How can banks help poor savers and rash spenders?

28/11/2017

Money management is a painful task; it’s a source of anxiety for 64% of Americans, while 22% of Britons say daily money worries are their main cause of stress. [1][2] With research suggesting that spending habits are formed by age seven, and parents in the US proven to be bad financial role models – only 43% set financial goals for themselves – it would seem like there’s not much people can do about their financial habits. [3]

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The perception of traditional banks suggests that they can’t help with this problem; just 27% of Americans place a ‘great deal’ or ‘quite a lot’ of confidence in them, and only 36% of Britons believe they work in the best interests of consumers. [4][5] “Things like excessive charges and fees send a clear message that banks lack faith in their customers. Subsequently, consumer trust in the bank breaks down, resulting in a negative relationship,” says Anne Boden, CEO and founder of mobile banking start-up Starling. [6]

However, building trust and encouraging people to be good with money could be good for business. “Fundamentally, banks grow by selling financial products,” says Ricky Knox, CEO and co-founder of digital challenger bank Tandem. “Is it a good business model if you are providing poor customer service or making your customers poorer?” [7] Starling and Tandem are part of a new wave of fintech firms, apps and online banks aiming to help people be better with money by making it easier to manage their finances. But considering that many consumers are wary of the industry as a whole, how can banks reach people who are prone to spending more than they can save?

Money isn’t working
Being bad with money may be a widespread problem, but the stigma surrounding it leads many to conceal their finances even from loved ones. “Couples would prefer to talk about sex or infidelities rather than how they handle family finances or how much money they earn,” writes therapist and psychologist Joan D. Atwood. [8]

“Much of the discomfort we experience surrounding our personal finances can be accredited to its stigmatisation. There is this notion that money is taboo, but not talking about it can be harmful,” says Boden. “One of our aims at Starling is for our customers to feel comfortable having an open dialogue about money. There are an alarming number of people still living in fear of their finances and I think banks have the power to reduce this fear and stigma by creating an open line of communication and having full transparency.” [6]

“Banks are happy to bleed you dry.” says James, 31, from Stevenage. He found himself in dire straits a few years ago when he lost his job and found he couldn’t pay the rent for his flat, let alone the payments on his overdraft. His bank offered him a credit card to make ends meet, which only exacerbated the problem. He ended up having to seek bankruptcy, with his debt mostly written off. [9]

It’s evident that banks can at the very least be accused of not adapting to individual needs. “The financial models in place don’t really allow for individuals to make their bank work for them,” explains Boden. “Instead, banks use current accounts – the epicentre of most people’s financial lives – to cross-sell and upsell products like mortgages, loans and ISAs. This makes it very hard for customers to be ‘good’ with money because they can only access one or two options, which may not suit them and their personal needs.” [6]

Knox agrees that customers have become used to poor products and poor customer service, to the extent that they expect nothing more. “Firstly, many of the products on offer simply don’t match what they need as customers. For example, what is more appropriate, an unsecured personal loan or a credit card? These are staple products, but it’s not clear which one is most suitable, if appropriate at all,” he says. “Secondly, many customers simply don’t have the time to spend hours each month managing their finances. On top of the banking jargon, people often feel stressed by the thought of even looking at their bank statement.” [7]

Rise of the money helpers
The UK’s ‘big five’ banks are all closing branches as more people nationwide bank online instead of in branches (39% and 36% respectively), making it harder for consumers to obtain much-needed support. [10] But new money management tools and advice services are emerging.

