Digital-First Banking

Why Financial Literacy Is A Lesson So Hard For Americans To Learn

Americans are known the world over for many things, but financial literacy isn’t one of them. We’re not known for being a nation of expert money managers.

GoBankingRates offered up a six-question money quiz a bit back to the public to let consumers test their inherent knowledge of financial literacy and only about 3 percent of respondents managed to pass.

“Only 49 out of 2,001 respondents answered five out of six of the questions correctly, which translates to 83 percent or a ‘B,’” the personal finance site reported. “The majority wouldn’t even get a passing grade on this financial quiz because they answered four or fewer of the six questions correctly, which is a 66 percent or lower” accuracy rate.

In fact, Americans have failed several financial-literacy tests in recent years.  Only about one-third of respondents to a FINRA Financial Education Foundation’s five-question 2016 financial-literacy quiz managed to pass. The other two-thirds failed by getting two or more of the five questions wrong.

And while one can argue whether the tests reflect the kind of general financial knowledge necessary for financial literacy, many are indeed in dire financial straits. Six out of 10 consumers that PYMNTS recently surveyed reported that they lived paycheck to paycheck. Part of that was lost jobs thanks to COVID-19, but a lack of savings is also to blame.

Our late March survey showed that 45.4 percent of consumers had $2,500 or less in savings, while 15.6 percent had no savings at all. That the lack of a cash cushion hits consumers making less than $50,000 a year the hardest.  Our survey showed that 69.3 percent of Americans in that income bracket had $2,500 or less in savings, while 28.9 percent had none.

However, Americans’ financial-literacy difficulties are far from a new issue, nor is this a problem that has lacked mitigation efforts. Apps like Wally, Mint, YouNeedABudget and Acorns have also launched in the past decade in a bid to help consumers build budgets and digitally track them to stay on financial-management plans.

How the apps work varies, but in general, they encourage consumers to design a monthly budget for how much they want to spend in various areas (food, entertainment, apparel, etc.), with options to pushing money into savings/investment accounts designed to grow over time. These apps tend to send consumer real-time notifications via text when they are approaching going over their monthly budgets so they could to start curbing their spending.

The problem is that getting consumers to use these apps — and stick with their advice is challenging.  First of all — though the vast majority of Americans are financially illiterate according to the tests, the vast majority of Americans also don’t know that about themselves. Consumers tend to overestimate their financial literacy.

According to a survey by research provider Raddon, 44 percent said they were “very” or “extremely” literate, but when given a financial quiz, only 6 percent scored an “A.” It is hard to get consumers engaged with an app offering a service many don’t perceive themselves as needing.  The goods news, according to PYMNTS Financial Invisibles study, is that U.S consumers as of last year were warming up to the idea of seeking some extra help. As of late 2018, 28 percent were “very” or “extremely” interested in financial education, a figure that continually rose throughout that year.

However, the same study revealed that education is a tool with limited reach; to manage money well it seems one needs a minimum amount of money to work with.

According to our data, people living paycheck to paycheck aren’t blowing money frivolously. The majority (51.8 percent) are stretched covering basic bills, and nearly one-quarter (24.3 percent) simply don’t make enough to cover their costs.

Moreover, as Affirm CEO Max Levchin noted in an interview with Karen Webster last year, merely giving customers knowledge about how to best manage money is only a starting point. To change the financial literacy picture isn’t just a matter of affecting what customers know. It is also about getting them to apply the knowledge to change their habits around money.

The trouble with most financial-education apps, he noted, is that they are built to make life simpler for the already financially responsible and knowledgeable — people who in a pre-app world would have been managing all their household finances via a spreadsheet. That person will hugely benefit by how much time financial-education apps save them, but they were never really the customer the product was built for.

The customer who wasn’t making those spreadsheets? The person who was having a hard time making ends meet each month? The person who is getting eaten up by interest payments?  Levchin said they aren’t going to be reached by something as simple as an app pinging them and saying, “don’t spend, don’t spend,” because frankly, they can ignore that. And if they have an emergency or just a garden-variety household-management need, they’re certainly going to ignore it.

“Companies have to be part of the solution,” Levchin told Webster. “The punchline on all these products telling someone ‘just don’t spend any more money’ is that that is not enough. It just doesn’t land with the people you want it to land with.”

So how to make them land? That, Levchin noted, is about finding a way to offer more than information about financial responsibility, but to find ways to make it rewarding for customers. The bad habit exists for a reason. It was or is rewarding to the customer who has it.

To create a good habit to replace it, it’s not enough to tell a customer they are doing something wrong, he said. You have to tell them how to do it right and then give them a reason to want to do it right.

What those rewards might look like, he noted, is a work in progress and for financial responsibility innovators to determine. One possible option is a lottery- or prize-linked savings offers, which were illegal until recently. Now that they aren’t, a potential cash reward represents a good way to incentivize people to pay their bills on time and save a certain amount.

What is most important is that to get people to learn financial literacy and then actually apply it, they need to be reminded and pushed with something other than hectoring about why they should, Levchin said. “What seems to have an effect on people is actually creating an incentive for good behavior instead of trying to force-feed them videos on how to balance a checkbook,” he said.

——————————

NEW PYMNTS DATA: HOW WE SHOP – SEPTEMBER 2020 

The How We Shop Report, a PYMNTS collaboration with PayPal, aims to understand how consumers of all ages and incomes are shifting to shopping and paying online in the midst of the COVID-19 pandemic. Our research builds on a series of studies conducted since March, surveying more than 16,000 consumers on how their shopping habits and payments preferences are changing as the crisis continues. This report focuses on our latest survey of 2,163 respondents and examines how their increased appetite for online commerce and digital touchless methods, such as QR codes, contactless cards and digital wallets, is poised to shape the post-pandemic economy.

TRENDING RIGHT NOW