The following is a transcript of the podcast episode
Ryan McEndarfer Editor-in-chief at PaymentsJournal.com
I’m your host Ryan Mac. In today’s episode we’re going to be talking about financial literacy with Bill Handel, Vice President of Research and Chief Economist at Raddon. Bill, welcome to the podcast.
Bill Handel, Vice President of Research and Chief Economist at Raddon
Thank you, Ryan,
Ryan McEndarfer Editor-in-chief at PaymentsJournal.com
Now to get things started: I know that your organization recently put out a study on financial literacy, and I wanted to point out some of the interesting facts that I found out while going through the study. The first one is that almost half of the study respondents identified themselves as extremely or financially literate but fewer than half received a passing grade on a wide-ranging financial literacy quiz that accompanied the study, and only about 6% of them scored an A. I thought it was kind of funny that everybody rates themselves as very financially literate, but when they’re given the test, maybe not so much.
Bill Handel, Vice President of Research and Chief Economist at Raddon
Yes, Ryan, that’s a great point. We did this study in two phases. Number one was a self-assessment phase asking [respondents] what they thought about financial literacy and the things that they had done to improve their literacy. But then we put it to the test and actually had a relatively short, 15-question test where we asked them actual questions around literacy. And what was very interesting is that we found that the correlation between what they thought they knew and what they actually knew wasn’t as strong as you might think. In other words, those people who said they were extremely or very financially literate really were not all that literate. In fact, only about half of those people who said they have high degrees of literacy actually passed. And passing was simple, was getting at least 10 out of the 15 correct. So it’s not a high bar. It’s very fascinating for us to see. It simply points to the big issue that’s out there around financial literacy in the United States.
Ryan McEndarfer Editor-in-chief at PaymentsJournal.com
A quick side note: If people are interested, can they still take the quiz personally themselves? I’d be curious to see where I rank. So, is that quiz still available?
Bill Handel, Vice President of Research and Chief Economist at Raddon
Well, the quiz was actually done with a panel. It was a panel of nationally representative consumers across the country that we put together. It’s actually not a public quiz because that could end up skewing the results because some people could get in and answer multiple times. We did it in a very controlled type of environment. But we’re happy to share the questions that we used with it. That’s an interesting thing. I took the quiz myself to see how I would score. I’m not going to reveal the results.
Ryan McEndarfer Editor-in-chief at PaymentsJournal.com
Another point that the study made — and I really think that financial institutions should listen to this — is that more literate customers are more likely to use almost all the deposit products than less literate customers. They’re less likely to use the financial institution’s branch lobby, so effectively representing a less costly customer for their financial institution. I found that to be really interesting. It’s in the best interest of financial institutions to make sure that their customers are financially literate.
Bill Handel, Vice President of Research and Chief Economist at Raddon
That was one of the key findings when we looked at the study. That is, financial literacy is actually a win-win proposition. Too often in the financial services space this is kind of a win-lose. If the customer wins, the financial institution loses. If the financial institution wins, the customer loses. That’s not really the case. The case is that as customers become more literate, they actually become better customers in terms of the depth of product they’ve got with you. And they become more efficient customers to serve because they’re likely to use a broader range of channels and they’re not likely to spend as much time in your lobby trying to resolve issues that they have created because of their lack of literacy. So I think there’s many good reasons that we should be emphasizing this whole issue of financial literacy with our customers.
Ryan McEndarfer Editor-in-chief at PaymentsJournal.com
Another interesting point (as a Millennial I would say that I fit in perfectly here) was that 81% of Americans say that they would find financial literacy programs at least somewhat valuable, but 16% have actually attended one (and again, myself, I never have attended one). But those who have not participated in a program are more reliant on online sources as well as family and friends for financial information and guidance. That point probably sums up (myself in particular) very well when it comes to financial literacy and relying on outside sources.
