Enabling Financial Health

How does the financial well-being of customers affect the relationship with the financial service provider? How can trust be built up, what tools are needed and where are financial health offers already being used?

Setting the scene

Many consumers are still struggling with debt and managing their finances, and COVID has provided an additional stress. Financial stress has a big impact on our overall physical and mental health, our productivity and our level of social engagement. This highlights the core role financial wellbeing plays in each consumers life and their daily interaction with money.

Financial health is subjective, deeply personal and emotional. It is as much about financial literacy and central moments like marriage or retirement as it is about everyday habits like buying coffee-to-go. Financial providers therefore need to really understand what financial health means for each of their customers in order to respond effectively.

Trends like Open Banking and Embedded Finance provide a holistic view on each customer’s individual financial situation. This enables providers to focus on the actual customer needs beyond the boundaries of one single industry’s value chain.  If providers of financial products and services (banks, insurers, fintechs but also non-financial players who “embed” finance into their offerings) finally have the right tools to effectively leverage data into a true understanding of their customers, as individuals navigating everyday life with all its ups and downs – they can  become more effective financial partners and mentors that actually help their customers maintain and improve their financial wellbeing, instead of  just selling products and paying lip-service to providing advice. This is the best way to really start living the motto of “putting customers first”.

Think about it – your doctor’s job is to ask the right questions to diagnose and prescribe the right remedies to effectively treat your ailment. You trust him/her to be your health partner that will always put your interests first. So then why do we not trust our banks to give us the same trusted advice? Yes sure, banks do provide advice but in many cases its marketing offers, and product-push dressed up as advice. And even if the advice is in the best interest of the customer, it is in many cases hard to prove.

Defining financial health

Let us get clear on what we mean by financial health and well-being.

Fundamentally – it is a subjective and personal concept that means different things to different people. For some, it is about paying rent on time. For plenty, it is about budgeting for a take-away latte. We all arrive at adulthood with different levels of privilege, different cumulative debts, and different spending habits — and for all of us, monetary stability is personal.

Financial health indicates your relationship with your money. It is the ability to make confident, well-informed money-related decisions resulting in financial security for both the short and long term. This means it is not just about the big macro “life events” like buying a house or saving for retirement, but it means being able to use finance as a daily tool that continuously supports our overall well-being by enabling micro events and decisions, so that we can fully engage with our day-to-day lives, jobs, and society at large.

And it’s not about being wealthyGallup research on wellbeing discovered that very wealthy people can have poor financial wellbeing and that people with objectively meagre assets can feel their financial wellbeing is thriving. In fact, the study found that banks have the most trouble supporting the financial wellbeing of customers making at least $200,000 a year.

And why is financial health important?

When we think of health and wellness we think of physical health, but also mental and emotional health. However, financial health has become an increasingly important part of our overall wellness, especially in our new post-COVID reality.

A healthy relationship with your money is as important as having a healthy relationship with body and emotions. More people than ever before are stressed about their finances. Despite this, it is still largely taboo to talk about money. A study found that individuals with depression and anxiety were three times more likely to be in debt. This clearly indicated the relationship between financial stress and mental health.

Financial stress also impacts physical health (particularly in cases where individuals do not have access to medical insurance), productivity levels (stressing about personal finances at work) and social engagement (In a US survey, 87% of those who said they were thriving in terms of financial well-being reported their relationships with friends and family were stronger than ever; this dropped to 61% for those with low financial wellbeing)

Whatever the customer’s subjective impression and state of financial wellbeing may be, banks can play a crucial part in improving this.

Financial service providers’ responsibility

Banks and other financial providers have a bigger societal role and responsibility as a heavily regulated player crucial to the world’s well-being. Just as car companies are regulated to produce safe vehicles that protect their drivers and to not kill the environment with carbon emissions, it stands to reason that banks should have a similar responsibility towards their customers and society as a whole.

Baker and Stone, in their article for the Harvard Business Review, even go so far as stating that a different regulatory approach is needed that ties financial-services providers’ profit to customers’ financial health. It states that banks should only do well financially when their customers do well financially. And banks now have the data and data-crunching methods to create meaningful insights of how their practices are improving or damaging the financial health of their customers.

Given that financial well-being is such an emotional and personal concept, establishing trust is the key ingredient. Consumers need to trust that their bank has their best interest at heart.

