Randomized Trials for Strategic Innovation in Retail Finance

This paper discusses how retail financial institutions can use randomized controlled trials (RCTs) to improve profits and reach social objectives.

It is necessary to establish causality in order to understand reasons for the success or failure of an innovation. Establishing causality is, however, difficult because of the unpredictable nature of human behaviour. RCTs are an important tool in establishing causality, because they are able to test a particular product or service, while keeping all other variables fixed. For instance, in order to evaluate a savings product:

• RCT would randomly assign clients to be offered the new product;
• Other clients would be randomly chosen to not receive the offer;
• Treated clients (those who got the offer) would be identical to the control group (those who did not get the offer);
• Random number generator determines who got the offer;
• Bank could compare client retention and balances over a period of time to assess if the new product had a causal effect on client behavior and profitability.

The paper presents several examples to demonstrate that RCTs can provide a source of strategic innovation for financial institutions.