Financial literacy is growing increasingly important — particularly among people in low- and moderate-income communities who have been disproportionally impacted by the pandemic and its economic consequences.
Experian data from 2020 revealed 63% of adults are worried about their personal finances, 51% are worried about job security, and nearly half are worried about the impact of COVID-19 on their credit.
Banks and credit unions can play a critical role in improving financial literacy, which in turn helps individuals strengthen their overall finances, including their credit standing. The result is a win for both consumers and financial institutions that can lead to stronger customer relationships, increased engagement and financial wellness.
However, there are a few key considerations institutions’ leaders must keep in mind when looking to implement a successful financial literacy program.
A Model Worth Examining: Latin America’s Tandas
The pandemic affected consumers multitude of ways, financially. Experian found that more than one-third of consumers reported last year either not being able to pay monthly bills or not being confident in their ability to pay credit card bills. As the market quickly evolves, it’s important to know when consumers’ needs and concerns change and to offer solutions relevant to their financial needs. Customer and member surveys can help indicate the right direction.
The data will provide perspective as well as allow for further personalization of offers at the right time. Most consumers tend to be disappointed with the lack of personalization they see in branding, according to Kameleoon Research, showing an information gap between what financial institutions think they know and actual consumer needs. Personalization can help financial institutions humanize their brand in a way that manages expectations and builds trust.
Another unique challenge during this time is that the financial literacy gap is widening as consumption of digital financial services continues to increase. As this accelerates, banks and credit unions must find a way to bridge the gap for people who lack access to financial information.
No Need to Go It Alone:
Consider adopting programs and partnering with organizations that create accessibility to financial information for the underserved in your community.
A good example of this comes from the lending tandas of the Mission Asset Fund (MAF). Tandas originated in Latin America meant to help the broader community by enabling rotating savings and credit. Using the spirit of the tanda, the MAF has found a way to standardize this system to benefit recent immigrants and credit-invisible individuals in the Bay Area.
Being invisible can prevent people from obtaining basic needs like apartments or job applications. Being invisible also costs more: payday lenders can charge as much as 391% to 521% annual percentage rate for loans.
To solve for this, MAF’s system services zero-interest loans to thin-file individuals and ensures tight reporting of successful client repayments to credit bureaus. Reporting to credit bureaus is something that most nonprofit organizations never have to think about. However, MAF helps these individuals improve their score by 168 points on average. Along the way, it works to educate their clients on successful repayment techniques and helps them to understand how credit scores work and how to review them regularly to ensure good financial standing. (The Credit Builders Alliance and Experian partner with MAF.)
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Playing A Part In The Bigger Picture
Over 40 years ago, the Community Reinvestment Act (CRA) was created to help meet the credit needs of low- and moderate-income communities. Addressing socioeconomic inequalities through financial literacy remains a legislative priority.
In 2020, this initiative was given a modern update when the Office of the Comptroller of the Currency issued a final rule to “strengthen and modernize” CRA regulation.
Among the regulation’s points was that banks should support digital inclusion programs that serve low- and moderate-income residents by encouraging them to use mainstream banking tools to better manage their finances. The rule also recognized that providing funding for financial literacy is one of several “qualifying activities,” defined as an activity that supports the credit needs of a bank’s entire community.
Many community groups opposed major elements of the overall rule and it is regarded as a certainty that the rule will be reviewed once President Biden appoints a new Comptroller.
In any event, financial literacy initiatives should always be an important cornerstone to banks’ business and customer relationship imperatives.
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Empowering People Through Education and Tools
There are a number of ways to easily implement financial literacy within your current system infrastructure. For banks and financial institutions looking for a place to start, try this approach:
- Provide access to credit reports and scores: You can easily integrate online access to credit scores and credit reports within your digital playbook. Partners can integrate these into your platforms and make it a seamless experience. Keep in mind that there are different credit scores in the marketplace with FICO® Scores the most used by lenders. You will want to assess what to offer and provide background information so people understand clearly the score they receive.
- Provide credit monitoring: This service can help detect fraud and keep consumers aware of their standing before applying for credit. These services include alerts that notify customers of key changes on their credit reports.
- Offer budgeting and savings tools: Understanding how to budget can allow consumers to spend wisely and make decisions about what should be spent during a given month. Online tools such as scorecards and calculators that can also be woven into your institution’s online experience.
While most consumers have concerns related to paying off debt or increasing their savings, in the future, interests may change beyond the pandemic. Financial literacy and credit education is a long-term benefit that creates a foundation for a strong financial future. Experian data shows that over time, credit education strengthens consumer financial health. 60% of consumers enrolled in a credit education program see an improvement in their credit scores. Consumers with lower scores often see the greatest benefits.