Money gurus may seem quirky and even quaint, but the likes of Suze Orman have made a big name for themselves helping millions of people who are bad with money. In addition to giving talks and selling books, Orman’s website has a resource centre, blog and special calculators. [11]

Various financial apps and online banks are helping people capitalise on the shift towards online banking. These new operations often boast instant notifications, fast balance updates, free use abroad and other speedy, modern innovations. Take Monzo. The digital bank’s trump card is its app, which takes control of your card and provides real-time account tracking and analysis. Highlighting the start-up’s appeal, it broke a world record in early 2016 by raising £1 million on Crowdcube in just 96 seconds. [12]

The new caring banks
Monzo is not alone in its mission to make banking more consumer-friendly using an app. Starling similarly aims to make money move faster and work more around customers’ needs. “Our banking app itself is designed and optimised to help people have a healthier relationship with their money by giving them a holistic view of their finances. An important part of having a healthy relationship with your money is feeling in control of it,” says Boden. “We want to help them take control and build a relationship with their finances. This means we need to fit in with their life, rather than interrupt it.” [6]

Like Monzo, Starling launched after the financial crisis, but it was an idea that brewed in Boden’s mind for many years. “It was obvious to me that there were huge problems in the traditional banking model that could no longer be overlooked,” she says. “It was refreshing to see how many people embraced the concept of a mobile-only bank!”  [6]

Tandem was founded in 2013 following consultation with a group of more than 11,000 co-founders with the goal of building a ‘good bank’ – one that provides true financial liberation for all. “We’ve only recently launched our app and are in the process of rolling out our first product, a credit card,” says Knox. “So far, the feedback has been positive and it is allowing us to improve Tandem every day... We are co-creating a bank with our future customers and we hope to continue involving these people throughout our launch and beyond into everything we do.” [7]

Insights and opportunities
Financial shame is real, and far from helping people manage their money, many banks aren’t trusted. But as the wave of new, caring financial services shows, empathy is important for attracting customers. Destigmatising financial woes could provide a lifeline to many and make both customers and those providing them services wealthier. [14]

“Technology is revolutionising traditional industries. Uber has changed how we think about transport, Spotify has changed our relationship with music. Financial services are changing too; fintech is changing how and who we bank with. New companies are creating solutions and undoubtedly can support all of society,” says Knox. “Open banking and API reforms being introduced next year in the UK will allow banks such as Tandem to develop a clearer insight into customers and provide a banking service that delivers a real, tangible change that customers will be able to feel in their day-to-day lives by moving away from the ‘one-size-fits-all’ approach sometimes seen in the sector.” [7]

Knox points out the UK is a great place to be right now for new fintech firms, partly because the Financial Conduct Authority is very supportive of new companies trying things to improve people’s relationship with money. “New banks and apps are launching every month, so the future is looking bright and I hope Tandem will play a significant role in this,” he says. “Tandem is a business, but we’ve set out purposefully to build a bank that helps customers manage their money better. Customers will always want borrow money to buy a new house or a new car, but it makes more sense to support them to reach these goals with better products.” [7]

“The fact is that if you destigmatise money, if you help people to have healthier financial lives, more people will feel comfortable taking out things like loans or mortgages,” says Boden. “If people can talk about money, they know their options. They know what’s out there, what they can afford. They can take better risks. They can spend more on what they love. The fact is that banks do not have to be greedy, overcharging for small things, penalising for innocent mistakes. If we treat customers fairly and help them have good relationships with money, in turn, they have a good relationship with us and that makes the best business sense of all.” [6]

 Sources

1. 'Most Americans, rich or not, stressed about money: Surveys', CNBC (August 2015)
2. 'Fears grow for a year of squeeze', The Independent (January 2017)
3. 'Study: parents are terrible financial role models', Time (March 2012)
4. 'Americans' confidence in institutions stays low', Gallup (June 2016)
5. 'Most Brits trust banks but don’t think they work in customers’ interests', YouGov (May 2017)
6. Interview with Anne Boden conducted by author
7. Interview with Ricky Knox conducted by author
8. 'Couples and money: the last taboo', The American Journal of Family Therapy (January 2012)
9. Interview with James conducted by author
10. 'Changing channel preferences in retail banking - UK', Mintel (October 2016)
11. 'The costs of financial isolation', The Atlantic (April 2016)
12. 'Monzo reaches £1m in 96 seconds in record breaking raise', Crowdcube (March 2016)
13. 'Monzo: sparking a digital banking revolution', Canvas8 (January 2017)
14. 'The percentage of Americans without bank accounts is declining', Fortune (September 2016)

A version of this article was first published on the Canvas8 website

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