Introduction
More Americans are taking an interest in the state of their financial health. As of 2020, only a third of Americans were considered financially healthy, but trends such as paying down credit card debt and an increased interest in investing indicate that many want to improve their financial situation.
In the past, some financial institutions may not have considered the alignment between their customers' financial health and their own business interests. But helping people overcome financial challenges and achieve financial goals can actually be a great way to build trust, acquire new customers, and deepen engagement. It's a substantial (and largely untapped) business opportunity that puts the customer first.
To help financial institution leaders better understand this opportunity, this article will explore the following:
Consumers’ growing interest in their financial health
The business opportunity this represents for financial institutions
Three simple ways that financial institutions can help their customers improve financial health (and drive their bottom line in the process)
What is financial health?
According to the Financial Health Network, financial health is “a composite measurement of a person’s financial life. Unlike narrow metrics like credit scores, financial health assesses whether people are spending, saving, borrowing, and planning in a way that will enable them to be resilient and pursue opportunities over time.”
To paint a complete picture, financial health is measured across eight indicators. While it may seem counterintuitive to the pandemic-related economic decline, in 2020, Americans saw an overall increase in seven out of eight indicators. This could be due to several factors such as aversion to risk in an unstable economy, government stimulus payments, and a growing interest in long-term financial health.
When someone is financially healthy, they can generally meet daily obligations, save for the future, and enjoy their life; they are resilient against adversity and able to seize opportunities when they arise. Unfortunately, in our wealthy economy, most citizens are not financially healthy themselves. That means that most Americans don’t have a cushion to get through emergencies or further economic decline; and millions deal with financial hardships every day.
Only one-third of Americans are financially healthy
With two-thirds of Americans falling into ‘financially coping’ and ‘financially vulnerable’ categories, the growing interest in changing financial health outcomes presents a substantial opportunity for financial institutions. Creating products and services to help customers increase their financial health not only puts financial institutions at a competitive advantage, but serves a grave need that most Americans have.
How is financial health different from a credit score?
When a lender needs to determine the likelihood that someone will make payments on a loan, they check an applicant’s credit score. That’s why credit scores are based on factors like whether or not someone pays their bills on time, how much they owe to lenders, and how long they’ve had credit for.
While credit scores give lenders a standardized tool to determine credit worthiness, they don’t paint a full picture of financial health. For example, imagine someone who has great cash flow and a low debt-to-income ratio, but they’ve never had a credit card or taken out a loan. Despite not having a credit score, they would still be considered relatively financially healthy.
When credit scores are used to make decisions outside of gaining access to credit, such as whether or not someone can rent an apartment, it can hurt those who haven’t built good credit but are otherwise financially healthy. The more robust financial health indicators, of which credit score is one, are a more complete and fair way to make decisions like whether or not someone can rent an apartment.
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How does financial health relate to other social factors?
Stark disparities in financial health persist based on race, gender, household income, and age. In an era in which equity and inclusion are top-of-mind for businesses and society, this presents an opportunity for banks to make an impact by building products and services that help close these historical gaps.
Initiatives like BlackRock’s Emergency Savings Initiative take steps towards addressing these gaps. Through the project, BlackRock and its partners deliver tools and resources that empower vulnerable people around the world to improve their financial health by building emergency savings.
If more financial institutions join the cause to close these gaps, it could make a lasting impact to the health and wellbeing of America and the world. Due to the rise of financial health-related startups, positive change is happening with or without the support of large financial institutions. However, the need for change gives financial institutions the opportunity to lead the charge, build a stronger brand, and stay ahead of trends.
Financial health is increasingly a priority for Americans
Financial health is increasingly a priority for Americans While 44% of Americans report money as their number one source of stress, overall financial health actually increased by 4% from 2019 to 2020. Several trends indicate that this is due to increased interest in improving financial health.
The pandemic of 2020 and the subsequent economic crisis led to some unexpected outcomes in consumer finance, including Americans trying to get out of credit-card debt. Surprisingly, the average credit card balance decreased by 14% in 2020. At the same time, the average FICO™ score rose to 710, up from 703 the previous year. The drive to get out of debt is a changing consumer behavior that’s likely to become permanent. This means that business models based on high-interest debt may have to shift towards more sustainable solutions for consumers’ financial health.
