US Banker: The Business Case for Financial Literacy
Bank tellers may spend their days counting out money, but that doesn't mean they all manage their own finances well. So, starting this fall, SunTrust Banks Inc. will kick off a company-wide financial literacy initiative in which it will train front-line employees in the basics of money management - budgeting, balancing a checkbook, paying bills on time - and educate them on the importance of saving and investing.
SunTrust officials say the workplace education program is worth the investment because studies show that financially secure workers are more productive than those with money troubles. (The threat of foreclosure or eviction can be a powerful distraction, after all.) Bank officials intend to eventually parlay the in-house program into a value-added service it can offer to its corporate customers, many of which have approached SunTrust about offering financial education to their own employees.
But perhaps the biggest payoff for SunTrust will be in the trickle-down. J. Scott Wilfong, the president of SunTrust's greater Washington, D.C., region, says that the financial crisis was caused, in large part, "by the fact that people just don't understand finance. That included a lot of bankers that were selling financial products." The bank, which has made financial education a centerpiece of its nearly year-old "Live Solid, Bank Solid," branding campaign, wants workers who have completed training to use the knowledge they have gained to both better advise customers and steer them toward products that best meet their needs. While that approach may not produce the short-term profits the bank might have strived for in the past, it could go a long way toward improving customers' financial standing - and SunTrust's prospects for cross-selling.
"If consumers are doing better with their money, then they can afford more home loans, car loans and school loans," says Michael Gutter, a University of Florida professor who is an expert in personal financial education. "Financial institutions need to think about this from a long-term perspective."
Bankers have always believed that financial education makes good business sense, to some degree, and it's why they often take the lead in sponsoring high school literacy programs and adult money-management seminars. But some bankers admit that, in recent years, they lost focus. Most of the industry's capital was devoted to product development, not people, and the result was that many customers were steered toward "free" checking accounts that maximized overdraft fees and into loans they couldn't afford or didn't understand.
"There was no incentive to worry about the long-term financial health of the customer," says Don McGrath, the chairman of BancWest Corp. in San Francisco. "Obviously, we've all seen the problem with that set of facts."
The financial crisis has changed that. It's led to a surge in bank-sponsored programs, targeting youths and the elderly, the banked and the unbanked. Like SunTrust, many banks are also starting to incorporate financial education into their marketing. Bank of America, for example, recently started running advertisements touting its one-page, plain language mortgage disclosure form. The Washington Trust Co. in Westerly, R.I., is embedding educational videos on such topics as reverse mortgages and loans for first-time home buyers into e-mails to customers.
Part of banks' motivation, undoubtedly, is rebuilding trust. By responding to consumer demands for transparency and financial knowledge, banks can diffuse the backlash and credibly lobby against efforts to impose more regulation on them, says industry analyst Mike Moebs, whose Illinois firm collects and analyzes data about financial institutions for business, academic and government clients.
Adds Gutter: "It's good PR right now. Banks want to show they care about their customers." It remains to be seen how well the efforts will pay off for banks, or if they will stick with their commitment to financial literacy once the economy recovers. Studies show that people with damaged credit who undergo money-management training often revert to their old habits. Moreover, banks have profited handsomely over the years from customers' missteps - repeatedly paying overdraft and bounced-check fees, for example - and recovering that lost income is likely to be an ongoing challenge if consumers become more savvy about avoiding fees.
Few bankers are as active in financial literacy efforts as McGrath. He is an officer of the Financial Services Roundtable, an industry lobbying group that is strongly encouraging its members to take a more active role in financial education. He sits on the President's Advisory Council on Financial Literacy, a panel established by President George W. Bush that is awaiting new instructions from the Obama administration - which has said financial education is a top priority. The council has issued recommendations on what the federal government could do to increase financial literacy nationwide, such as mandating financial education from kindergarten through 12th grade and offering tax incentives to employers who provide financial literacy programs in the workplace.
McGrath also is as a board member of Operation HOPE, a Los Angeles advocacy group that takes a civil rights approach to the need for financial education. For 17 years, Operation HOPE has counseled the poor and unbanked and provided financial education resources used in classrooms and communities across the country.
