Building financial literacy is good for business

Finan­cial lit­er­a­cy is to fin­tech what in-per­son cash deposits are to bricks-and-mor­tar banks: the absolute basic. With lit­er­a­cy comes knowl­edge and with knowl­edge, as the say­ing goes, comes pow­er.  

That’s how Eddie Behringer sees it, at any rate. Chief exec­u­tive of Seat­tle-based Cop­per Bank­ing, he gives his cus­tomers cash rewards for hit­ting their sav­ings goals and even offers to top up their accounts if they pass a quick test about finance.

Financial literacy is a market opportunity

His rea­son­ing is sim­ple: most peo­ple are ill-informed about how finance works and being ill-informed leads to bad deci­sions that lim­it their oppor­tu­ni­ties. The ear­li­er such edu­ca­tion occurs, the bet­ter, accord­ing to Behringer, whose dig­i­tal bank focus­es exclu­sive­ly on teenagers. “When they win, we win. And ulti­mate­ly, our world wins,” he adds.

That may sound like wish­ful fin­tech spin, but there are hard num­bers to back it up. Research by mobile data ana­lyst App Annie esti­mates that Amer­i­can 16 to 22 year olds spend $44 bil­lion a year and influ­ence how an addi­tion­al $600 bil­lion is spent. 

The mar­ket oppor­tu­ni­ties for banks in the pre-banked sec­tor, like Cop­per, extend to the wider bank­ing uni­verse. Like teens, the world’s “unbanked” would ben­e­fit expo­nen­tial­ly from know­ing how to max­imise their cash. Their income may be small but, at 1.7 bil­lion peo­ple, they rep­re­sent a vast untapped mar­ket.

How­ev­er, the real prize for fin­tech pro­mot­ers of finan­cial lit­er­a­cy is exist­ing bank cus­tomers. Thanks to the trans­paren­cy offered by dig­i­tal banks, peo­ple are final­ly wak­ing up to the sub-opti­mal offer­ings of tra­di­tion­al banks.

So argues Niki­ta Tch­es­nokov, part­ner in the ear­ly-stage fin­tech invest­ment firm Gauss Ven­tures. “A new, finan­cial­ly lit­er­ate gen­er­a­tion is quick­ly real­is­ing they have been his­tor­i­cal­ly over­charged for bank­ing prod­ucts and are start­ing to shift their loy­al­ty and cus­tom to these new trans­par­ent providers,” says Tch­es­nokov.

He is not alone in see­ing the upsides of help­ing peo­ple wise up about mon­ey man­age­ment. The “win-win out­come” is tout­ed by for­mer invest­ment banker turned finan­cial lit­er­a­cy cham­pi­on Ker­im Der­hal­li. Through the smart use of gam­ing and social inter­ac­tion tools, Derhalli’s stock trad­ing app Invstr has not only empow­ered con­sumers, but also won their cus­tom.

A cut­ting-edge dig­i­tal offer is obvi­ous­ly key to attract­ing and retain­ing new users, but it all starts by get­ting peo­ple through the fin­tech door, he says. Explain­ing Invstr’s rapid uptake, it’s “as much about pro­vid­ing edu­ca­tion as it is about dig­i­tal­is­ing a finan­cial ser­vice,” Der­hal­li argues.  

Anoth­er believ­er in the busi­ness ben­e­fits of increas­ing consumer’s finan­cial lit­er­a­cy is Helen Bier­ton. Chief bank­ing offi­cer at UK dis­rup­tor Star­ling Bank, she main­tains that edu­ca­tion­al tools such as instant noti­fi­ca­tions and spend­ing break­downs are help­ing cus­tomers see through the “com­plex and daunt­ing” maze of per­son­al finance.  

New customers mean new expectations

Finan­cial lit­er­a­cy is a dou­ble-edged sword, how­ev­er. Yes, it makes indi­vid­u­als more like­ly to switch banks as they become more skilled at iden­ti­fy­ing providers that are “right for them and their needs”, as Bier­ton puts it. But it also brings new expec­ta­tions of what good ser­vice looks like.

It’s a chal­lenge fin­tech inno­va­tors like Wirex are con­tent to embrace. The UK’s first reg­u­lat­ed cryp­to bank, Wirex has raised the bar for mod­ern mon­ey man­age­ment by enabling users of its online plat­form to trade up to 20 tra­di­tion­al and dig­i­tal cur­ren­cies at any one time. Oth­er handy, sim­ple-to-adopt inno­va­tions include a con­tact­less deb­it card to spend cryp­to sav­ings in-store.

It is no longer nec­es­sary to wait for the bank to open or the stock mar­ket to clang its bell. Armed with a sound under­stand­ing of basic finance, indi­vid­u­als now have an array of tools to man­age their mon­ey how they want, when they want, says Wirex chief exec­u­tive Pavel Matveev.

Nor is the lit­er­a­cy leap that great, says Matveev. The smarter fin­tech gets, the low­er the knowl­edge thresh­old becomes. “Arguably, con­sumers don’t even need to be that finan­cial­ly lit­er­ate any more to make the most of dig­i­tal plat­forms like ours,” he says. 

Tra­di­tion­al banks are wis­ing up to this. Recent years have seen a mas­sive expan­sion of dig­i­tal offer­ings from bricks-and-mor­tar finan­cial insti­tu­tions as they seek to keep up with their dig­i­tal chal­lengers. Restric­tions on move­ment imposed by coro­n­avirus have accel­er­at­ed this process, with dai­ly use of dig­i­tal bank­ing chan­nels up by 6 per cent glob­al­ly over the last year.

This sen­si­tiv­i­ty to chang­ing con­sumer pat­terns includes an appre­ci­a­tion of the need to edu­cate peo­ple about basic bank­ing. Kevin Mar­tin, chief oper­at­ing offi­cer of wealth and per­son­al bank­ing at HSBC, describes a future sce­nario in which cus­tomers kick off a query with an arti­fi­cial intel­li­gence chat­bot and get passed to a front­line col­league should they need more help.

In 2019 alone, HSBC clocked ten mil­lion chat­bot con­ver­sa­tions, a fig­ure it antic­i­pates could increase twelve-fold by 2024. Even so, Mar­tin still expects the human ele­ment of bank­ing to per­sist. There­in lies reas­sur­ance when things become com­pli­cat­ed.

Quick though banks might be to mim­ic fintech’s dig­i­tal tools, their core busi­ness mod­el may still rely on keep­ing cus­tomers in the dark. That way the prof­itable sys­tem of covert fees and admin­is­tra­tion charges can con­tin­ue.

The end game for illiteracy

Of course, many cus­tomers are hap­py to stick with the sta­tus quo. If it costs them more to avoid the per­ceived faff of active­ly man­ag­ing their mon­ey online, that’s a price many may be pre­pared to pay. How well this argu­ment holds up in today’s econ­o­my remains to be seen.

Ricky Knox, chief exec­u­tive of Tan­dem Bank, doesn’t buy the idea that tra­di­tion­al banks can con­tin­ue to prof­it from “human lazi­ness”. Not because peo­ple will stop being lazy about their mon­ey, but because, through clever tools like Tandem’s auto-sav­ings ser­vice, dig­i­tal ser­vices will work around people’s nat­ur­al iner­tia.

Anna­maria Lusar­di, pro­fes­sor at George Wash­ing­ton University’s Glob­al Finan­cial Lit­er­a­cy Excel­lence Cen­ter, agrees. Finan­cial illit­er­a­cy may serve the inter­ests of big banks in the short term, but as a long-term strat­e­gy it’s doomed, she says: “Bet­ter to serve the needs of con­sumers if they want to keep them.”