It is therefore unfortunate that, more than a decade on from the global financial crisis, financial institutions still have a trust deficit and are still trying to regain the trust they lost with customers.

The fintech revolution does not seem to have helped that much yet: the vast majority of us are still not feeling well, financially speaking. A study shows that:

  • 47% of Europeans say their finances are not secure enough to live a guaranteed stress-free life
  • 41% say they have less than 20% of their income left after paying their bills
  • 47% agree that worrying about rising bills has a negative impact on their overall wellbeing
  • 56% are dissatisfied with the amount they are able to save each month
  • 44% are more concerned about their financial well-being than they have been at any other time in their lives

There is also the important issue of ethics and providing responsible financial health advice and offerings that does not expose customers to risks that they cannot afford, understand and manage. A recent example of a student taking their own life after racking up more than $700,000 in losses trading options on popular investing app Robinhood, highlights the new ethical issues facing financial service providers.

The special responsibility that banks and financial service providers have regarding the financial health of their customers becomes very clear when looking at the fundamental principles of user-friendliness, which have to be redefined in this context. “Don’t make me think” – the central credo for an optimal user experience – can have disastrous consequences in the context of financial health.

Only those, who think and make investment decisions in a considered manner instead of sliding into them without hurdles, can avoid taking unknown and unwanted risks. This must also be reflected in the design of apps, even if this could slow down the fastest possible short-term growth. However, these are precisely the ethical considerations that must be made for reasons of financial health and the sustainability of the customer relationship.

Making investing fun and simple through e.g. gamification and ease of use is all good and well, but if it unknowingly nudges people into risky financial behaviours, then it has missed the whole point behind financial health.

So how should financial players respond?

Basically, any financial well-being strategy need to be authentic in purpose and personal in application.

Authentic – if banks say that they care about their customers financial well-being, they are making a big promise. A customer’s sense of financial wellbeing is intensely emotional, and they will therefore be naturally sceptical about the bank’s true intentions. And if it is just a veiled product or marketing push, the impact on trust can be detrimental. Banks need to really mean it.

Personal – financial well-being is personal and subjective hence banks need to learn to understand what financial wellbeing means for each individual customer. They need to effectively leverage data insights to provide hyper-personalised and contextualised offerings to customers at the point of need.

According to Gallup research, customers feel a deeper sense of financial wellbeing when they can strongly agree that their bank:

  1. understands their financial situation
  2. helps them reach their financial goals
  3. makes it easy for them to manage their finances
  4. helps them make better financial decisions
  5. looks out for their financial wellbeing
  6. offers solutions to meet their financial needs
  7. puts their financial wellbeing ahead of the interests of the bank

To start putting these into practice, banks can start building propositions that are effective in reducing overall customer stress levels, and track this as a KPI.

Propositions that will be effective in reducing financial stress will help customers address four dimensions:

Knowing yourself – self-knowledge is the first step to financial freedom. How do you spend money? What are your dreams and aspirations? What are your savings goals? Banks should help customers get to know themselves, mining and leveraging all the available data to provide real insights.

Knowing your financials – Banks can no longer just provide a bunch of complicated product fact sheets, highlighting the risks involved and expect the customer to be educated enough to make the right decision. Banks should leverage tools like AI to ask the right questions to help customers understand their financial situation and financial behaviours. They should provide financial education in a fun and engaging way (think gamification), linked to simpler products and easier to use tools. The rights insights will help banks to provide the right context and the right tailored solution.

Knowing your relationship with money – customers see money differently, and our relationship with money is changing as we move more to digital. With online purchase money is in many instances abstract and easy to mis-manage. Gen Zs also increasingly see cash as something intangible, something you cannot manage and save digitally.

Knowing your bank (know your personal “financial advisor”) – sharing financial info is still a very personal matter with many social taboos, and people still need an advisor that they can know and trust, to talk to about money issues and to get advice. Here banks can both leverage their existing branch infrastructure in smarter ways to provide face-to-face value-added human interactions, and on the other hand ensuring their digital chatbots and robo-advisors compensate for the human interaction loss through services that feel sufficiently human. If people feel like the machine is “listening” to them they are more likely to remain engaged. AI innovation is making this more and more achievable.

So, promising financial wellbeing without understanding the customer experience or knowing what wellbeing means to customers is a significant risk that will likely result in costly failures or misfires.

