Schools, banks together should train consumers to manage their finances

The need for financial literacy could not be greater. Beyond the many changes in the financial system and the complexity of financial markets, the pandemic showed how unprepared many people would have been in the face of a small shock, let alone a big one. The unmet need for financial literacy in the United States is troubling.

We know how to gauge knowledge about the topics that influence routine financial decisions, such as saving, investing, discerning reliable sources of information or the management of risk. What we find is that too many people score an F. Unfortunately, improvements in financial knowledge on these fronts have been mostly stagnant over time, and any improvements have been concentrated among those with the highest levels of financial literacy to start with.

Banks certainly play an important role in improving customers’ financial well-being and they are well positioned to provide customers with incentives to be or become more financially literate. Many bank initiatives are already underway and they will contribute to improving the financial literacy of many Americans. As a scholar and longtime researcher in the field of financial literacy, I also see economic advantages in sharing the responsibility for financial education with the education sector. There are three reasons for that.

First, the financial knowledge that bank customers need is becoming more and more complex. Indeed, it is so multifaceted that financial literacy is now an official field of academic study (carrying its own code — G53 — in the Journal of Economic Literature). There are now national standards on financial literacy with criteria that identify the topics that an individual must understand to be financially literate. Material has also been created to provide precision and rigor in that learning. Simple rule-of-thumb or one-size-fits-all recommendations are no longer adequate for navigating our complex financial system.

In effect, everyone has become a chief financial officer for their own finances (however small or large). We do not expect a CFO to learn on the job, but to acquire that knowledge formally, for example in school. Likewise, it is useful and important for individuals to acquire the basics of personal finance before they interact with banks. More than ever, this knowledge needs to be broad and deep, since financial decisions are interrelated — if someone carries a lot of student loans, for example, this has implications for how much they can borrow. Comprehensive financial knowledge is also emphasized in the national standards.

The second point is related to the first one: There are benefits in the division of labor, and that extends to financial education. Financial literacy is now a formal discipline taught in schools and universities using a set of standards. If banks want to become educators or improve customers’ financial literacy, they will need to direct substantial resources toward that goal. As an economist, I wonder if it is an efficient allocation of resources.

A better option would be to have each of the industries — finance and education — specialize in what they already do best, and I also believe that the two industries could support each other in compelling ways. For example, banks could promote financial education in their local school, university or community while educators could partner with banks to build case studies and practical applications. Moreover, banks may provide contracts and products with better terms to customers who have attended formal financial education programs.

The third point is related to the demand for financial education. While there is an obvious need to increase the level of financial literacy in the population, it is not so clear that individuals would turn to banks to meet that need. When surveyed on where they get financial information and knowledge, most respondents mentioned families, friends and colleagues. The workplace and the employer are also often cited as sources where people would like to get financial education.

At the same time, to make banks responsible for consumers’ financial literacy also creates potential conflicts of interest. Can banks impartially provide information and education on topics related to their own profits? Do customers want that type of education from their banks? The resources that banks earmark for financial education could end up unused or used inefficiently if customers do not trust the education provided.

Given the seismic changes underway in the economic system and the financial and economic crises we have already experienced, financial literacy has become an essential life skill, similar to reading and writing. Put in another way: Financial literacy is basic knowledge that everyone needs in order to participate successfully in society. Recognizing educational institutions as the gateway through which financial knowledge can be improved also supports the idea that financial learning should be accessible to everyone. It is an approach that benefits not only individuals, but also banks and the entire financial system.