It’s Time to Kill Financial Education–And Develop a FinHealth Services Market

From reading the banking-related press, I can only conclude that Millennials are financially-struggling morons, whose hands need to be held through every financial decision they make.

Like this, as reported in CU Today:

"According to one 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 (at least) three things wrong with that statement:

  1. Traditional methods for financial education are a waste of time when it comes to helping Millennials because it's a waste of time for all generations.
  2. Not all Millennials need help "getting through" the week or month.
  3. Real-time alerts have been around for a long time and haven't solved anything for anyone (i.e., of any generation) because they don't address the root cause of someone's financial troubles.

Financial Education Doesn't Have the Impact Proponents Would Like to Believe it Does

The press is filled with study after study attempting to prove that Americans' level of financial literacy is low, and that therefore, we need more financial education. The credit unions eat this up.

There are a couple of issues with this perspective. First, according to a study conducted by a University of Colorado professor using the Fed's Survey of Consumer Finances:

"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" may actually be exhibiting smarter financial behaviors, and making smarter financial decisions, than so-called financially literate households.

Second, there's more evidence that education efforts fall short. In a study titled So Many Courses, So Little Progress: Why Financial Education Doesn’t Work — And What Does, the author found:

"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."

And therein lies the fundamental problem with financial education: It's focused on addressing financial literacy, and not financial behavior.

Perceptions of Financial Literacy are Influenced by Economic Conditions and Life Stage

In 2013, I surveyed US consumers how their financial lives had changed from pre-recession to recession to post-recession, and about their level of financial literacy. The percentage of Millennials that considered themselves to be financially literate in 2013 versus 2010 jumped dramatically:

% of Millennials that considered themselves to be financially literate
Millennials (21-26)24%47%
Millennials (27-34)30%50%

Source: Aite Group

Did Millennials devour a ton of financial educational material over the course of those three years to cause this rise in their self-reported literacy levels? You'll never convince me the answer is yes. The answer is:

  1. Economic conditions improved between between the depths of the recession in 2010 to 2013, making them feel like it was easier to manage their financial lives, hence, making them believe they were more financially literate, and
  2. Among the younger group in particular, they had the experience of joining the working world, and having to  manage real money--not the theoretical nonsense they were fed in financial education classes back in high school.

Millennials Are Doing a Lot Better Than You Think They Are

Guess what, folks? Not every Millennial is a hopeless basket case charity candidate struggling to make ends meet. Four out of 10 younger Millennials, and nearly half of older Millennials have no problem making the monthly payments on their loans (or so they say). Less than four in 10 say that it's often a struggle.

A Bank of America survey also dispels the notion of Millennials as financial illiterates. The survey revealed that among Millennials:

  • 47% have at least $15,000 in savings, up from 33% in 2015.
  • 16% have at least $100,000 stashed away, twice as many that said they had saved that much two years earlier.
  • 63% said they're saving--one percentage point less than the percentage of Gen Xers who said they're saving.
  • 54% have a budget, and three-quarters of them stick to it each month.
  • 60% feel financially secure.

The numbers might even be better than they appear. The BofA survey lumped all Millennials--aged 23 to 37--together. It's likely, however, that the 30-something Millennials are in better shape than the 20-somethings who are first getting started in their careers

Here's the paradox, however. Despite the generally positive feelings about their own financial situations, BofA found that among Millennials:

  • 73% believe their generation overspends on unnecessary indulgences
  • 64% think their generation isn't good at managing money

See the problem here? It's a perception problem. Although many Millennials are doing OK, their perceptions of their generation may be inaccurate.

Why? Maybe it's because they read the reports in the press and keep seeing everyone tell them that they're financially illiterate. (Nah, that can't be--they don't read the press. Do they?)

Financial Health Services--Not Education--Is What's Needed (But There Are Hurdles)

What's needed to improve consumers' financial performance (not just "health") are financial health products and services (let's just call it FinHealth), not educational material.

Early PFM providers were pioneers but never really got past budgeting and expense categorization. Newer fintech entrants are providing tools that do things like enable automatic (i.e., forced) saving. All well and good. But for the financial health services market to bloom and prosper, it must overcome a number of hurdles:

  • Lack of consumer demand. There’s a paradox in modern American society: Money is very very important to us, yet we really really hate spending time and money managing it. This produces a challenge for FinHealth entrepreneurs: There is no existing consumer demand for the services they are bringing to market. There may be a need—but there is little to no demand (in the economic sense, where people have a measurable willingness to pay for products and services).
  • Definition challenges. What is financial health? The term has connotations in the industry, implying something that applies to an underserved and/or more-needy segment of consumers. But someone who makes or has a lot of money isn’t necessarily financially “healthy” and likewise, someone who doesn’t make or has a lot of money isn’t necessarily financially “unhealthy.” This produces another challenge for FinHealth entrepreneurs: A potentially lucrative segment of consumers (i.e., those who can afford the services, and may be willing to pay for them) don’t see themselves as good candidates for the services because of the prevailing definition of financial health.
  • The lack of an established market category. A not-so-unique problem facing FinHealth entrepreneurs is the challenge of creating a market category. For the previous two reasons listed above (as well as other reasons), there is no established market for FinHealth in the US. Any entrepreneur trying to create a new market category faces challenges and uncertainties in selecting and executing on a profitable revenue and monetization strategy when there is no historical precedence.
  • Inconsistent track record of results. The studies cited earlier demonstrate the shortcomings of financial education. Other types of FinHealth approaches--like PFM--have little to show for themselves in terms of impact on financial health and performance. Most of the studies I've seen show a correlation between the use of PFM and desirable behaviors (to the bank, like cross-sell success), but they don't establish a causal relationship between the tools and financial health.
  • Measurement challenges. And how could those tools be shown to have a causal effect? There's no generally accepted way to measure financial health! As a result, any number of providers in, or coming into, the market can claim to improve consumers’ financial health, but how do they prove and validate their claims?

The banking and fintech community needs to put discussion (and efforts) related to financial education behind them. It's 2018. We have big data, AI, machine learning, mobile ubiquity, you name it. What consumers and finhealth startups need is a FinHealth services ecosystem--a connected and integrated set of finhealth products and services. And by "products and services," I mean things that consumers have to pay for (i.e., not financial educational material). C'mon--if we're willing to pay $5 for a flavored latte--it's not inconceivable that we'd pay $5 for a FinHealth product or service.

Building a FinHealth Services Market

How is this FinHealth services market going to come to fruition? I haven't seen a FinTech startup in the space that strikes me as having the vision to bring together the various types of potential FinHealth products and services into a cohesive offering. Likewise, I've yet to run into a bank or credit union with the vision, desire, or resources to do it.

I'll guess we'll just have to wait for Amazon to do it.

Sadly, they seem to be the only player with the understanding of how a platform business model works, and how to build an ecosystem (or market) around a particular space.

There's a lot of great work being done in the FinHealth space by CFSI and the Omidyar Network. Perhaps separately or together they can help engineer the development of a FinHealth services platform to launch a legitimate and sustainable set of FinHealth products and services.

Ron Shevlin
Director of Research
Cornerstone Advisors