Interest Loans

Many times customers do not switch to a new service when it is introduced, even when it is strictly preferable. One such example is when a financial institution introduces a new low interest loan. What can get those who currently have a high interest loan to switch to a low interest loan?

Hypothesis: Emphasizing the existing trust between a credit union and its members shifts the relationship frame from a business transaction to one of shared long-term interests. Furthermore, because people are less likely to do anything that requires an action (due to friction costs), requiring an active choice where both the high and low interest loan require the same action would ensure that people will not choose the high interest loan simply because it required less work. Thus, we predicted that a fiduciary letter would increase the number of switches, as would requiring an active-choice. Finally, we predicted that calling attention to the fact that the member is pre-approved on the envelope would be more effective than a blank envelope.

Experiment: We partnered with Self-Help credit union, and designed an experiment to increase the number of members who switch to a low interest loan. The experiment had 6 conditions, all combinations of two envelope types and 3 letter types. Members either received a blank envelope or an envelope that had “pre-approved” on the outside. In addition, members either received a generic letter asking them to switch (control), a letter that emphasized the trusting relationship between Self-Help and the member (fiduciary), or a letter that both emphasized trust and also required the member to call in with their decision regardless of their choice (fiduciary + active choice).

Results: We found that the use of active choice was the most effective and that a fiduciary letter was more effective than a generic one. Furthermore, we found that indicating that the member was pre-approved on the outside of the envelope was more effective than a blank envelope.



Application: Active choice is a powerful tool that can be used in many situations. Typically, when we want someone to make a change, doing so requires some small amount of extra work, whether it’s mailing back a letter, filling out a form, calling a number, or even reading an email. While one might not think this should be a real barrier to change, it turns out that these small friction costs can make the difference between action and inaction. If instead, we can set up the choice so that the same amount of work is required for selecting the old and new option, we are far more likely to get the desired change. Anytime we want someone to take an action, we should make sure that the desired outcome is at least as easy as the undesired action, if not more so.