elizabeth immer bernold interview moneyland ch

Elizabeth Immer-Bernold: Penalty Fees Are Not a Sufficient Solution

In this moneyland.ch interview, Elizabeth Immer-Bernold sheds light on how behavioral economics insights can be used to optimize companies’ billing policies and shares easy to implement, scientifically proven tricks we can all implement to avoid problems with our bills.

Elizabeth Immer-Bernold is a behavioral customer experience expert at Die Ergonomen Usability AG, a Zurich-based consulting firm that focusses on user centered design. The qualified behavioral economist and her colleagues work closely with teams in various industry sectors to optimize their products and processes. You can contact Elizabeth Immer-Bernold on Twitter (@immerliz).

Elizabeth, how would you describe your average workday as a behavioral customer experience expert?

As a behavioral economist and product designer I have two primary objectives: To understand why people do what they do, and to apply that understanding to make sure that products, services and systems help us to behave well.

Could you name an example of a broad behavior that could do with an overhaul?

A key issue is getting people to pay their bills before they become overdue (or as soon after as possible). According to a study released this week by Intrum Justitia, 54 percent of consumers in Switzerland pay at least one bill late every year, and only 49 percent of taxpayers settled their tax bills on time in 2018! We in Switzerland are currently the second-worst bill payers in Europe, only better payers than the Greeks. Bills that go unpaid create problems for all parties involved – customers as well as companies. If more people would pay their bills on time, all stakeholders would benefit.

How should companies deal with customers who pay their bills late, or fail to pay altogether?

Many companies and also the tax authority charge late-payment fees as a means of pushing people to pay their bills on time. But our data shows that penalty fees do not work well enough. Despite late-payment fees, which by the way are already very high, many bills remain unpaid too long past their due dates.

Penalty fees have the added disadvantage of generating negative sentiments among customers. The higher the fees, the higher the customer dissatisfaction. This is dangerous for companies! Dissatisfied customers are not likely to remain customers for long. Customers want their customers to pay, but they also want to keep them as customers. Late-payment fees are not a sufficient solution.

Are there alternatives to late-payment penalties?

Yes, we see that there are alternative ways to effectively improve customer payment morale. This year, for example, we managed to help one of our customers improve their payment collections without adding any late-payment penalties. An astound number of this company’s customers now pay their bills more promptly and responsibly than they did prior to the interventions that we designed, and customer satisfaction levels have also improved. This is exciting to see, and quite rewarding.

How did you accomplish that?

Our analysis showed that contrary to popular belief, the majority of people who fail to pay their bills are neither bad people nor are they people who deliberately chose not to pay their bills.

Our research pointed to three main reasons why customers fail pay their bills in a timely way: They either lack the appropriate motivation, sufficient psychological capacity and/or the financial capacity to do so.

What do you mean when you say that customers lack the motivation to pay?

For example, the future consequences resulting from unpaid bills, such as possible late-payment fees or the blocking of a mobile number, are not taken seriously enough in the present. We have seen that when invoice-senders communicate the consequences of not paying to their customers more clearly, this leads to many previously-delinquent customers promptly settling their bills.

What do you mean by lack of psychological capacity?

Attention is a scarce resource. Today, our lives are so busy that many people are simply overwhelmed. Even when it looks like future penalties are clearly communicated, too many customers still fail to pay their bills on time.

We ascribe this to a lack of psychological or cognitive capacity, which you can think of as including lack of self-control, disorganization or forgetfulness. In other words, even when customers are motivated to pay their bills, they may still forget about or misplace them. A few forgotten bills might not seem like much but we see that once customers have missed several payments, the bills begin to stack up, and the relatively high outstanding balance – even two months’ worth of bills rather than one - becomes much harder to pay than the single bills would have been on their own.

Companies can help their customers to avoid this problem by simplifying their bills and collections- and payment processes – designing them in ways that really account for their customers’ needs.

What about the third reason?

The statistics paint a clear picture: more and more Swiss are living “on the edge,” financially speaking. Some people simply do not have the financial capacity to pay their bills – they buy more than they can afford. Others fail to budget properly and run out of money before they sit down to pay their bills. Still others have money available, but they do not realize it. This can happen if the money is held in a different account than the one they normally pay bills from.

Do these results fall in line with existing behavioral economics data?