His company, too, is heavily involved in financial education. BancWest unit, Bank of the West, is one of more than a dozen financial institutions participating in "Bank on San Francisco," a program in which banks and credit unions offer financial literacy education and low-cost savings and checking accounts to the unbanked. (The program was founded in San Francisco three years ago and has since spread to dozens of other cities.) Bank of the West also educates senior citizens about protecting their financial assets from swindlers.
McGrath says it is simply good business for banks to educate their customers, and use their "megaphones" to encourage financial literacy training, particularly in schools.
"The ability to have a much better educated populace is good for the industry," McGrath says. "It's sad that the problem had to get so bad before we decided to deal with it."
Marshall & Ilsley Bank in Milwaukee is also a strong proponent of financial education; it recently added a second full-time staffer devoted solely to financial literacy. In one of its programs, M&I explains banking and credit basics to people seeking job training at an Arizona food. It also helps soon-to-be-released prisoners in Wisconsin learn to create and live on a budget. Since 2005, the bank has given financial literacy training to about 15,000 people throughout its nine-state service area, says Ammar Askari, the bank's vice president of retail administration.
While the unbanked and the underbanked represent a potentially profitable customer base down the road, banks also recognize the need to stay connected with existing customers. Rilla Delorier, SunTrust's chief marketing officer, says SunTrust's "Live Solid. Bank Solid" campaign is based on research that shows customers not only want reassurance that their bank is stable, but also that it cares about their financial well-being. A typical ad campaign can take about four months from inception to launch, but SunTrust rolled out the "Solid" campaign in early October, after just six weeks in development, because research showed the message would immediately resonate with consumers. "America has changed its mindset around money," Delorier says.
The campaign has included training for employees in select branches and the plan going forward is to take that initiative to a broader segment of the bank's retail workforce.
David Mancl, director of Wisconsin's Office of Financial Literacy (a division of the state Department of Financial Institutions) and also a member of the President's Advisory Council on Financial Literacy, says financial education in any workplace has been shown to reduce employee stress and increase productivity.
What's less known is whether bank employees will effectively pass on what they have learned, but Mancl intends to find out. Using a $200,000 grant from the Investor Protection Trust, a Washington, D.C., nonprofit, a research team that includes Mancl's agency will study the benefits of financial literacy training provided to 4,000 credit union employees in Wisconsin. The employees' financial knowledge will be tested before and after they receive online training. After the instruction, researchers will measure whether employees increased their participation in 401(k) plans, as the training advises, and whether customers' contributions to retirement plans increase after consulting with employees that went through the training.
"When you do financial training in the workplace of a financial institution, the employees may take steps to improve their own financial wherewithal, but maybe more important is how that will transfer to the customer," Mancl says.
Building a savvier base of customers may help banks solve some of their problems, but it could create others. If people really do improve at managing their finances, how will banks make up for the loss of revenue that now comes from customers' money management problems?
An unavoidable reality for serious financial literacy efforts is that banks' income depends greatly on the carelessness of a small percentage of customers. U.S. banks and credit unions generate $34 billion annually in overdraft fees on checking, debit and ATM accounts, according to the FDIC, and research firm Oliver Wyman notes that 68 percent of all NSF and overdraft fees come from just 5 percent of accountholders racking up 20 or more overdrafts a year.
Those fees are likely to become even more critical to banks' bottom lines next year, when federal laws take effect limiting banks' ability to extract credit card fees. The Obama administration's plan to create a Consumer Financial Protection Agency - which the industry vehemently opposes - also threatens to further commoditize basic loan products and shrink margins that are already razor thin.
"We've seen pretty strong mortgage rules. We've seen pretty strong rules on credit cards enacted," says Rebecca Borne, policy counsel for the Center for Responsible Lending, an advocacy group based in Durham, N.C. "That leaves overdrafts wide open as an area banks can exploit."
Borne contends that for banks to gain more credibility as financial literacy advocates, they should, for example, halt the practices of charging "piled-on" overdraft fees, which often hit the poorest customers hardest. "Banks are clearing transactions from highest to lowest to clear the account earlier and charge more fees," she says.
