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How Some Institutions Are Using Financial Health Programs to Capture Business

July 22, 2021
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As more consumers – especially millennials – grapple with managing their finances, the opportunity is ripe for financial institutions to offer financial literacy programs and build loyalty among accountholders.

Raddon research shows that the desire for financial literacy is increasing. In 2017, 38 percent of consumers found financial literacy programs valuable. But in 2020, during the pandemic, half of consumers said they saw a high degree of value. Young consumers have typically seen more value in these types of programs, and their intensity has increased. In 2017, 16 percent of Credit Driven consumers, or those 18 to 34 years old with income levels $50,000 and above, found these programs extremely valuable. Now, that percentage is 29 percent. For Fee Driven consumers, or those 18 to 44 years old with incomes below $50,000, 56 percent also found these programs valuable in 2020 – up from 48 percent.

More importantly for financial institutions, 65 percent of Credit Driven consumers and 42 percent of Fee Driven consumers say they would bring more business to their primary financial institution (PFI) if it offered literacy programs.

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Many financial institutions already provide their accountholders with financial literacy content such as blogs, articles and webinars, and some even offer financial planners. Those services are valuable to consumers, especially younger consumers, as the charts below detail. But one service really stands out: 47 percent of consumers said they would like to see their PFI offer apps and tools to assist in monitoring spending behavior and budgeting to support their financial health.

For many consumers, the current banking industry does not work well, leaving them powerless to manage their finances. Some financial institutions are taking steps to give more power back to the consumer, including adding transparency and tools to give consumers a better view of their full financial picture. In turn, the financial institutions hope to capture more of their accountholders’ business.

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According to a survey Raddon conducted earlier this year, only 12 percent of consumers consider themselves extremely financially knowledgeable, and 8 percent say they are not knowledgeable. Less than half – 43 percent – say they are financially healthy while 12 percent indicate they are not. To further develop financial literacy among accountholders, many financial institutions have added more in-depth content and tools to their websites and mobile apps, such as libraries, videos and calculators.

Scoring Financial Readiness

USAA has provided financial literacy tools since 2015, and it takes its financial literacy content one step further by offering members a short assessment to help them evaluate their overall financial health status with a score. The bank said more than 800,000 of its members had engaged with its Financial Readiness Tool as of 2019. According to the bank, the average scores have been increasing year over year, and it has seen an 18 percent spike in members acting on what the tool recommends. Members motivated by this score improve their financial health by increasing balances and using more products and services, thereby deepening their relationship with USAA.

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Automated Cash Flow Mapping

Another trend apparent in financial institutions, especially among the major banks, is the use of automated intelligence to map cash flow trends. Bank of America offered its interactive budgeting tool to its 21 million mobile customers in January 2016 to help people make better financial decisions, and it’s working. The bank reports one out of four people increased their savings by 20 percent or more, one out of three people increased their checking balance by 20 percent or more, and one out of seven people reduced their credit balance by 20 percent or more.

Managing Through Low-Cash Moments

PNC recently launched its Low Cash ModeSM digital offering to address $17 billion in industry overdraft fees. That’s about $52 per person in the U.S. missing from consumers’ pockets, usually because of simple budgeting and timing errors. When Raddon asked consumers in 2020 if they had a monthly budget, only 64 percent said they did. And of those members, only 13 percent indicated they used a budgeting application such as Mint. When asked the same question in 2017, only 50 percent said they had a monthly budget.

When not tracking your cash flow, it is quite easy to incur an overdraft. PNC is very transparent about the process and is giving customers more control to manage through low-cash moments or mistimed payments. PNC expects to help its customers avoid $125 million to $150 million in overdraft fees annually, but it also expects this innovative approach to drive significant growth in new and existing customer relationships over time.

Enabling Pain-Free Savings

Some institutions are also helping their accountholders save. Ally Bank is using artificial intelligence to offer customers Surprise Savings. The bank looks at cash flow patterns and identifies times it would be safe to transfer insignificant amounts to a savings account, then automatically transfers the funds. Chase offers a service where it initiates a $100 transfer every time an account receives a deposit of over $100. BMO Harris Bank incents customers to save by rewarding $5 (up to $60 total) for every month a customer saves $200 or more for 12 months. Encouraging savings is a solution where both the financial institution and the accountholder benefit.

Building Credit and Boosting Scores

Lending is another area where institutions can help build financial literacy for consumers. According to the CFPB, almost half of Americans have little or no credit, which can have a major impact on a person’s financial health. Some reports estimate up to four in five Americans are living paycheck to paycheck. According to the 2020 Financial Health in a Pandemic report from Raddon, 42 percent of Americans do not have enough cash to cover an emergency expense of $400.

One startup called SeedFI was founded on the premise that it is difficult for many Americans to get ahead financially. SeedFi offers a credit-building product designed to create long-term saving habits while improving credit. Customers save small amounts from each paycheck, which is reported to the credit bureaus to build their credit history. In five months, customers can generate $500 in savings. SeedFi customers with no credit history were able to establish a credit score of 600, while customers with existing credit scores boosted their scores by 45 points, according to the company. SeedFi is setting its customers up for success at traditional financial institutions.

Nusenda Credit Union has tracked several KPIs related to its small-dollar loan program. The credit union found it saw an overall improvement in member credit scores as well as new member growth related to the product. It also noted that borrower sentiment improved toward the credit union.

Even Small Steps Make a Difference

According to the most recent Raddon survey, only 25 percent of accountholders strongly agree that their credit unions are advocating for their financial welfare. Financial institutions need to do more to fix this broken system. While offering financial literacy information and seminars to your accountholders can be beneficial, there are more things banks and credit unions can do to improve consumers’ financial health. Putting more power into the hands of accountholders improves their situation and their sentiments toward their financial institution.

Smaller financial institutions may not have the budget to add artificial intelligence into their mobile platforms right away, but they can take smaller steps now and make those technology offerings part of a long-range strategic plan. By adding small-dollar loans for emergency funds, credit-builder products and incentives to save, banks and credit unions can not only motivate consumers to better manage their finances, but they can start conversations that deepen accountholder relationships.