Why financial literacy is the new frontier of the banking customer experience

This article was first published in Global Banking & Finance Review 

Despite the proliferation of financial services, platforms and tools in the marketplace, consumers are more vulnerable than ever. In the U.S., a Federal Reserve survey finds that 36 per cent of consumers can’t cover an unexpected $400 expense with cash or its equivalent. Meanwhile, nearly a quarter say their finances are worse due to job layoffs and other issues caused by the pandemic.

European consumers are experiencing similar issues. Some 48 per cent of residents report that their wellbeing declined in 2020 due to COVID-19, and one in five say they are going into debt to cover everyday spending.

As governmental help in the form of rent subsidies, mortgage payment holidays and enhanced unemployment ends around the world, consumers are at greater risk than ever. And they want help: In the UK, 93 per cent of consumers say that education has failed to prepare them to handle their finances, and 43 per cent believe that it’s their bank’s responsibility to do so.

Consumers are constantly making choices that improve or harm their finances, and many have long-term consequences. For example, taking on excessive debt can lead to high interest rates, crisis-based living and bankruptcy. Failing to save anything for retirement, as 45 per cent of U.S. boomers have, is now plunging the elderly into poverty with alarming regularity.

Adding to the complexity of the challenge is that self-serve financial tools, seamless digital switching and easy lending terms make it easier than ever for consumers to get credit and loans or gamify services they know little about – and they have. Recently, Robinhood made an undisclosed settlement to the family of Alex Kearns, the 20-year-old novice options trader who committed suicide when faced with suspected losses of $730,000. This story should serve as a chilling case in point that institutions share the risk of financial literacy issues with their consumers.

Banks can make more money from servicing wealth, not debt 

For banks, financial literacy is a challenge that can and should be faced head-on. While banks have historically made their money by servicing debt, low and sustained low interest rates have cannibalised that source of revenue. Now, banks make more money by helping consumers grow their wealth. Given that huge swaths of the population around the world are living in financial peril, banks’ current and future revenues and profitability are also at risk. So, what can banks do to help consumers learn about – and master – their finances?

Why investing in financial literacy is in banks’ best interests

Delivering an exceptional customer experience is no longer just about offering great products and services; it’s about helping consumers navigate the choices, small to large, that affect their financial well-being and mental health.

When banks assume a role as educator and mentor, they can help consumers reduce and eliminate debt and manage their ongoing commitments, such as mortgages and loans. They also help consumers increase their wealth over time. Banks win by deepening customer relationships and increasing profitability while reducing bad debt and collections costs and freeing up funds for ongoing digital investment.

Here’s how banks can help consumers improve their financial well-being now:

Learn from the competition

Fintechs have driven innovation in the industry, with simple, user-friendly interfaces; user tools such as AI-driven chatbots; and insights such as nudges, alerts, spending breakdowns and data visualisations. These tools can be applied across services, including cash management, payments, lending, insurance and more. Banks can either replicate these features or buy tools from fintechs directly.

Nudges and alerts can help consumers monitor such items as outstanding balances, loan payment terms and due dates, and more, improving their credit and helping them reduce debt. Modelling tools can help explore the implications of decisions, helping consumers better experience their consequences.

In the U.S., Zoggo Finance is teaching Gen Z how to make better decisions, using games and incentives. Emma helps consumers track finances, eliminate wasteful subscriptions and use recommendations to save money. Betterment and Wealthfront provide robo-advising that simplifies investment decision making, while Coinbase makes cryptocurrency investing accessible.

Develop deep customer insights

Banks can learn how consumers make decisions, including those that aren’t in the best interests of their financial well-being. Teams can conduct qualitative and quantitative research and apply design thinking to these challenges.

Teams can conduct innovation sprints, using insight-driven tools and techniques such as user personas, pain mapping, inspirational case studies and new technologies to explore new opportunities. They can then align the best of these opportunities to their target customer experience, by developing a growth strategy; commercialising new business models, products and services; and aligning their technology roadmap and investments accordingly.

During the early days of COVID-19, Sparkler executed fast-paced research to learn how UK consumer beliefs and attitudes were changing. As an example, Sparkler found that among 18- to 34-year-olds, 37 per cent needed more credit to pay for essentials, 45 per cent were interested in alternative ways to invest money and 38 per cent said they needed greater guidance on managing pensions, insights banks could put to work.

Become a data-driven business

Banks can improve data gathering, analysis and segmentation across the customer lifecycle. They can then use this data to design personalised customer journeys across digital channels, where financial education is delivered both just-in-time and on an ongoing basis. By deploying cloud-based tools to better predict behaviour and risk, they can offer financial content and intervention to support customers’ decision making.

Banks can use AI-driven chat and other tools to guide consumers through products and services and help them make the right choices. Similarly, brokerages can break down and demystify options, stock and crypto trading, while putting appropriate checks and balances in place to avoid harming vulnerable consumers.

Ageas, a leading insurance company in Europe and Asia, is building analytics solutions at scale, to offer personalised services and automated processes across its life, non-life, and accident and health business lines.

Deploy modern strategies and architectures

Banks are moving data to the cloud, using microservices to build flexible services, and creating end-to-end solutions using APIs. By so doing, bank teams can gain access to near-real-time, accurate data for decision making. They can then use advanced analytics to predict financial difficulty, model the affordability of new loans and automatically trigger interventions for vulnerable consumers.

But they’ll have to move faster to keep pace with the market. Banks are adopting agile ways of working to speed up innovation and reduce risk. Schroders, a global investment manager, has trained 600 professionals on agile processes, accelerating the speed of project release by 20 per cent in just nine months.

As consumers struggle with finances, they are looking for a helping hand. By intervening early and often with personalised financial literacy tools and services, banks can create customers for life. As financial services leaders know, keeping, servicing and growing customer relationships can be more profitable than constantly marketing for and losing them, or writing off bad debt due to ongoing loan and credit losses.