Financial literacy is to fintech what in-person cash deposits are to bricks-and-mortar banks: the absolute basic. With literacy comes knowledge and with knowledge, as the saying goes, comes power.
That’s how Eddie Behringer sees it, at any rate. Chief executive of Seattle-based Copper Banking, he gives his customers cash rewards for hitting their savings goals and even offers to top up their accounts if they pass a quick test about finance.
Financial literacy is a market opportunity
His reasoning is simple: most people are ill-informed about how finance works and being ill-informed leads to bad decisions that limit their opportunities. The earlier such education occurs, the better, according to Behringer, whose digital bank focuses exclusively on teenagers. “When they win, we win. And ultimately, our world wins,” he adds.
That may sound like wishful fintech spin, but there are hard numbers to back it up. Research by mobile data analyst App Annie estimates that American 16 to 22 year olds spend $44 billion a year and influence how an additional $600 billion is spent.
The market opportunities for banks in the pre-banked sector, like Copper, extend to the wider banking universe. Like teens, the world’s “unbanked” would benefit exponentially from knowing how to maximise their cash. Their income may be small but, at 1.7 billion people, they represent a vast untapped market.
However, the real prize for fintech promoters of financial literacy is existing bank customers. Thanks to the transparency offered by digital banks, people are finally waking up to the sub-optimal offerings of traditional banks.
So argues Nikita Tchesnokov, partner in the early-stage fintech investment firm Gauss Ventures. “A new, financially literate generation is quickly realising they have been historically overcharged for banking products and are starting to shift their loyalty and custom to these new transparent providers,” says Tchesnokov.
He is not alone in seeing the upsides of helping people wise up about money management. The “win-win outcome” is touted by former investment banker turned financial literacy champion Kerim Derhalli. Through the smart use of gaming and social interaction tools, Derhalli’s stock trading app Invstr has not only empowered consumers, but also won their custom.
A cutting-edge digital offer is obviously key to attracting and retaining new users, but it all starts by getting people through the fintech door, he says. Explaining Invstr’s rapid uptake, it’s “as much about providing education as it is about digitalising a financial service,” Derhalli argues.
Another believer in the business benefits of increasing consumer’s financial literacy is Helen Bierton. Chief banking officer at UK disruptor Starling Bank, she maintains that educational tools such as instant notifications and spending breakdowns are helping customers see through the “complex and daunting” maze of personal finance.
New customers mean new expectations
Financial literacy is a double-edged sword, however. Yes, it makes individuals more likely to switch banks as they become more skilled at identifying providers that are “right for them and their needs”, as Bierton puts it. But it also brings new expectations of what good service looks like.
It’s a challenge fintech innovators like Wirex are content to embrace. The UK’s first regulated crypto bank, Wirex has raised the bar for modern money management by enabling users of its online platform to trade up to 20 traditional and digital currencies at any one time. Other handy, simple-to-adopt innovations include a contactless debit card to spend crypto savings in-store.
It is no longer necessary to wait for the bank to open or the stock market to clang its bell. Armed with a sound understanding of basic finance, individuals now have an array of tools to manage their money how they want, when they want, says Wirex chief executive Pavel Matveev.
Nor is the literacy leap that great, says Matveev. The smarter fintech gets, the lower the knowledge threshold becomes. “Arguably, consumers don’t even need to be that financially literate any more to make the most of digital platforms like ours,” he says.
Traditional banks are wising up to this. Recent years have seen a massive expansion of digital offerings from bricks-and-mortar financial institutions as they seek to keep up with their digital challengers. Restrictions on movement imposed by coronavirus have accelerated this process, with daily use of digital banking channels up by 6 per cent globally over the last year.
This sensitivity to changing consumer patterns includes an appreciation of the need to educate people about basic banking. Kevin Martin, chief operating officer of wealth and personal banking at HSBC, describes a future scenario in which customers kick off a query with an artificial intelligence chatbot and get passed to a frontline colleague should they need more help.
In 2019 alone, HSBC clocked ten million chatbot conversations, a figure it anticipates could increase twelve-fold by 2024. Even so, Martin still expects the human element of banking to persist. Therein lies reassurance when things become complicated.
Quick though banks might be to mimic fintech’s digital tools, their core business model may still rely on keeping customers in the dark. That way the profitable system of covert fees and administration charges can continue.
The end game for illiteracy
Of course, many customers are happy to stick with the status quo. If it costs them more to avoid the perceived faff of actively managing their money online, that’s a price many may be prepared to pay. How well this argument holds up in today’s economy remains to be seen.
Ricky Knox, chief executive of Tandem Bank, doesn’t buy the idea that traditional banks can continue to profit from “human laziness”. Not because people will stop being lazy about their money, but because, through clever tools like Tandem’s auto-savings service, digital services will work around people’s natural inertia.
Annamaria Lusardi, professor at George Washington University’s Global Financial Literacy Excellence Center, agrees. Financial illiteracy may serve the interests of big banks in the short term, but as a long-term strategy it’s doomed, she says: “Better to serve the needs of consumers if they want to keep them.”