OBSERVATIONS FROM THE FINTECH SNARK TANK
According to one banking industry expert:
Traditional methods for financial education are a waste of time when it comes to helping Millennials plan for their financial futures–instead, credit unions should share financial advice that helps Millennials get through the week or month, and relaying that information through mobile platforms and real-time alerts.”
There are four problems with that statement, the first three being:
- Not all Millennials need help “getting through” the week or month. The oldest Millennials are 38 years old already. Many have actually moved out of their parents’ basements, believe it or not.
- Real-time alerts have been around for a long time and haven’t solved anything for anyone because they don’t address the root cause of someone’s financial troubles.
- Traditional methods for financial education are a “waste of time when it comes to helping Millennials” because they’re a waste of time for all generations.
How Fast Can We Turn Millennials Into Baby Boomers?
The fourth problem is that delivering advice on smartphones might backfire. A study on financial literacy from the TIAA Institute revealed some surprising findings:
Millennials who make mobile payments and/or track their spending with their smartphone are more likely to overdraw on their checking accounts than other consumers.
The study went on to assert that improving levels of financial literacy would lessen the negative effects of using smartphones to make payments and track spending.
- Making mobile payments and using smartphones to track spending aren’t causes of overdraft behavior, and
- It ignores the impact of age and income: Financial literacy scores increase with age and income.
So if you want to reduce the prevalence of overdrafts among Millennials, don’t take away their smartphones–turn them into Baby Boomers.
And I guess give them more money, but let’s start with the first thing first and see how that goes.
Financial Education Doesn’t Have the Impact Proponents Would Like to Believe it Does
Plenty of studies attempt to prove that Americans’ level of financial literacy is low, and that therefore, we need more financial education. Leading fintech influencer Chris Skinner calls financial literacy the “scourge of our times.”
There are a couple of issues with this perspective.
1) According to a study conducted at the University of Colorado using the Fed’s Survey of Consumer Finances data:
“57% of US households exhibit signs of financial illiteracy, a phenomenon even among college degree holders. Financial illiterates report that they are aware of their lack of financial knowledge, and thus they bear less financial risk and allocate less money in risky assets, and are constructively less overconfident. Collectively, financial illiterates’ households adopt a portfolio choice strategy that is fully rational.”
In other words, households that are financially “illiterate” exhibit smarter financial behaviors and may make smarter financial decisions than so-called financially literate households.
2) A study titled So Many Courses, So Little Progress: Why Financial Education Doesn’t Work–And What Does concluded:
“One-size-fits-all financial education has 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.”
Will AI-Driven Advice Make Financial Literacy Unnecessary?
So what can banks and credit unions do to have a positive impact? As the expert quoted above said, they can “share financial advice [through mobile platforms].” Some banks are already doing that:
- A Bank of America press release says its Erica virtual assistant can “help clients tackle more complex tasks and provide personalized, proactive guidance to help them stay on top of their finances.”
- Citizens Bank’s vision for its AI-driven SpeciFI program “is for customers to realize we’re being intelligent about looking out for them, calling out the important stuff.”
This begs the question: Who needs to be financially literate if chatbots and robo-advisors can make our financial decisions for us?
Chatbots and Robo-advisors Won’t Necessarily Change Behavior
There’s no question that consumers want digitally-provided advice from their banks. According to JD Power:
78% of U.S. retail bank customers are interested in receiving financial advice or guidance from their bank and 58% say their preferred means of receiving advice is digital content delivered through a bank website or mobile app.”
But will people let a chatbot or robo-advisor control the management of their financial lives?
It would be like Erica turning into HAL (you know, from 2001: A Space Odyssey):
Sorry, Ron. But I can’t let you spend $300 for tickets to see Dead and Company when they come to Boston this summer. You need the money to pay your electricity bill.”
That ain’t happening.
Banks are between a rock and a hard wall when it comes to improving their customers’ financial performance. On one hand, education designed to improve literacy may not have the desired impact. But on the other hand, advice tools may not be effective in changing behavior.
Financial Illiteracy Isn’t the Problem
The cause of financial problems isn’t poor financial literacy–it’s poor financial behavior. But bad behavior is really just a symptom.
Bad financial behavior–like overdrawing on a checking account or paying bills late–doesn’t occur because someone is financially illiterate. It happens because they have other challenges and problems. Want to help those people? Find out what those problems/challenges are and address them.
Financial services providers are just making themselves feel better by providing financial education to “cure” financial illiteracy.
Bottom line: Robo-advisors may be great for stock picking and portfolio allocation, and chatbots might be great for customer service, but they’re useless in helping people improve their financial health and performance unless they drive behavioral change.
The reality is this: A mediocre robo-advisor with the right incentives and engagement model to drive behavior change can be more effective in improving consumers’ financial performance than a great rob0-advisor with poor incentives and ineffective engagement model.
The industry needs to lose its literacy/education delusions and refocus its efforts on behavior change.