To Fix Financial Technology, We Have to Fix Financial Education
Why Financial Institutions are Failing to Court the Millennial Generation
The solution to the struggle that financial companies have in courting millennials won’t be a product. It won’t be some huge innovation in financial services or app design. It won’t even be stricter government regulation enacted to gain back the trust of the public. All the new application overhauls in user interface and features like mobile deposit and biometric security are fantastic, but they’re just band-aids that show us companies are still scratching their heads at what they should be doing. So before they find out, they’ll throw millions of dollars at the wall and hope that something sticks. That by making their tools easier for people to use — it’ll be enough. But that’s the thing. You can’t sell a product purely on convenience (unless that is the product). You sell a product on what it does, and if the value it adds is enough, people will buy it no matter how cumbersome it is.
Instead, the real reason behind the lack of interest in financial services is a lack of education in practical financial knowledge. With the incredible expansion of financial tools within the past few decades as well as the crash caused by the 2008 Lehman shock, there’s been built a feeling of exclusivity and distrust surrounding the entire industry — discouraging many from learning even about its basics. And this, the lack of learning and knowledge about financial services is the key reason in the decline.
Of course, financial professionals don’t expect their clients to have the same amount of in-depth knowledge — if they did, they wouldn’t need their services — but there’s an implicit assumption that there is a shared base of foundational knowledge and worldview. Financial advisors don’t expect their clients to know about the Long Strangle or Iron Condor they’ll use to hedge client portfolios, but they’ll assume that their clients will at least know how calls and puts work and share a priority towards value stability over liquidity.
And That’s Where They’re Wrong
There’s a wide discrepancy in what is considered foundational knowledge. Even those who have learned about it may only faintly remember it from a mandatory economics class back in college. This is not because people are dumb or ignorant. I have friends much brighter than I who but stare at me blankly when I try to discuss the benefits of buying puts versus shorting. The only reason I know is because I’ve had an interest in finance since an early age and graduated with an economics degree — a privilege people in other professions just simply don’t have the time or opportunity for, not to mention the under-privileged and non-college goers who need the knowledge the most.
And this is the problem. We can’t want what we don’t know.
From online communities like Reddit’s r/personalfinance with over 8 million subscribers to small local finance Meetups, we see that there’s a large and active interest in savings and asset growth. But the existence of these communities is a mixed bag, because though they’re a positive sign that proves that there is an existing need — their oversized role as a primary information sharing space also shows that there is a very real lack of a formalized and universal space for effective wide-scale education.
In addition, what is taught through these venues is only the most general of what exists. They are about saving, having emergency funds, and calculating which debt repayments to prioritize. Because of their broad audience, advice and information is only the most basic and universal. This means that while there are articles and tutorials on things like 401Ks and IRAs, there is an overly represented focus on saving and safety: how to be debt-free, how to reduce and track spending, and attempting to guarantee retirement fund growth with minimal risk using ETFs and bonds.
But that’s not enough
With slow wage growth, government-forced inflation, and longer retirements than ever, the traditional mentality of savings alone being sufficient is no longer true. Millennials want to retire by age 60, but in order to do so they would have to either start off making much more than the current average starting salary or grow their retirement fund much higher than the yearly single digit % return from a stable ETF.
Over-allocation in specific assets poses enormous risk, but a diversified portfolio requires much more time and analysis than someone whose full-time job is not finance can afford.
Without sufficient knowledge, millennials let the meager savings they do have sit in their checking account — because with the almost-decade long zero-bound interest policy, it’s better to forgo the 50¢ monthly interest from your saving account than risk losing $20 from an overdraft fee.
In addition, Millennials have also become the Do-It-Yourself generation because of the internet. Taxes, Savings, Investing, Financial Planning. With only the knowledge that we must do these things, but not being taught the nuances, we Google general guides to do the tasks— not realizing that without the professional help, we might actually be losing out on less-known advantages in tax relief or subsidies.
We need financial services. So…
Teach Us That We Do
The tough question really isn’t “if” investments should made into teaching the public at large about practical financial knowledge. Rather it should be about “How.”
So far in the private sector at least, we’ve seen three divergent methods spring up with varying degrees of success:
High-Touch Guidance (most often webinars):
Brokerages and institutions like Charles Schwab have weekly to monthly webinars and info-sessions for existing users to teach them more about specific strategies and tools. Being restricted to existing members however, the effects are non-existent for teaching or courting new users and mostly serve to boost retention and engagement.
Unfortunately, this is the path most traditional firms take… explaining their lack of success.
Content Marketing:
A marketing strategy made famous by Silicon Valley darlings, there’s a reason why content marketing is beloved by both companies and users. When done right, politely, and with the customer in mind, great content serves as the holy grail of knowledge to the user and potential viral marketing for the company. Mint, a simple personal budget management financial service exploded to 1.5 million users because they just focused on teaching great lessons.
Of course, it wasn’t guaranteed that the people who read the content would become users. But by creating great educational content people could share, a reader who had no interest in the product could still share and refer someone else who would.
Gamification:
A personal favorite of mine, gamification is a great way to impart knowledge. TradeHero, a fintech startup that aims to teach people how to invest in stocks by giving users virtual currency and make them compete socially has raised $10 million due to its popularity and promise. Another app, Bux, has a smaller focus on the education but goes the extra step and allows users to switch off from virtual currency to the real market when they feel like they’re ready.
Both apps prioritize the ability for users to take baby steps into investing with a no-risk approach. Yet like the webinars used by traditional firms, the downside of gamification is that it is only experienced by existing users.
So Which One Is Best?
At our current stage of population financial literacy, content marketing remains the best venue for educating the greater population. That’s because at the end of the day, having public content is the easiest method for information to be spread. It’s also why spaces like /r/personalfinance are doing so well, because they inadvertently fulfill that exact role. What is necessary now is to either develop these spaces so that they can springboard users into more nuanced topics and appropriate resources or recreate these spaces and expose them to a greater audience.
Optimally, all three solutions can be joined in a flow that gently pushes people along towards financial literacy: content marketing triggering a person’s interest in the topic, no-committment gamification giving them a personal experience within the service, and then finally high-touch lessons when they want to go more in-depth.
…Is the Conventional Answer, But It’s Too Late for Conventional
Because we know how averse and suspicious people are of corporations pushing ideologies on the public — and for good reason. That’s why Mint had such tremendous success, because its blog seemed like an innocent and benevolent source of knowledge with no hidden motivation.
To replicate that sort of success in a scale that permeates the general population, we can’t rely on slow and independent movements from companies tepidly trying. We need an assertive and coordinated push. As much as it pains me to say it — we need the government.
And that’s because for this to truly happen — on a timescale that’ll both help current financial institutions, as well as the current and upcoming generation of prospective savers — we need something that already has built-in reach to all corners of the population. This can emerge in something like adding practical finance to the educational curriculum (something I don’t think either party can contest to ideologically), offering free adult financial classes that will give a one-time tax break, or my dream: a private-public partnership to create a gamified financial education application that an everyday person would use and achieve real-world rewards.
Imagine a completely free application sponsored by a partnership of companies and approved by the government that serves purely to educate its users in how to prepare themselves financially for the future. Each lesson is created to be fun and simple enough to complete in short-bursts, but comprehensive enough to be practical. As an extra incentive, completion of each course lead to a small tax break (let’s say $10) or some other small but real tangible benefit.
Individuals become much more prepared for retirement and their general financial lifetime. Financial institutions increase their customer base and goodwill. The government gets to lower costs in medicare and social security since a larger portion of the population would be able to afford their own medical and life payments.
Because then we’ll know.
