Why consumers’ financial literacy is a matter of survival for banks

Today, college students, on average, graduate with $29,000 of private and federal loan debt. A recent survey my company conducted showed that 35% of respondents said their biggest concern was not knowing how much they would need to pay. Similarly, buy now/pay later is booming, but consumers are reporting they didn't understand the fees they were charged and thought BNPL was a “money management tool” as opposed to a way of borrowing money.

While there are several factors that play into the confusion, it can’t be denied that a significant part of the problem stems from a lack of financial literacy — but who is responsible for improving it?

Banks are at the center of Americans' lives, serving as critical institutions that help power our economy. Yet all too often, they can act and be perceived as necessary utilities, focused on profits rather than on being partners that promote financial literacy and wellness of their customers.

But we live in a rapidly changing world. Financial services, standards and customers are all evolving. It is now an accepted truth that banks must seek new ways to provide value. As more apps embed checking accounts and decentralized finance emerges, banks cannot rely on traditional barriers to entry to retain customers or protect their business models. To remain a key player in the financial lives of Americans, banks must take on a more prominent role in helping people understand and evaluate different products and services. In fact, banks are the best positioned to step into this role in our ecosystem. Banks need to further financial literacy not because they are responsible, but to survive.

In the face of new entrants, digital behaviors and a new digital way of life, delivering value to customers can no longer just be about offering great products. People are increasingly looking for companies that help them understand and navigate all the new options being offered. Seventy-three percent of Americans rank finances as the No. 1 stress in life (even more than their health!) — debt being a key contributor to that stress. If banks can alleviate this and have a positive impact on Americans’ overall well-being, they will be able to continue to play a central role in their customers’ lives. Financial literacy, simply put, is an area where social purpose and good business intersect.

There are additional benefits to getting involved in improving financial literacy. Markets and a society’s economic potential cannot be optimized unless individuals have a good basic knowledge of economics and finance. This enables them to make informed decisions with benefits not just to themselves but to the entire economy. The rise of modern economic growth over the last few centuries was driven by the rise of mass schooling and literacy across the world. Just imagine the societal impact improved financial literacy could have.

A widening wealth gap is another reason it is more important than ever for banks to step up their involvement with financial literacy. It is already causing tension and is bound to have a harmful impact on society as called out by Treasury Secretary Janet Yellen in a recent virtual address hosted by the World Economic Forum. She is not alone, with many economists and financial experts sounding alarm bells over long-standing structural issues relating to income inequality. Improved financial literacy would contribute to addressing this gap and would facilitate more effective savings and debt management.

The government and nonprofits have begun helping people access the education, information and advice they need to make better financial decisions. The U.S. Senate has passed a resolution to recognize April as Financial Literacy Month, realizing that there is a need for more financial education in schools and for adults. The Jump$tart Coalition and other nonprofit organizations promote financial literacy through special events, online and print content as well as school curricula.

But at the end of the day, laudable as this is, it’s not enough. In the U.S., one out of every five students lacks basic skills of financial literacy. Many investors are financially illiterate (broader participation in financial markets has not been accompanied by a corresponding increase in knowledge) and we see daily at Spinwheel that the basics of how loans and debt are managed is not understood.

Banks need to back financial literacy. Over 93% of adult Americans have a bank account with a financial institution, making the impact they can have obvious. They need to back financial literacy to keep their customers in the midst of ongoing industry disruption but also to grow market confidence and help mold a society that is structured to thrive and achieve its full potential in a fluid and quickly changing world.

As banks reset and refine business models and growth strategies, they will need to get creative and hands-on when it comes to financial literacy. What the world has not seen yet is a bank that puts financial literacy front and center, for its own profits and for the benefit of society. In my opinion that would be getting it right on the money.