Americans have a financial literacy problem — or to be totally accurate, they have two financial literacy problems.
The first is the obvious — as a group Americans aren’t very financially literate. By the numbers, roughly two-thirds of American consumers can’t pass a basic financial literacy exam. But that isn’t the biggest problem, according to data from research provider Raddon. The bigger problem is that by and large it seems Americans don’t know what they don’t know, as 44 percent of American consumers rated themselves “very” or “extremely” literate.
And when PYMNTS has spoken to innovators trying to bridge that gap like Zogo founder Bolun Li and experts like George Washington University’s Dr. Annamaria Lusardi about how this gap has grown so large, their answers are similar.
Experts say most people lack financial literacy because they were never taught. It’s not a standard subject in most public schools, meaning whatever financial wellness training Americans get comes from around the kitchen table from family members. Family members that, by the data, have a roughly 66 percent chance of being financially illiterate themselves, and thus a dubious source of knowledge at best.
Lusardi — GWU’s endowed chair of economics, accountancy academic director and the head of the Global Financial Literacy Excellence Center — told Karen Webster that financial wellness is a complicated, technical academic subject that requires study early and often. She said the concepts are vital, but that doesn’t mean they’re things people are simply going to pick up on their own without any formal education.
“No one understands the way interest-compounding works, or what inflation is or how to map out risk diversification just by looking at the world around them,” Lusardi said. “Some of these concepts are actually not even intuitive.”
But she noted they’re relevant to consumers at a surprising young age. After all, many 18-year-olds sign student loans for hundreds of thousands of dollars, often with very little understanding of how long the debt will be part of their lives.
However, Lusardi said one of the pandemic’s rare upsides has been how it’s opened people’s eyes to the idea that Americans need financial literacy. And as this week’s headlines demonstrate, the push to give teens tools to teach it as expanding, as big names like Chase are entering the field for the first time.
Teen Checking Accounts: The New Digital Piggy Banks
Chase, in collaboration with Greenlight, is throwing its hat into the financial literacy ring with the launch of Chase First Banking. The new no-fee checking account operates through the Chase mobile app, aiming to teach kids about the importance of money management.
The goal of the app, according to Greenlight, is to help parents raise “fiscally intelligent children.” It’s a simple digital interface that allows kids to save funds within the account and the parent who oversees it to set custom controls.
Those controls allow parents to set what chores need to be marked as completed for funds to be dispersed. They can also set limits on how much money can be spent or where money can be spent, and even send alerts to their kids letting them know what chores still need to be done to get their allowances.
The app also has a long-term savings feature that lets kids choose a financial goal like buying a video game console. They can save a portion of their funds toward their goal, and the app will let parents know when the goal has been achieved.
“Families are juggling so many more responsibilities today than ever before. To help, we’ve made it easy for parents to manage kids’ allowances, keep track of chores and teach important financial skills from within the Chase Mobile app,” Allison Beer, head of digital for consumer and community banking at J.P. Morgan Chase, said in a statement unveiling the app.
And while Chase is certainly the biggest name moving in the teen banking and financial wellness market, it isn’t alone.
Step, a teen-focused mobile banking startup co-founded by Square veteran Alexey Kalinichenko and Gyft Co-Founder CJ MacDonald, recently raised $22.5 million in Series A funding. The firm’s goal, according to MacDonald, is to build a different kind of digital banking setup, designed to offer teens a way to learn smart money habits. It also offers parents a window into their teens’ spending habits.
Can These Efforts Live Up To The Billing?
That teaching financial literacy both younger and more widely is something worth doing and that putting high tech spend management tools into people’s hands earlier is likely to be a lot more educational than stuffing a few dollars a week into a piggy bank both seem like fairly safe assumptions.
How broadly useful the tools will be, however is harder to measure. As Lusardi pointed out, technical tools can be useful, but aren’t a stand-in for formal education because tools in hand without well rounded knowledge of how to use them isn’t a solution to the problem. But she noted the push itself is important as it is the only thing that will advance the cause in the pandemic period and beyond is persistent focus on making more robust financial education.
“I really hope that we take [financial literacy] up because we need help here,” she said. “It’s not happening if we don’t push [financial education] into the important role it needs to play.”