There’s a crisis in the financial world. It has nothing to do with wars, the economy, or the rise of decentralized finance. It isn’t linked to interference by politicians or conglomerates. No, the real crisis is one you probably haven’t heard about — financial illiteracy.
A lack of financial literacy among customers is leading to significant financial losses for banks. Learn more about this silent crisis, what’s caused it, and how banks can bridge these financial literacy gaps.
The Growing Financial Literacy Gap
Literacy describes the ability to read, write, and even more importantly, truly understand what one reads. But what is financial literacy, and why is it so important? Financial literacy is the ability to properly utilize and understand financial skills, including budgeting, transacting, saving, and investing.
Despite great strides in education and the sharing of knowledge, there are still people who suffer the burden of illiteracy. And financial illiteracy is perhaps an even bigger problem. According to the World Economic Forum (WEF), half of adults in the US are financially illiterate.
The problem is not confined to the US. It’s a global problem and the driving factor behind many of the irresponsible financial choices so common today.
The WEF found that people of all ages struggle to comprehend financial risk. This lack of risk comprehension passed from one generation to the next, maybe a significant factor in the widening financial literacy gap.
How Did It Get to This?
A lack of education on financial topics in schools, inadequate information about financial products, and misunderstandings caused by financial jargon. These all contribute to the financial illiteracy crisis.
Banks and other financial institutions also need to look at improving their client lifecycle management processes. If not used to its fullest potential, knowledge gaps about their products and services arise.
The Cost of Financial Illiteracy
Without financial literacy, people also cannot make the best decisions regarding credit card spending, retirement investments, savings, or insurance needs. This can cause them to fall into debt or worse, costing banks billions in the process.
- When people lack the financial literacy to manage their finances, they easily fall behind on payments or default on loans. The desperation this causes can influence them to make even riskier decisions.
- Customers who don’t understand the financial products available to them may underutilize services and avoid higher-margin products. In their frustration, they may repeatedly switch from one bank to the next.
- A lack of financial literacy, compounded by poor financial decisions, can lead to situations of non-compliance and even unintentional fraud. And the investigations necessary to unravel it all lead to even more complexity and cost.
Financial Illiteracy Can Have Far-Reaching Consequences
The 2008 global financial crisis had many contributing factors. These included loose monetary policy, a lack of regulation, and complex financial products. The widespread use of subprime mortgages, where borrowers with poor credit were given home loans, played a major role in the resulting crisis.
But although risky practices were to blame, financial illiteracy played its part. If more people had understood what they were applying for, they might not have done so. If they had known they could not meet their financial obligations, they may have avoided those loans.
How Banks Can Bridge the Financial Literacy Gap
Fortunately, there are several ways banks can bridge the financial literacy gap.
Education is the Key
Banks can implement digital tools and online resources that educate the public about financial terminology. Through free webinars and financial literacy workshops, they can teach people how to maximize their savings, calculate affordability, and draw up a realistic budget.
Collaboration with Schools and Employers
It’s never too early or too late to become financially literate. By partnering with schools, colleges, and businesses, banks can raise financial literacy. They can also increase awareness of financial products best suited to those populations.
Stronger Client Lifecycle Management
Banks need to track and nurture their customer relationships from the onboarding stage to build long-term retention. And a robust client lifecycle management (CLM) approach allows them to do this.
An efficient CLM tool ensures customers are informed about and educated on financial products at every stage. CLM software can offer the same benefits to other financial institutions, too, for example, investment and insurance companies.
Personalized Services
Personalized financial planning services increase financial literacy as well as customer engagement. These financial advisory services can also be AI-powered, for even more cost-efficient solutions to customer service.
Conclusion
A lack of financial literacy is costing banks billions, and causing their customers to fall into debt and despair. But it doesn’t have to be this way. By taking a proactive approach and educating people on financial topics and products, both banks and their customers will enjoy better fortune.