The rise of retail investing also reflects a growing interest in financial management, which is a part of financial health. In 2020, individual investors opened more than 10 million new brokerage accounts, more than any year in history. While several factors may have influenced this, including stimulus checks and more time at home, a growing interest in investing is a strong indicator that Americans’ are taking their long-term finances more seriously.
For financial service providers, the implication is clear: financial health is a growing priority for Americans—and many of them actually wish their banks would help them improve it.
Consumers expect banks to help them improve their financial health
Increasingly, people are turning to financial institutions to help them improve their financial health. A 2019 Accenture study found that half of consumers are interested in receiving financial advice from their financial service providers, including on how to manage their money and improve their spending habits. It also showed that people are more willing to share data in exchange for better advice.
Customers are moving to financial services providers that help them. This is shown by the rapid growth of Chime, a digital bank that offers financial health-related services including fee-free overdrafts, early paycheck access, and help to build credit history and grow savings. These offerings have helped Chime acquire over 4.3 million customers, making them a top 10 bank in the US.
A 2015 Gallup survey shows that customers who feel that their primary bank supports their financial well-being are more satisfied with it—and hold a higher percentage of their investments there.
Many banks already grasp the connection between consumer financial health and their bottom line. For example, USAA offers its customers a financial readiness action plan. The program takes customers through an assessment of their financial health and delivers an action plan to improve it.
According to a survey of nearly 4,000 US consumers, the top three financial institutions for improving their customers’ financial health are Capital One, USAA, and Chime. For each of these institutions, 48% of customers say they helped them improve their financial health.
Varo is another example of a bank that puts its customers’ financial health first. They offer no-fee overdraft protection for up to $50, early access to earned income, and automated savings tools. Perhaps as a result, Varo has seen a growth in new savings account openings of 670% since 2018 and has helped customers save over $50 million.
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Financial health is an untapped business opportunity
With the rise of consumer-first fintechs, banks are facing increased competition—and the dynamics of consumers paying fees for things like overdrafts or minimum balances are changing. As this trend continues, the banks that help consumers overcome financial challenges will win their hearts, minds, and loyalty; and expand into new market segments.
The data bear this out. The 2019 US Financial Health Pulse showed that people whose primary institution helps them improve their financial health are 1.5 times more likely to be satisfied with their provider and 1.3 times more likely to buy more products and services from them in the future.
The market for financial health advice is vast. There are hundreds of millions of Americans who are financially coping or vulnerable—and many need that help from their financial institutions. Investing in customer financial health early can help banks build and maintain a competitive advantage in a crowded market.
Depository accounts (checking and savings) are at the heart of most people’s financial lives. They are the nexus point for money coming in and going out, which gives banks valuable data they can use to help their customers gain a better picture of their finances:
Average account balances
Cash flow throughout the month
Overdrafts and other account fees
Opportunities for better budgeting
Opportunities for product upsells and cross-sells
In addition to better serving customers and increasing brand loyalty, financial institutions can expect the following results by helping their customers improve their financial health:
Larger balance sheets – When customers are financially healthy, they tend to have more cash on hand. This means a larger deposit base for the bank and the opportunity to sell more products, such as loans and investments.
Stronger loan portfolios – Financially healthy customers are unlikely to default on their debts, which means lower delinquency rates for the financial institutions that serve them.
Reduced customer service and collections costs – When someone incurs an overdraft fee or an extra charge for late payment, they’re more likely to call customer support. Financially healthy customers that avoid these issues are less likely to do so. Additionally, banks will have reduced collection costs when financially healthy customers are better able to pay their bills on time.
Three steps for financial institutions to build customer financial health
For banks to help customers build up their financial health, they will need to evolve their culture, product mix, fee structures, and other facets of their business. It’s a complex topic that will take some time to figure out, but it doesn’t have to be daunting.
Here are three steps financial institutions can follow to determine how to help customers improve their financial health.
1. Understand customer challenges. Financial institutions start to help customers improve their financial health by first understanding their challenges and goals. Surveying customers is one way to identify pain points that need to be addressed. Banks may find that some customers struggle to manage their cash flow while others have a tough time saving for retirement. Existing survey tools like the Consumer Financial Protection Bureau’s (CFPB) financial well-being scale are a good place to start.
Another way to gain insights into the challenges your customers face is to analyze their transactional data—which can provide more concrete, nuanced insights. This includes any information you currently have about your customers, including credits, debits, bill-pay activity, and online banking use. An analysis of this data can paint a long-term picture of financial health, while a survey is more of a moment-in-time snapshot.
