From bias to buy-in: the behavioural economics advantage in RegTech sales to financial institutions

The sale of regulatory technology to financial institutions is often a long and complex process, with multiple stakeholders, as is the norm for enterprise sales. But let’s look at how the principles of behavioural economics can shine a light onto this complex sales environment and perhaps provide some pointers to ease transactions, aka make sales.

The increasing regulatory scrutiny coupled with the development of newer technologies has driven the adoption of regulatory technology (RegTech) in the financial sector. However, selling RegTech solutions to financial institutions presents unique challenges due to the complexity of decision-making processes within these organisations. Behavioural economics, which integrates insights from psychology and economics, offers a lens through which these challenges can be better understood and addressed.  So, let’s look at behavioural economics and cognitive biases and see how we can better understand and address the non-linear, or chaotic decision making of humans in terms of selling RegTech into financial institutions.

Behavioural economics

Behavioural economics diverges from traditional economic theories by recognising that individuals do not always act rationally – and let’s remember that although it may be an organisation that is buying, this organisation is made up of humans and these humans make decisions that are influenced by cognitive biases, social factors, and emotional responses. Key concepts such as anchoring, loss aversion, the endowment effect, social proof and heuristics can provide a deeper understanding of the decision-making processes and how to counterbalance those processes within financial institutions.

Cognitive Biases and Decision-Making

Anchoring

We hear the term ‘love at first sight’ and this could be said to be similar to ‘Anchoring’, a cognitive bias where individuals rely heavily on the first piece of information encountered, a bias that can be problematic in courtrooms and possibly for those pitching regtech solutions against a strong incumbent supplier, where there is comfort in the familiar. In the context of RegTech sales, presenting a compelling initial value proposition plus elevating a firm’s position through branding can set a positive reference point, influencing subsequent evaluations of the product.

Loss aversion and the Endowment effect

Loss aversion describes the tendency for individuals to prefer avoiding losses over acquiring equivalent gains. In this context is may be that the buyer/user/influencer is more content to stay with a current system or process.  The endowment effect is a cognitive bias that explains why people tend to overvalue things they already own, which coupled with loss aversion can be a strong influence on resisting moving to a new system.  In this case, organisations would rather stick with what they have and know than have to take on the implementation of a new system or process.  Emphasising the potential risks and costs associated with inadequate or aging compliance systems can be a more effective sales strategy than focusing solely on the benefits of the new RegTech solution.  Although, it would not be advisable to focus purely on the negative points of an older system as you must take care not to instil a sense of stupidity or hopelessness about the older system as this will tend to create a barrier to sale but rather balance this with other positive enforcement cognitive biases.

Social Influences

We know that individuals look to others to guide their own actions – find me a marketer that doesn’t know the value of good word of mouth advertising. Demonstrating successful implementations of RegTech solutions by other reputable financial institutions can serve as powerful endorsements, reducing perceived risks and fostering trust.  Although, as a seasoned marketer I know the pain of trying to get signoff of a testimonial or case study, particularly within financial services.

Heuristics in decision naking

Heuristic decision making is a cognitive process that involves using mental shortcuts or ‘rules of thumb’ to simplify complex decision-making tasks. These heuristics are based on experience and practical approaches rather than formal logic or extensive data analysis. They enable individuals to make quick, efficient decisions by focusing on the most relevant pieces of information and ignoring less important details.  Everyday examples of this type of decision making includes:

• Doctors using heuristics to quickly diagnose a common illness based on a few key symptoms.
• Investors might rely on the availability heuristic by choosing to invest in well-known companies.
• Shoppers may use the recognition heuristic by choosing familiar brands over unknown ones.
• Employers might use representativeness heuristics by favouring candidates who fit a typical profile of successful employees.

So, how does this type of decision making apply to the sale of regulatory technology to financial institutions?

1. The decision-makers recall recent news, reports, or discussions about RegTech solutions that have been successful in other similar firms.
   
   
2. Due to their larger customer bases, award wins, and bigger marketing budgets, established firms are often perceived as more reliable. As a result, companies are more likely to choose a RegTech solution from a well-recognised brand, even if it comes with higher costs or fewer features compared to newer, lesser known competitors. To overcome some of this it is possible to employ some techniques such as:

Simplification

Due to the complexity of RegTech solutions, simplifying information through the use of visuals, infographics, and clear language can reduce cognitive load and facilitate quicker understanding and decision-making among stakeholders.

Building trust through social proof

Case studies and testimonials from established financial institutions have proven to be instrumental in building trust. Vendors who can showcase their solutions’ success stories are more likely to overcome initial scepticism and gain a foothold in potential client organisations.

Anchoring with value propositions

Presenting a strong initial value proposition that highlights the immediate benefits and, possibly, cost savings of the RegTech solution helps set a positive anchor. This initial perception significantly impacts the overall evaluation of the product.

Addressing loss aversion

By focusing on the negative consequences of non-compliance, such as regulatory fines, reputational damage, and operational disruptions, vendors can leverage loss aversion to underscore the urgency and necessity of adopting their RegTech solutions. But always being careful to not undermine the prospective buyer.

Creating a sense of urgency

Techniques that create a sense of urgency, such as limited-time offers or highlighting competitive advantages of early adoption may motivate quicker decision-making and commitment from financial institutions.  This on its own isn’t strong enough to get a prospective buyer to sign the contract, but used in conjunction with other techniques can help move a discussion forward a little quicker or better position you against a competitor.  A key influence here could be the implementation time – if it’s something a RegTech is good at doing within tight deadlines, it may well sway the buyer.

And finally…

The integration of behavioural economics into the sales strategy of RegTech vendors provides a nuanced understanding of the decision-making processes within financial institutions. By addressing cognitive biases, leveraging social influences, and employing heuristics, vendors can better align their approaches with the psychological and emotional drivers of their clients.

The application of behavioural economic principles offers a strategic advantage in the complex sales landscape of RegTech solutions. By understanding and influencing the decision-making behaviours of financial institutions, vendors can enhance their engagement and increase the likelihood of successful sales.