Sue Hunt says "water-cooler conversation" at Consumer Credit Counseling Service of Greater Atlanta, a nonprofit agency that advises people on how to manage debt, often centers on how fees can push consumers trying to rehabilitate their finances even deeper into a hole. "Banks and lending institutions are going to put the fees on the people who have the most difficulty paying their loans," says Hunt, housing program manager for CCCS. "But if they don't, then the costs will trickle down to those who do pay loans on time."
Scott Talbott, senior vice president for government affairs for the Financial Services Roundtable, says that banks haven't really come up with a game plan for replacing revenue they could lose if customers get smarter about paying overdraft fees, but says it's a problem the industry would welcome.
"That would be a good scenario to have our customers manage their money well," he says. "The benefits to the consumer, to the economy, to the industry are a positive. All are strengthened by better financial literacy."
Moebs, the analyst, says that banks have no choice but to shift their business model away from overdraft fees that are under so much scrutiny from regulators and consumer advocates. He suggests that financial institutions fully inform customers about how fees are incurred, warn customers when they are about to be charged, and - importantly - better diversify fees so that revenues are not as heavily weighted on overdrafts. Moebs' analysis indicates that nearly 45 percent of banks and credit unions have overdraft revenue greater than net income.
The solution, he says, is for banks to charge more fees, but to spread them out across product portfolios and make them transparent so that regulators don't have reason to intervene on consumers' behalf. That would be difficult in the current economic climate, Moebs acknowledges, but says it's crucial to future profits. "We have at stake a broken business model," he says, "and the only way we are going to be able to make it work is to charge more fees" on transactions, loans and deposits.
Even with more financial know-how, some customers, of course, will keep paying for their financial mismanagement. Moebs likens financial education to speed limit signs: Drivers know how fast they should go, but some always speed.
Indeed, results from a pilot financial literacy program for college students that Gutter worked on in Wisconsin in spring 2006 showed participants immediately reduced credit card use and increased savings. But nine months later, their card use and debt levels were higher and their savings rates were lower than before the study started. One area of improvement that stuck: Before the training, 33 percent of students said they used a budget. Nine months later, about 42 percent of students were using a budget.
M&I Bank's financial literacy program, which uses the FDIC "Money Smart" financial toolkit as a framework, has shown more positive results. The bank requires most participants to take a 10-question multiple-choice financial literacy test before and after they go through a training session. The number of correct answers goes up an average of 44 percent after the training is complete.
Still, Askari says the stream of revenue from customers who cannot manage their money is unlikely to evaporate. As an example, he describes M&I Bank's Credit Builder program, which helps people improve their credit history by showing how they can improve credit scores by making regular payments. The bank funds a certificate of deposit - a simulated "loan" - for the participant, who then makes monthly payments until the total adds up to the value of the CD. At the end, the participant can cash in the CD, including the interest earned. But a considerable number of people who start the program never complete it, says Askari, who plans to research just how many people drop out of such second-chance bank accounts - and why.
"We are saying, 'Look, we want to help you, but we want evidence that now you want to help yourself,'" Askari says. "The worst of them will not rehabilitate."
But what encourages financial literacy proponents is that people are now far more interested in learning how to manage their money - and banks are far more interested in teaching them.
Since 2008, the Financial Service Roundtable has encouraged members to focus community outreach on financial literacy. A recent roundtable survey showed that 56 percent of the community service projects its members sponsored in the second quarter focused on financial literacy - up from 35 percent in the third quarter of 2008.
Hunt of Consumer Credit Counseling says two years ago many mortgage candidates who were required by their lenders to get financial counseling treated it as "a huge imposition."
"The people who are coming to the table now," she says, "are better educated about the home-buying process and want to become more educated."
Many also are in better shape financially, she notes.
Mancl says the number of people attending financial education events sponsored by Wisconsin's Office of Financial Literacy has grown by a third in the last year.
"We are getting record attendance," Mancl says. "The public is tuned into its own financial education."