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Is Fintech Bad For Your (Financial) Health?

A new study from the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) revealed some surprising findings:

1) Millennials who make mobile payments are more likely to overdraw their checking account. According to the study, 28% of mobile payment-making Millennials reporting overdrawing on their checking account. Among those who haven't made mobile payments, just 20% have overdrawn.

2) Millennials who track spending with their smartphone are more likely to overdraw their checking account. Of the Millennials who use their mobile phone to track spending, 25% overdrew their account, in contrast to 20% of those that did not track their spending.

The study also attempted to measure financial literacy by assessing respondents personal finance knowledge and understanding in eight areas:

  • Earning—determinants of wages and take-home pay.
  • Consuming—budgets and managing spending.
  • Saving—factors that maximize accumulations.
  • Investing—investment types, risk and return.
  • Borrowing/managing debt—relationship between loan features and repayments.
  • Insuring—types of coverage and how insurance works.
  • Comprehending risk—understanding uncertain financial outcomes.
  • Go-to information sources—recognizing appropriate sources and advice.

The study's authors discovered that:

1) Higher financial literacy lessens negative effects of using smartphone for mobile payments. Of the mobile-paying consumers who could correctly answer no more than a quarter of financial literacy questions, four in 10 overdrew their accounts. Of those correctly answering three-quarters or more of the questions, just 11% overdrew their accounts.

2) Higher financial literacy lessens negative effects of using smartphone to track spending. Of the mobile spend tracking consumers who could correctly answer no more than a quarter of financial literacy questions, three in 10 overdrew their accounts. Of those correctly answering three-quarters or more of the questions, just 10% overdrew their accounts.

The findings are clear, no? Fintech is bad for your financial health! Using PFM and making mobile payments causes overdrafts! Financial literacy to the rescue!  

Well, not so fast. Let's take income and age into account here and see what happens.

Surprise, surprise, older generations are more financially literate than younger generations. Six in 10 Baby Boomers answered more than half of the financial literacy questions correctly, compared to almost half of Gen Xers and Older Millennials, and a little more than a third of Younger Millennials.

And when we factor income into the equation, the picture becomes clearer. On average, Older Millennials who make more than $100k answered 61% of the literacy questions correctly. The average correct answer rate among Older Millennials earned less than $25k was 30%.

Younger Millennials who make more than $100k answered 47% of the literacy questions correctly versus the 26% that Younger Millennials earning less than $25k answered correctly.

And I'm sure you won't be surprised to find that both Younger and Older Millennials with a college degree answered more literacy questions correctly than their age cohorts without a college degree or high school diploma.

Financial literacy isn't the panacea some would like to make it out to be. It's like driving a car: Becoming more "literate" by studying the workings of a car and reading books on driving won't make you a better driver. Experience and practice will.   

If you want to reduce the prevalence of overdrafts among Younger Millennials, the best thing can you do for them is turn them into Baby Boomers. And I guess give them more money, but let's start with the first thing first and see where that goes.

Financial Misbehavior--Not Illiteracy is the Problem

The TIAA/GFLEC study listed one of the literacy-related questions (and percentages of Younger Millennials giving specific answers) asked in the survey:

Sebastian wants the premium payments for his car insurance to be as low as possible. What can he do?

  1. Increase the deductible on his car insurance (correct answer; chosen by 40% of Younger Millennials)
  2. Lower the deductible on his car insurance (chosen by 9%)
  3. Nothing, because his premium payments are dictated by his driving record (chosen by 14%)
  4. Don’t know (chosen by 37%)

Here's my question: How many Younger Millennials have their own car and insure it? What I'm getting at is that, potentially, some meaningful percentage of the 37% who didn't know the answer to the question didn't need to know the answer to the question.

I couldn't tell you how many more questions in the study were like this one.

Bottom line: Stop focusing on financial "literacy." Literacy isn't the problem--bad financial behavior is the problem. Many people overdraw on their checking account not because they're financially illiterate but because they have a host of other challenges and problems. You want to help those people? Find out what those problems/challenges are and address them. Stop making yourself feel better by providing financial education.

Ron Shevlin
Director of Research
Cornerstone Advisors

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