When we started writing this two weeks ago, the world was a very different place. Financial wellbeing is going to be front and centre for everyone, for a long time now, no matter how little or how much they have.
Money can be a confusing and overwhelming topic for the average person, but it doesn’t need to be. It’s clear that teaching credit literacy and financial education is beneficial for financial consumers. However, financial institutions can also benefit from having financially literate clients.
In this blog post, we’re going to take an in-depth look at what financial literacy is. Next, we’re going to look at why it’s important — not just for consumers but also for banks and financial institutions.
We’ll explore how teaching credit literacy to credit users leads to more responsible credit users. Finally, we’ll also look at how mobile technology is changing the face of financial education. We’ll find out what that means for today’s financial institutions.
What Is Financial Literacy?
Financial literacy, in its most simple terms, means having an understanding of money and finances.
Having financial literacy means that you know how money works. You understand what a credit score is and why it matters. You know the difference between a checking and a savings account. You also know how to determine if you’re getting a good interest rate on the money you’ve put into those accounts.
Financial literacy also includes having a working knowledge of different types of investments. You understand the pros and cons of various investments. If you’re not an investing expert, you know where to go for credible investing advice.
Financial literacy is more than simply knowing about these things. Financially literate people also know how to implement this knowledge into their daily lives.
They feel comfortable handling money and creating a personal budget. They know how to create a retirement plan or how to save for holiday travels.
Beyond just budgeting, financial literacy also includes credit literacy. This means having a working knowledge of debt management and understanding how credit cards work. Rather than being a slave to their debt, they know how to make their debt work within their financial lifestyle.
Being credit literate doesn’t necessarily mean that a person will never have any debt. It does mean that they will be able to make responsible decisions about what debt they are taking on and how they are managing it. They are able to make their debt payments on time, avoiding late fees or other debt fiascos.
When money’s not a mystery, consumers feel more in control. Financial literacy education is an empowering tool which helps to boost the entire economy. It also boosts the self-esteem of the individuals who are gaining greater financial knowledge.
Let’s take a look at why financial literacy matters.
Why Is Financial Literacy Important?
New and developing technology has opened up a world of financial options to consumers. Many of these options were unavailable (or less accessible) to the average consumer just a few generations ago.
Want to invest in stocks, bonds, real estate, index funds? There’s an app (or a few dozen) for that! Need to take out cash or deposit a check? Now you can do both at most ATMs.
Want to create a personalised investment fund to save for retirement? You can probably do it from your laptop in the comfort of your own home, without ever having to go into an actual bank and speak to an employee.
The problem is that with so many financial options readily available, there are now even more opportunities to make costly mistakes. Having more options makes financial decisions more complex and overwhelming.
With life expectancy rates going up worldwide, a longer life span calls for humans to learn be even more responsible with money. The financial strategies that worked for our grandparents may not be relevant anymore. No one wants to grow into a senior citizen who is left relying on their children or their government to support them.
Not to mention that as technology expands and as investment options grow, the entire global financial market becomes more and more volatile. Financial literacy is a necessity for being able to “roll with the punches” of the ups and downs that happen in any economy.
Remember the Spiderman quote? “With great power comes great responsibility.” Today’s financial consumers have plenty of power, but they need appropriate financial literacy education in order to step into that power responsibly.
Teaching Credit Literacy Makes More Responsible Credit Users
When people don’t know how credit works, they are more likely to fall into crippling, high-interest debt. One American study determined that about one-third of credit card fees and charges are incurred due to the user’s financial ignorance.
At first glance, taking advantage of financial consumers’ ignorance might seem like the quickest way for financial institutions to earn some money. Of course, that is highly unethical. In the long run, no one in society really benefits from that type of approach.
Consider it from this perspective: a lack of financial knowledge an also lead to a fear of seeking out credit. Everyone has heard stories about someone who’s drowning in debt, who can’t pay off their student loans or keep up with their credit cards. Plenty of people have been in that situation themselves, due to a lack of education about how to avoid such fiascos.
When people see this happening, they may become so leery of going into debt that they won’t even want to take out credit in situations when it would be appropriate — such as buying a house, for example. Banks and other financial institutions would quickly become obsolete if all consumers started shying away like this.
On the other hand, financially literate consumers understand the benefits of taking out certain loans in proportion to their income. They are able to make payments on time and avoid bankruptcy or foreclosures. All of this means good business for banks.
A study on this topic from Raddon Research Insights showed data backing this up. Financially literate consumers are indeed more profitable bank customers. The same study also determined that most consumers will actively seek out financial literacy from their trusted financial institutions.
The next question is: what is the best way deliver financial literacy education?
The Future of Financial Literacy Education is Mobile
With smartphones in everyone’s hands, today’s consumers have everything they need at their literal fingertips. From email to online shopping to texting, today’s humans have come to expect mobile capabilities in most of their daily tasks.
Their money is no different! As more and more banks around the world have made mobile banking available to their customers, it has become an expected service.
However, we know that financial technology can be used for much more than the standard banking functions. Why not use technology as a fun, engaging method for teaching credit and financial literacy to people?
Whether young, old, or middle-aged, fintech apps are able to provide users with relevant financial education that can be personalised for the individual spender. Just as people use smartphone apps to track their health and exercise, a fintech app can also help them track their spending and money actions.
The right technology can take that tracking a step further and provide the user with personalised recommendations and education based on their own habits and lifestyle. We’ve written before about gamification in fintech apps and how it can help to engage consumers in the financial process.
Keep in mind that it’s never too early to begin financial literacy education. Many young adults are leaving university with barely any knowledge of their finances, when they should be starting to learn about money in their teens (if not before). Though most schools do teach at least some kind of basic money information to children, it’s clear that what has been offered in the past simply hasn’t been enough.
The Wise Financial Literacy Test from New York has gotten off to a great start in developing a program for teaching young people about their finances. However, using fintech apps can take that financial education a step further. Today’s teens are more and more glued to their mobile devices — so why not bring the financial education to meet them where they’re at?
It’s not just teens. Nearly everyone uses smartphones. Many use them for hours a day, making mobile technology an excellent platform to teach credit and financial literacy education.
How Navag8 Can Help
Navag8’s financial technology gives its users an engaging and personalised goal-based interface. By setting personalised goals, the app can give people tips and personalised recommendations on how to meet those goals. Informative financial content is interspersed throughout the entire app experience, teaching credit literacy and growing financial health step-by-step with tips and hints.
Does this technology sound like something that your financial institution could benefit from? Do you want to learn how your consumers and financial clients can use the Navag8 technology in conjunction with the financial services that you are already offering them?
Contact us today to set up a demonstration!