OBSERVATIONS FROM THE FINTECH SNARK TANK
In a recent survey, the Financial Health Network asked financial services executives about their organizations’ most important strategic priorities. The second most-frequently mentioned priority–cited by seven in 10 banks and credit unions–was “improving customer financial health.”
I’m not buying it.
The Data Doesn’t Add Up
If seven in 10 financial institutions are focused on improving customer financial health, then why do only:
- 48% incorporate customer financial health into their strategic plans?
- 42% provide personal financial advice or coaching to help with day-to-day challenges?
- 38% offer digital financial health management or budgeting tools that provide advice?
- 21% regularly track and report on customer financial health as an enterprise-level key performance indicator?
Banks are Paying Lip Service to Financial Health
The reason why banks pay lip service is rooted in the industry’s view of the term as something that relates to low-income, underserved, disadvantaged consumers.
And the reality of banking is that that’s not where the money is.
As a result, a lot of banks’ “financial health” efforts are either public relations-oriented community grants or financial literacy efforts.
I don’t doubt that the former helps those communities. The latter might not be having much impact. According to the study So Many Courses, So Little Progress: Why Financial Education Doesn’t Work:
One-size-fits-all financial education has been demonstrated to have little to no effect on changing real-world financial behaviors. A meta-analysis of more than 200 studies found that educational interventions explained only 0.1% of the financial behaviors studied.”
In both cases, however–community grants and financial literacy programs–financial health efforts remain focused on a small minority of under-served, disadvantaged consumers.
And that’s a shame.
Financial Health of Bank Customers
A survey of US consumers with a checking account from Cornerstone Advisors reveals that many consumers across the income spectrum wrestle with various aspects of their financial lives.
Although the vast majority of Americans across all income levels pay their bills on-time and in-full most or all of the time:
- The majority of consumers with income less than $35,000 struggle to plan ahead for their expenses or pay reasonable interest rates on outstanding loans.
- A little less than half of the consumers in the $50k to $75k range earn competitive rates on their savings and investments, or on-track with their savings for the long-term and to cover emergencies.
- About a third of consumers in the $100k to $250k level said they don’t always earn competitive rates or are on-track with their savings.
- Among the $250k+ crowd, nearly three in 10 said they don’t always spend less than they earn (I know, you’re not shedding any tears).
Q2 2019 survey of 2,506 US consumers
SOURCE: CORNERSTONE ADVISORS
The point here is that many consumers at all income levels have financial health issues of some type–the difference often being time frame, with concerns shifting from the present to the future as income rises. Omidyar Network’s report Breaking New Ground in Fintech supports this:
Low-income consumers discussed financial health in terms of problems to avoid like “not worrying about covering costs, and “not being in debt.” They valued solutions for immediate, short-term challenges. By contrast, moderate-income consumers spoke about financial health more in terms of future opportunity. These participants wanted solutions that provided financial advice or investing tools.”
The New Financial Health
The implied connection between financial health and low income is outdated. A new financial health concept is emerging, one that is:
- Behavioral. The old financial health concept was rooted in “literacy,” and dominated by educational approaches designed to teach someone how to better manage their financial life. The new financial health concept is behavior-driven, designed to use technology to help people change their financial behaviors and influence the financial decisions they make when they have to make them.
- Integrated. A growing body of research links financial health to both physical and mental health. This means that the new concept of financial health doesn’t look at financial behavior (or literacy) in a vacuum, and removes the management of financial health out of the strict realm of financial institutions and providers.
- Measurable. Under the old concept of financial, someone was either financially healthy or not. The new concept recognizes that there is a continuum of financial health–ranging from poor health to high performance–and that the components of financial health can be quantified (much like the scores we get on a wide range of physical health tests).
And this new financial health concept applies to all consumers–not just the under-served ones.
Financial Health Predictions
Some predictions about financial health:
- Financial health will become the new basis of competition in banking. Over the past 70 years, the basis of competition has shifted from location (who has the best/most branch locations) to price (who has the best rates and fees) to convenience (who makes banking easiest). The new basis will be financial health–who best helps consumers improve their financial health (or performance). Price and convenience will still play a role–but the point of differentiation will be improving measurable financial health.
- Financial health platforms will emerge. Or at least one will. The financial health fintech space is growing and getting too complicated for consumers to navigate and for players in the ecosystem to integrate with one another. An Amazon of financial health–or better yet, a Fitbit of banking–will emerge to help consumers find the best financial health providers and help providers better integrate.
- Mid-size institutions’ positioning will be threatened. Many community banks and credit unions think they’re well-positioned for the new financial health because they “care” more about consumers than big banks do. Nonsense. The new financial health is AI- and API-driven. Big banks are already investing more in terms of people and money on this than any smaller bank could. Mid-sized institutions will need to make a complete strategic commitment to competing on financial health–which they are not doing today.
- The government will stick its nose into financial health. The Community Reinvestment Act (CRA) was “enacted with the intent of encouraging depository institutions to help meet the credit needs of low- and moderate-income (LMI) neighborhoods.” While much good has been done as a result of the legislation, there are two emerging issues: 1) What “neighborhood” does a digital bank serve? and 2) It’s not just LMI consumers that need help, and those people need more than just credit. Look for a future administration or Congress to require banks to monitor and improve their customers’ level of financial health.
The Last Word
According to Rob Levy, Vice President, Research & Measurement at Financial Health Network:
Financial health is on the rise as a key priority for financial services executives. When so many American households are struggling, the real question is whether this new industry consensus can move from an idea into real products, programs, and strategies that place customer financial health at the heart of financial services.”
That means moving from lip service to real service.