behavioural economics
choice architecture
digital lending

How choice architecture can boost conversions & collections in digital lending

Chitwan Kaur   /    Content Specialist    /    


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    In a perfectly egalitarian market, consumers would have complete control over the choices they make. Every product or service would be judged solely based on its merit, stifling any opportunity for brands to gain an edge over their competition. However, for better or for worse, real markets are never perfect and customers don’t make choices in a vacuum – they are influenced by several factors, consciously or not, before they commit to one alternative.

    What is choice architecture?

    An environment rife with features that influence a certain choice or action can be created artificially and consciously. American behavioral economist Richard Thaler described this as ‘choice architecture’. It is the design through which one can present various choices to a decision maker with the objective of nudging them toward the best possible decision. 

    Read: Nudges, cross-promotions & rewards: A triad for better conversions in digital lending

    The concept derives from a subversion of the idea of Homo Economicus in classical Economics – that humans always make the most rational decisions. In truth, humans are often driven to irrationality and don’t always make choices that are in their best economic interests. Such paternalistic intervention is necessitated, or at least justified, to weed out irrational biases and promote their welfare.

    Choice architecture for digital lending

    Choice architecture has found several uses across spaces like healthcare, food and beverages, automobiles, politics and conservation. In digital lending, it can be leveraged by lenders and fintechs to realize a larger organizational vision, achieve customer satisfaction, and give a boost to business objectives.

    1. Financial inclusion: Choice architecture can support the financial inclusion goals of a digital lender. FinTechs and lenders servicing a new-to-credit clientele can help them make decisions around the loan amount sought, nature of financing and repayment plans that are in their best interests.

    2. Business objectives: Digital lenders can utilize the tools of building a choice architecture to improve their conversion rates and recovery operations, creating significant dividends for their business. 

    Previously, we wrote about the role of behavioral psychology in collections in this in-depth e-book.

    How to use choice architecture in digital lending

    As choice architects, digital lenders require a toolkit to create the right conditions for the customer to make a desirable choice. These tools help them structure how choices are laid out before a customer and how they are described.

    • Number of alternatives

    Delinquent customers are often bombarded with unsolicited phone calls, and in more escalated cases, home visits. In doing so, lenders take away the freedom of choice from their customers – their only two options are paying up or suffering persistent harassment.

    Firstly, the lender must establish that the customer has a choice. What follows is tricky – 

    a. more choices increase the chances of a preference match for the customer

    b. more choices place a greater cognitive burden on the customer as they must evaluate more options

    How do you balance these two aspects? Provide the decision maker with the fewest number of options that can encourage reasonable trade-offs while also not being too overwhelming.

    At the point of checkout, the customer can be offered various financing options like a term loan, BNPL, Pay in 3 or credit card. For the first three options, the lender may conduct pre-qualification and present a loan amount, interest rate and tenure the customer is eligible for. By showing the customer the most affordable plans for each of these options, the lender can facilitate the right choice for them.

    Here’s another example – in the case of medium-risk delinquencies, lenders can lay out a number of treatment options like reducing interest rates, extending the term of a delinquent debt, or even designing their own repayment plan (tenure and EMI).

    Too few options may lead to the presence or absence of a certain alternative influencing the choice. The customer may not be presented with the optimal choice and forced to settle for the next best option. Alternatively, giving too many options may lead to a ‘tyranny of choice’ by introducing too many factors that complicate the decision-making process. Either way, the customer may be forced to make a choice that doesn’t fit perfectly with their needs and fail to repay their debt.

    Read: What is Adaptive Checkout and how does it help improve conversions for online commerce?

    • Mapping

    In the case of credit and financing products, choosing the right options becomes even more complicated given the inherent lack of clarity around the costs of using them. For instance, credit cards attract annual fees, interest rates, late fees, charges for purchases in other currencies and MDRs. 

    A credit card customer, therefore, will have to weigh the consequences of not paying some or all of these costs. In fact, they would have had to make trade-offs between the pros and cons of using credit cards and other financing products like loans or BNPL.

    Similarly, after taking on a loan, a customer is presented with three choices –

    1. pay off the outstanding debt

    2. default on the loan

    3. work out an affordable and practical repayment plan 

    In both cases (choice of credit product and choice of repayment), he must know the consequences each choice will have on this ultimate borrowing experience. This correlation between the choice made and the experience derived is called  mapping. 

    It is important to help the customer walk through the impact the trade-offs will have when he chooses one option over the other. An effective choice architecture system will allow the customer to better map each choice with its consequences, which may look something like this – 

    Option a: he may have to borrow again to pay in full, or go broke.

    Option b: he may have to jeopardize his credit score and risk not getting a loan in the future.

    Option c: he may not be able to convince the lender and arrive at a pragmatic repayment plan.

    The lender can ease this difficult choice by offering the customer comprehensive information about the various options. Thaler himself recommends the use of a technique called RECAP: Record, Evaluate, and Compare Alternative Prices. In this context, RECAP would involve creating a schedule of all the costs involved in using various credit products over different tenures. FinTechs could also build calculators for this information within their user journeys.

    • Set up default options

    The ‘default’ option may be the most simple and elegant tool used to create a choice architecture. There may be times when a customer does not make a choice at all – out of fear, distraction or sheer laziness. They will take whatever option requires the least cognitive effort. 

    Default rules are inevitable. When the customer does not consciously make a choice, one or the other option must be imposed on them. This is called ‘required’ or ‘mandated’ choice.

    Having a default option in place suggests that there is a recommended or ‘normal’ course of action. At the point of financing, the lender can draw insights from platform activity, the nature of purchases, and insights drawn from their pre-qualification engine to display the best available option to a customer with a certain kind of risk profile.

    Read: How lenders can supercharge their conversions to increase loan disbursals

    When it comes to collections, lenders can extend a default treatment based on the risk bucket into which a customer is segmented. They may plan various treatment courses for different segments of delinquencies (created based on days past due, value at risk and behavioral segmentation). Customers may be shown various repayment plans, but the one best-suited to their segmentation can be presented as default.

    • Partitioning 

    People have a tendency towards even allocation and distributive justice, unless they are presented with a compelling alternative. Another simple yet effective tool for a choice architect in digital lending is partitioning available options into favorable and unfavorable sections. 

    Lenders can show customers favored financing options in groups of one, while clubbing unfavorable ones into a single category. This would assign more weightage to credit products better suited for the individual (in terms of affordability, compatibility with their needs, etc.) while nudging them away from choices that may be detrimental to them or the business in the long run. 


    Choices are governed by many internal factors –  intuition, circumstances and needs. But external influences also have an important role to play. A responsible and effective choice framework does not conceal any of the options available to customers, but presents them in a way that ensures the selection of the best alternative – without undermining customer autonomy.

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