But wellbeing strategies can succeed (and they do – see examples below). If it is based on deep customer insights and driven by an organisation where the people, culture, tools and way of working aligns to this strategic imperative then financial providers are likely to find success.

Providers should seek to combine the strengths of data, behavioural science and design thinking in a customer-centric approach when developing their financial health strategy and value propositions.

  • Data: Analyse all available transactional, market, and business data to identify user patterns and trends and build solutions that effectively leverage that knowledge
  • Behavioural Science: Use principles of behavioural science to better understand customer decision-making and human behaviour patterns to overcome barriers to action, and
  • Design Thinking: Employ design thinking and human-centred design approaches to build empathy with customers, and understand the context of their lives, needs, preferences and habits.

Real world examples

There are a whole host of new challengers and incumbents already finding success with financial health focused propositions. Here are a few recent examples for inspiration…

A great example is South African digital only Discovery Bank, being described as the world’s first behavioural bank. The bank is anchored in the company’s Vitality health insurance platform, which uses financial incentives to help customers curate and sustain healthier lifestyles.

It applies a behavioural system based on 5 key elements:

  1. Whether you spend more than you earn
  2. Whether you have insurance
  3. Whether you save for emergencies
  4. Whether you are saving for retirement
  5. Whether you are managing your secured debt

Discovery believes these 5 controllable behaviours can alleviate the 3 key risks of

  • unaffordable debt
  • exposure to unexpected expenses and
  • insufficient income at retirement.

These 3 risks in turn result in 80% of events where individuals are not able to meet their financial obligations. The Bank’s behaviour-change programme, Vitality Money, will guide and incentivise consumers to achieve better financial health and resilience.

A key feature of the Bank is dynamic interest rates, an industry first. This innovative benefit design links interest rates directly to clients’ financial behaviour; enabling them to earn more interest on savings and to pay less interest on credit as they improve their financial behaviour with Vitality Money. The Bank further leverages its Vitality health network to create an attractive ecosystem of rewards for clients in the form of dynamic discounts and incentives, such as free gym membership.

ING’s growth initiative THINK FORWARD which focuses on financial health innovations, has also resulted in Austrian fintech Monkee, which focuses on small weekly savings targets enabled via a 2-click saving feature. Saving becomes as easy as spending money. A digital finance coach provides additional motivation and helps to actually achieve goals.

Another cool example is Cleo, targeting “Gen Z” and with a rather lofty sounding mission to “fight for the world’s financial health”. Cleo’s AI/machine learning-powered app connects to your bank accounts and gives you proactive advice and information on your finances, including timely nudges, to help you stay on top of your spending. Over time, the idea is that Cleo can help change your financial behaviour for the better. The broader premise is that Cleo can replace your bank’s own app, and by speaking to you in a more human and user-friendly way, improve your financial health.

Similarly, Zuper, a Munich-based, AI-driven startup wants to challenge how people think about their finances and by using algorithms — show them how they can optimize.

In the same way that a fitness app coaches people to become physically stronger, Zuper’s mobile app provides financial coaching that helps people to become financially wiser and capable, helping them to either invest in or utilize loans, create savings, and find low-effort financial planning that suits their individual needs.

Finding focus on the path ahead

The untapped opportunities for both established and challenger providers remain massive if they can harness customer data effectively into targeted financial health propositions that truly extend beyond traditional finance products and services merely hiding behind an advisor or portfolio management “front-end”.

While this will obviously be beneficial for customers, it makes good business sense for providers – increasing customer loyalty at a time when banking customers are switching banks more than ever, can help secure long-term sources of stable revenue streams and increase customer share of wallet.

Partnering will also be key as ecosystems become more connected and customer data flows across interwoven user journeys. Financial data aggregators such as Plaid, Yodlee, Kontomatik and Finicity could be a real catalyst here to help companies connect the data dots.

Financial Health is in many ways the underlying promise of embedded finance and open banking. As banking and finance becomes more ubiquitous and embedded, the old-school product-push and pure profit motive of banks change to one that focuses on serving the customer, the community, and society as a whole.

People have busy lives and stretched budgets. Financial products should make our lives easier and help us realise our financial health potential. It is therefore the companies that continually shape their products around their customers, rather than expecting customers to shape themselves around product, that will continue to be winners.

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Overview