Behavioral economics research has provided convincing evidence that people do not behave perfectly rationally. But although we as humans are not perfect, our behaviors largely follow predictable patterns. We are not purely selfish beings, but we tend to do things that we enjoy, that make us feel happy and that have positive effects on our psyches, our bodies or our wallets.

Our bounded rationality means that we behave “suboptimally” in some systematic ways, for example at cost to our future selves. We focus primarily on things that bring us pleasure today and tend to discount what will bring us pleasure in the future. And this can create problems: obesity, not enough savings, high late-payment fees.

People do not pay their bills right away because paying bills costs us today but we tend not to think of paying bills as delivering much immediate gratification. At the same time, we like to play down the potential future problems we could run into due to our future behaviors. We lack self-control and far-sightedness.

What advice would you offer our readers, from a consumer perspective?

Just making a few basic changes to behavior can help us all to behave smarter– to help our future selves without discomfort today. I can share four useful tips that are easy to implement. These tips are aimed at helping individuals improve their payment habits, but they can be useful in other realms, too.

What would be your first tip?

Automate and make a plan.

A study in cafeterias has shown that diners eat healthier when they choose what they will eat for lunch a day in advance than they do when they select their lunches spontaneously. People generally make better decisions when they decide in advance - when the need is not pressing - than when they are face to face with the decision (standing hungry in front of a menu or buffet, for example).

The same applies to personal finance. The more payments you automate, the less you will have to concern yourself with paying bills once they arrive. Pay as many bills as possible using direct debit orders of e-bills.

If e-bills or direct debits are not an option, consider setting aside an automatic transfer of a fixed amount from the account your salary lands in into a separate bank account just for paying bills. That will help avoid spending the money on other expenses. Ideally, you should set up a standing order for the automatic transfer of this money every month immediately after payday.

And the second tip?

Don’t put off payments until tomorrow, react immediately.

Many people say they prefer to take care of bills every couple of weeks. In addition, many consumers who recognize that they have trouble paying their bills put off paying outstanding bills using the excuse that they will be able to pay their bills “in a couple of weeks.” I would argue that this isn’t strictly their fault – our brains trick us into believing that even if we struggle with something today, we will transform into something like Superman and master it easily in the future.

The problem with the “once-every-few-weeks” strategy is that often does not work out well. A few weeks from now we might forget to sit down – and then a whole pile of bills will go unpaid. Having to deal with a stack of bills also generates a lot more stress than taking care of a single bill, and bigger amounts are harder to pay than small amounts. Rationally speaking, it should be clear to us all that even in a few weeks or months, we will still be ourselves and have the same tendencies towards putting off paying our bills that we have today. Ideally, you should always pay your bills immediately as soon as you receive them.

What should we do if we don’t have money available to pay a bill right away?

If you are financially strapped and cannot pay a bill immediately, it’s best to register the bill in eBanking and set a deferred order for the payment of that bill. Simply post-date the order to be processed at a later date on which you expect to have money. This strategy is beneficial because once the order is placed, you do not have to deal with that bill anymore. It cannot go forgotten.

An alternative is to make a plan as to when you will pay the bill. Write down your plan on paper or enter the appointment into your calendar, making sure to be as specific as possible, for example “Pay health insurance bill via eBanking on Tuesday 15 December.”

What is your third tip?

Reward yourself for good behavior. This is not a joke.

Did you just automate all your recurring payments? Have you promptly paid a bill? Excellent! Go do something nice for yourself. Just make sure to connect this reward with paying bills. For example, you could reward yourself with an ice cream after you have paid a bill. You’ll enjoy it all the more knowing that you have earned the small indulgence.

And your last tip?

If you are having difficulty paying your bills, take action.

Having unpaid bills can be unpleasant, but even this situation does not have to be permanent. A great first step to solving the problem can be easy: Contact the merchants that you owe money to and ask them what solution strategies they offer to you. Prepare yourself before dialing to make sure you can think clearly during the call. Phone from a quiet, private place and make sure to have a pen and paper handy to take notes.

Do not forget that the person on the other end of a phone is just that, a person. Especially when they work for a good company, they will want to try to help you. The better prepared you are and the politer you are when dealing with the other person, the better the chances of your finding a solution are.

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The moneyland.ch magazine provides accurate, unbiased information on topics related to finance and money. In addition to research and expert interviews, the magazine contains numerous financial guides.