Bill Handel, Vice President of Research and Chief Economist at Raddon
There’s a little bit of “I know a guy” mentality in regard to financial literacy that is a little dangerous because we don’t as a country have a high degree of literacy and so we rely upon others to give us advice and to tell us what to do, and I think that in very many cases becomes the source for bad decisions. When we begin to emphasize as financial institutions the fact that we have the expertise that perhaps they’re not going to be able to get from their parents, what I find fascinating and all the studies that we’ve done find is how dependent Millennials and even more so Gen Z’s are on their parents for advice around financial services and financial literacy. And while it’s great that they have that trust, in many cases it’s their parents who are in trouble themselves. So the more that we can get the consumer to recognize that there are sources of expertise and that expertise resides within our financial institutions and we have a myriad of ways in which we can help you to improve your literacy, I think the better off the American consuming public is going to be and conversely, the better off we’re going to be as an industry.
Ryan McEndarfer Editor-in-chief at PaymentsJournal.com
I completely agree with that. One question that I wanted to follow up with is, if we’re saying, “Okay parents are good, but sometimes parents really don’t have necessarily the best advice” (and in my opinion I think elementary school does not do a good job or a job at all of teaching financial literacy), do you feel that financial institutions need to step up and play that role of the educator?
Bill Handel, Vice President of Research and Chief Economist at Raddon
Yeah. I think that is pretty important role, and they can do it either separately or they can do it as part of a school curriculum. Many organizations are now engaged with their local communities, very often in the school setting, to be able to provide these types of things. You don’t have to go in that direction. I think there’s a lot of other ways to go, but that is one thing to consider. I know of some credit unions as well some as banks who have actually set up branches within local schools, whether it be at the middle school level or at the high school level and even some a little bit younger than that. Part of that whole process is to build financial literacy, to build awareness of the importance of that. But you don’t have to go just down that path. The other side of it is something like what Bank of America’s done with Khan Academy, where that partnership is emphasizing the financial literacy part of the Khan Academy. So it’s not as though there’s necessarily one place to go, but I think we should be thinking about how we get this conversation going at an early age with the consuming public so that as they move into college they become much more aware. You want these younger individuals to be making good decisions because pretty soon debt, student loan debt for example, can become an overwhelming thing. Pretty soon they could accumulate credit card debt in a very old-fashioned, and that’s typically one of the most damaging issues that happens with younger consumers. They pile on too much debt in a way that they can’t pay off in any reasonable fashion, and then they’ve simply crippled themselves financially,
Ryan McEndarfer Editor-in-chief at PaymentsJournal.com
I completely agree. Now moving on to another point that the study made so well, 38% of Americans find financial literacy programs very or extremely valuable. Fifty-five percent of Millennials felt that way, particularly higher-income Millennials, and those higher-income Millennials are about twice as likely to bring more business to the financial institutions if they provide a financial literacy program. That echoes a previous point that we made, that it makes a lot of sense for these financial institutions to be providing financial literacy services — particularly to Millennial customers, who are looking for this type of information — because it’s resulting in more business for the financial institutions.
Bill Handel, Vice President of Research and Chief Economist at Raddon
I think the key thing we have to remember as financial service providers is how do we differentiate ourselves in the minds of the consumers? What is our differentiation? I think financial literacy provides a very positive, strong orientation or differentiation in the consumer’s mind because what we’re doing with financial literacy is telling them that we are their advocates. We are there to support them with help. We are there to help them make a better financial life, to make retirement easier, to make debt management easier, to make this process logical. The issue in my mind is that all of us who are in the financial services space think and dream in basis points. We understand all this terminology, and so it seems in many cases just second nature to us and that everyone should understand it. The average consumer doesn’t understand a lot of financial concepts that are just very much second nature to us. And so if we put ourselves in their shoes, then we begin to understand the more that we can make this financial literacy a part of our value proposition, the stronger our position with those consumers is going to be. I think that’s why we saw that result with the Millennials. If you think about the Millennials and then you think about the next generation that follows, Gen Z, both those groups have seen the carnage that was caused by the financial crisis. And they’ve experienced it, if not firsthand, they’ve seen it within their families or within the families of their friends. So it’s a very real issue, and that’s why we need to understand that psyche and take advantage of this and make financial literacy a cornerstone to what we do as organizations.