2. Develop a strategy to address those challenges: Once you achieve a deeper understanding of your customers’ needs, you can make a strategy to address them.
A good way to start is by reviewing your current product suite and identifying gaps and pain points—in particular with regard to the challenges your customers report. You may find that adding new features or making small adjustments can go a long way towards addressing them.
It’s important to recognize you don’t have to build all of this yourself, as many possible partnerships and solutions are already out there. A part of your financial health strategy will be to decide whether to build solutions yourself, partner with 3rd parties, or understand that outside fintech apps will better serve this need and work around that.
For banks that need additional resources to create financial-health products and services, Jack Henry and OpenClose are two companies that provide white-label solutions for banks.
Additionally, Plaid is a financial data-sharing platform that offers connections to many different types of tools that help consumers build financial health. If helping your users connect to outside apps and services is a part of your financial-health strategy, check out the Plaid Exchange API.
3. Track progress and iterate your offering over time: To ensure that your initiatives are actually helping your customers, you’ll need to track their progress over time. Integrating financial health into your key performance indicators (KPIs) is a critical step towards incorporating customer financial wellness into the company.
It’s important for company leaders and change managers to understand that financial health isn’t the responsibility of just one team. Rather, it should be embraced as a core value for the entire business, and be reflected in the KPIs. Normalizing this with your company will require things like:
1. Buy-in from senior leaders
2. Sustained, coordinated internal communications
3. Structural alignment around financial-health goals and metrics
As a first step, consider tracking outcomes that directly impact financial health, such as whether a recently released automated savings product is actually helping customers increase their savings balance. Once you learn the impact your products are having, you’ll know what changes you can make to create better outcomes.
It’s also important to maintain an ongoing dialogue with your customers around their financial health. These discussions can deepen customer relationships while helping you understand the impact your efforts are creating.
To create and maintain an open dialogue, consider the following:
Assembling customer focus groups to give feedback on your financial-health products and services
Conducting quarterly or semiannual phone surveys about financial health topics
Utilizing short, online mini-surveys that assess the impact your financial health products and services have throughout the different steps of the customer journey
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If banks don’t help consumers improve their financial health, someone else will
While financial institutions are well-placed to help consumers improve their financial health, they are not the only ones. Fintech startups are aiming to gain market share in several areas related to financial health.
Budgeting: Companies like TrueBill, Copilot, and You Need a Budget help users to understand their cash flow and build a budget, even offering personalized advice.
Automated savings and investing: Stash, Qapital, and Digit offer automated savings, helping users save for a rainy day and build their nest egg. Atom Finance, Betterment, and Wealthfront help users make better investment decisions.
Paying off debt: Tally, ChangEd, and Qoins help users pay down their debt, often by rounding up transactions to the nearest dollar and putting the spare change toward student loans or credit cards.
Consider the non-sufficient funds (NSF) fees and overdraft fees that many banks charge when customers spend more than they have in their accounts. These punitive fees disproportionately affect underserved groups; 95% are paid by those who are financially vulnerable or financially coping. While banks do offer some overdraft and NSF protection, America’s biggest banks still collect over $11 billion in these fees every year.
By contrast, fintechs have generated tremendous growth by aligning themselves with the financial interests of consumers. For example, Brigit helps people avoid overdraft fees and predatory lending. To date, Brigit has helped its users save more than $100 million on NSF fees and payday-loan interest.
If financial institutions can take their cue from Brigit and build products that help customers improve their financial health, they will take advantage of this significant business opportunity rather than losing market share to those who do.
Erica, a virtual financial assistant in Bank of America’s mobile banking app, is a step in the right direction. Erica helps mobile banking users understand their finances with fintech-like services such as monthly spending snapshots, recurring-charges monitoring, and scheduled bill-payment reminders.
For banks, aligning with consumers on financial health is the future
Consumers increasingly look to their banks to help them improve their financial health. If established financial institutions don’t meet their needs, they will look elsewhere; perhaps not just for financial health but for financial services as a whole.
That said, changing consumer expectations are not necessarily bad news for incumbents. As the hub of their customer’s money, financial institutions are in a prime position to offer services that improve financial health, opening up the possibility for new revenue streams while making a positive impact on people’s lives.
For financial institutions, the way forward is to help customers achieve better financial health—this can be done through internal initiatives, partnerships, or access to external financial tools that can help. Those who make it a priority can expect increased growth, engagement, and retention.