April is National Financial Literacy Month. If the past is any guide, the banking industry will use the opportunity to tout the various curricula, websites and public service campaigns it has created during the past year to help inform consumers about their finances.
Despite the good intentions and large sums of money behind these initiatives, there is little evidence to suggest that they are working. It's time for a different approach.
Financial knowledge is important, but it's not the endgame. Knowledge is meaningful only if consumers put it to work in the way they shop for and use — or don't use — financial products and services.
Given the vast array and increasing complexity of financial products, it's no wonder that consumers have a hard time managing their money. More choices and features are good, but only up to a point.
Helping consumers become more financially capable means marrying high-quality, easy-to-use products with timely, relevant, actionable and ongoing information. Consumers need both to be successful.
Banks are beginning to recognize this fact. As regulatory changes lead them back to the drawing board on checking accounts and credit cards, some are incorporating the elements of financial capability into both product design and customer communication in novel ways.
My organization has been on the hunt for innovative models that bring products and information together in ways that can help shape positive consumer behavior. With support from a broad group of financial services firms led by the Citi Foundation, we established a $1.5 million Financial Capability Innovation Fund to seed and test new approaches.
A call for proposals we issued last year netted nearly 250 ideas from nonprofits across the country. We ultimately selected five ideas, all of which are directly applicable to financial services providers.
Consumer Credit Counseling Service of Delaware Valley will test whether social commitments and text alerts can help consumers reduce debt. In this 21st-century version of a support group, consumers that sign up for a debt management plan will provide contact information for friends and relatives who will be alerted should the participant fail to follow through on debt payments.
Grow Brooklyn, an affiliate of Brooklyn Cooperative Federal Credit Union, will leverage technology, peer support and automation to help low-income savers turn virtual "impulse saving" into real cash in their accounts. In partnership with the tech startup Piggymojo, credit union members will be able to set savings goals and have funds automatically transferred from checking to savings when they make a decision to not spend. Forgoing that morning latte, for instance, would translate into actual savings accrued.
Mission Asset Fund of San Francisco will franchise its Cestas Populares program, a peer loan coupled with peer-led education, to help immigrants build credit and manage credit wisely. The program formalizes the lending circle concept, where a group of friends pools funds and loans the money to each member of the group in succession, by collecting and reporting the payment history to help consumers build credit.
Co-opportunity Inc. will leverage technology to enhance the effectiveness and scale of its volunteer budget coaching program. The Connecticut nonprofit will partner with HelloWallet, an Internet-based personal financial management platform, to link financial advice with financial products and test whether automated tools can be as effective as in-person financial advising.
Filene Research Institute, an applied research and innovation center for credit unions, will test whether rewarding consistent timely loan payments with interest rate reductions leads to better payment behavior. Filene will work with six to eight credit unions across the country to provide timely encouragement and an incentive to subprime auto borrowers to pay on time.
These innovative projects hold promise, but what matters is whether they are successful in helping consumers change their behavior and improve their financial well-being. Researchers will evaluate each project to see what really works.
Community-based nonprofits play a critical role as trusted advisers, and they may be better suited than banks to engage with consumers on financial matters, especially when the work will take weeks or months.
Still, it is easy to see how various elements of these projects could be replicated directly by financial institutions and baked directly into products and practices. For instance, several of the projects will experiment with text messaging to provide consumers with real-time information and encouragement. Increasingly, banks are using text messaging to provide customers balance information, or to warn them about low balances before an account is overdrawn.
This is exactly the kind of marriage between products and information that can lead to tangible results for consumers. It's beyond financial literacy. It's having your customer's back.