Ryan McEndarfer Editor-in-chief at PaymentsJournal.com
There’s really great points made there. In particular, it’s more of a focus on talking about financial literacy from a 101 standpoint because a lot of the younger generation is not getting that kind of basis. And as you pointed out, those of us who are heavily involved in the financial space know these things, deal with them day in and day out. So we look at things from that level and not saying, “Well if I were just starting in this career, what are some of the things realistically that I should know about the financial space and things that I should be aware of?” And as we pointed out before, the earlier that you [as a consumer] know these things, the better off you’re going to be in the long run. Talking about the long run here, the last point that I want to bring up that the survey made was that among those who have attended the financial literacy programs, the most popular sessions attended were financial planning at 52%, closely followed by retirement at 49%, and then wealth management investing at 36%. I think that goes to show that when it comes to Millennials and financial literacy overall that people do want to know this information. They want to know, “How do I get to the next steps that I need to get to in order to, say, retire or to be able to do wealth building?” and things of that nature.
Bill Handel, Vice President of Research and Chief Economist at Raddon
I think that there is an interest for sure. I think that’s point number 1. Point number 2 I would would suggest that as an organization a financial institution should take a modularized approach to what they do in financial literacy. That is, craft different types of modules in terms of what educating you want because as people go through the gates of life, their orientation, the things that become most important to them, will change over time. So you want to have things around retirement, things around wealth management, things around investing. But you also want to have things around debt management, appropriate debt management: How do you know that you’ve got the right amount of debt? What are the appropriate uses of debt? All these types of things. Modularize these. Use different types of channels to communicate; it should not necessarily all be classroom. Sometimes you’re going to use things like video. The Gen Z’s for example, our huge consumers of information via YouTube. So you want to use all the different types of channels as a way to continue to foster that education, that Improvement in terms of literacy. I think the time is ripe; it’s a good time for financial institutions that commit to these types of programs because they really can be a differentiator and result in bottom-line benefit for all of us in America. This results in a much more successful country because consumers will be much more prepared for a financially healthy life.
Ryan McEndarfer Editor-in-chief at PaymentsJournal.com
I certainly agree with you there. I’m glad that you brought up the different ways in which financial institutions should take a look at how to build financial literacy programs. I’m glad earlier that you brought up the name of Khan Academy. That happens to be one of my favorites, and how he breaks things down and makes it a very simple way to start and then you can grow and expand upon the knowledge that you want to know within a particular area. If people are looking at “Okay, how do I craft this from a technology perspective?” I think going to that site would really be a good representation of a model that people at financial institutions should consider. With all that being said, before we close out here, Bill, is there anything that you’d like to add?
Bill Handel, Vice President of Research and Chief Economist at Raddon
Well, the one thing I’d like to add is to make sure everyone’s aware that these things actually do work. These programs actually do work. What we found is that when we administered that quiz to the respondents, we tracked the results on the basis of how often or whether or not they had engaged in literacy programs with a financial institution or online, or maybe any other source. And what we found is that those people who were actively engaged in financial literacy processes or courses or anything else like this had a pass rate on the test which was twice the average for everybody else. Another, we had an 84% pass rate for those who had been engaged in financial literacy programs versus 42% for those who had not had significant engagement. That to me is very telling because that says that these things actually can work. This is not just frosting or window dressing that we’re doing here. We really can make a difference in terms of the ability and capability of our customers.
Ryan McEndarfer Editor-in-chief at PaymentsJournal.com
Well thank you, Bill, for taking the time today to speak to us about financial literacy.
Bill Handel, Vice President of Research and Chief Economist at Raddon
Thank you very much. I appreciate this.
