How nudging in consumer lending helps make smarter financial decisions

28th April 2023 - 4 min read

How nudging in consumer lending helps make smarter financial decisions


Nudging is a powerful and effective technique to encourage or persuade users to achieve a particular goal. When it comes to consumer lending, choice architecture can guide users to make informed decisions about the right financial products for them. Used responsibly, nudging is a win for both the consumer and the company, with the potential to reduce default rates and increase customer loyalty.

The Benefits of Using Nudging in Consumer Lending

In recent years, nudging has gained increasing popularity in consumer lending. Nudging is a behavioral economics technique that subtly influences consumer behavior without limiting freedom of choice. Using nudging responsibly can be highly effective in growing business and increasing loan success rates.

By understanding how and why users interact with objects, it is possible to make tweaks to boost desired results that are unnoticeable to the user. Nudges are powerful and can help create an engaging user journey, benefiting customers, businesses, and greater society.

What is nudging?

Nudging is a subtle persuasion technique that seeks to influence people’s behavior without restricting freedom of choice. It involves using positive reinforcements and indirect suggestions to encourage people to make choices that are in their best interest or align with a specific goal. 

The term was coined by legal scholar Cass Sunstein and behavioral economist Richard Thaler (who won a Nobel Prize for the concept in 2017) and is based on the idea that people do not always make rational decisions but instead are influenced by cues in their environment. These subtle cues, or nudges, exist all around us and often affect our behavior without us ever realizing it. For example, how streets are laid out to encourage pedestrians to walk a certain way or the order in which supermarkets present products. We don’t have to start our shop in the fruit and vegetable aisle, but we generally do. 

The most famous example of nudging is a small housefly painted on the urinals in Amsterdam’s Schiphol Airport. This tiny but highly effective intervention, suggested by airport staff, reduced unpleasant spillage by 80 percent because when presented with a target, people were instinctively aiming for it.

While some might critique nudging as manipulative, these tiny changes used in the right way can help us make decisions that are more beneficial to us and society without any detriment to personal freedom. By changing the choice architecture of a decision, nudging can influence people to make better choices without taking away their freedom of choice. It can be a compelling way to align everyone’s interests.

How nudging applies in consumer lending

While streets and houseflies make sense on a physical level, how can nudging be applied in the digital world? And more specifically, how can nudging be used in consumer finance and lending? 

Just like in the physical world, small changes can significantly impact user behavior within the realm of online consumer lending. Tweaks might include changing layouts or colors, for example, or switching the order in which information is given. Some changes may feel obvious, such as making “Apply Now” buttons more extensive and prominent, while others may be less so, such as using smaller text to suggest valuable hints and tips. Examples such as these can apply to online application forms, checkout processes, home landing pages, app pop-ups, or anywhere online in which a user needs to make a choice or take an action. 

Nudging can encourage customers to make responsible financial decisions, such as paying their bills on time or saving more money. This can be done through email or text message reminders or notifications on the lender’s website or mobile app. By reminding customers of their upcoming payment due dates, nudging can encourage customers to avoid late fees and penalties. Studies show payment reminders received by text improved on-time loan payments by an impressive 7-9%.

While, in principle, many of these nudges are straightforward and make common sense, it can take time to determine which changes will make the most significant impact. After all, we often miss the forest for the trees. This is where the value of beta testing and end-to-end testing comes into play and helps determine where nudges can be added to make the most significant impacts. 

How nudging in consumer lending helps make smarter financial decisions

Nudging, consumer lending and responsible finance

Nudging can also be a powerful tool for lenders because it can help reduce defaults and increase loyalty by ensuring customers choose the right products for them. In this way, it can play an essential part in responsible consumer lending. When used ethically, nudging can help consumers navigate the complex world of financial products and make choices in their best interests.

There are many ways in which nudging can be used as a force for good, too. This might include using techniques to provide clear and concise information to customers about loan products, to help customers break down the loan application process into smaller, manageable steps (by using multistep forms, for example), and provide evidence of the value and success of the loan product through social proof and statistics. By making the loan application process as easy and intuitive as possible, nudging can reduce the cognitive load of decision-making and make it more likely that customers will choose the loan product that is right for them. 

However, it is essential to note that the goal of nudging is not to control or force behavior but to guide it in a way that benefits both the user and the company. Thaler noted that the aim is to encourage people to “nudge for good,” not to manipulate or force. The Swedish Consumer Agency has been in an ongoing battle to punish companies that use intensive marketing tactics to push expensive or quick loans to consumers. 

If nudging is too forceful or manipulative, it can undermine user autonomy and be perceived as unethical or even harmful. Additionally, there is a risk that nudging may not always lead to the desired outcomes, as users can react negatively to the attempt to influence their decision-making. There is also a risk of putting off consumers if the nudge becomes too pushy or techniques seem overly sales-y. It’s important for businesses to use nudging techniques ethically and transparently, with the user’s best interests in mind, and retain the trust between business and consumer.

Nudging as a tool for responsible lending

Overall, nudging can play an important role in responsible consumer lending by helping customers make informed decisions about loan products and ensuring lenders remain ethical in the types of products that are offered. Lenders have a responsibility to ensure their sales processes are not manipulative or misleading and do not take advantage of vulnerable consumers, but should also consider adding nudging techniques to their sites to get the best outcomes.

Here at Naktergal, we can help you decide the best ways to easily incorporate nudging into your processes, using tools that are fair and efficient. This includes end-to-end testing and data analysis to determine the optimal version of your site. Get in touch to find out more.


Get insights into the latest developments in a fast-evolving industry with Näktergal’s newsletter.

Related articles