Banks can help you build your path to financial freedom
15 January 2021
Despite significant efforts of schools and media to give more attention to financial skills, the level of financial literacy in the general population remains low. Basic financial budget management appears very difficult for many people, let alone understanding more complex concepts like the correlation between risk and return, the need for diversification or fiscal optimization.
Unfortunately most banks today don’t sufficiently help their customers better understand and manage their finances and associated financial risks. Most banks are still too organized as product-factories trying to sell a maximum of their products. As a result the product-of-the-month is pushed to a maximum of customers, who often have no clue what they sign up for, but instead blindly trust their banker. On the one hand this trust in your banker is the cornerstone of the banking industry, but on the other hand banks should become more customer-centric and transparent and get rid of the jargon and fog surrounding banking (products). Today banking is still too much of a “private, closed club” with complex terminology, which is not very open to the layman.
Quite some banks have made an attempt to support their customers with their financial management by offering tooling like Personal Finance Management (PFM) apps and RoboAdvisors and by democratizing financial services, which were until then only offered to the happy few. Unfortunately most of these tools result in even more complex insights and decisions to be taken. For example, in a PFM tool customers need to decide on the allocation of expenses to budget-categories, setting up budget plans, doing liquidity forecasting… These features are very interesting for those already acquainted with financial management and its financial jargon, but often those customers are the ones least needing these tools.
If banks really want to support their customers with their finances, they should make it much more simple for the end-customer, i.e.
- Democratize financial management by removing the specific jargon and making user journeys much more guided, simpler, and more fun via e.g. gamification (while not ignoring the serious nature of financial management). Capilever’s RSTT and FINE modules exactly try to do this for respectively the investments and credits domains.
- Take over (at least a part of) the customer’s risk management via new banking products, which intrinsically reduce the need for liquidity management or interest rate risk management. Capilever’s LABL and FLEX products are such innovative credit products, which simplify the liquidity management for the customer.
- Generate pro-active personalized advice, which explains very simply what the financial issues are and allows to directly initiate corrective actions. This advice should for example make it very easy to fiscally optimize your savings or change certain consumption patterns.
- Give customers a simple and transparent financial health scoring. These scores should be visible for the end-customer and be similar to a credit risk scoring, but much less binary. This health scoring gives you insights in the financial risk you mean for the bank or for any party doing business with you. The financial health scoring is composed of 6 parts, i.e. knowledge and experience (financial literacy), spending/saving and planning, solvability, liquidity, risk/protection, and trustworthiness. The scoring also allows to get an immediate insight of what is your available monthly reimbursement capacity. Capilever’s CPRA product calculates such a scoring allowing to better manage counterparty risk, but obviously this scoring also helps provide better insights into your own financial health and which corrective actions you can/should take to improve it.
The different scoring parts should be calculated by the bank, based on the data available within the bank (like account transaction history), other banks (retrieved via e.g. PSD2), but also from many other sources (like social media, insurers, the government…). The more the bank is able to profile you as a customer, the better it will be in calculating the different financial health scoring parts.
When we zoom in on the 6 health scoring parts, we can identify:
- Knowledge and experience: this scoring is based on general customer data, like age, profession, education…, but also on all transactional data (what has the customer done in the past) and the way the customer interacts with the bank (which channels does he interact with, how does he interact with the channels…). A very important source for this is the MiFID questionnaire required to determine the customer’s knowledge, experience and risk level (risk appetite) and which is imposed by regulators for better determining the investment needs of a customer.
- Spending/saving and planning: this scoring is based on your spending and saving patterns, but also based on how much your finances fluctuate on a monthly basis and how well your budget plan matches reality (e.g. does the customer have saving goals set and is he able to meet those).
- Solvability: this requires the calculation of your total wealth, i.e. the sum of all your assets minus your liabilities. Obviously accounts and investments at the bank can be easily summed and the credits at the bank can be subtracted, but also solutions need to be found for assets and liabilities at other banks, life (and pension) insurances, non-liquid positions like private equity, real estate, collections (like wine, art…)… Capilever’s NLPT tool exactly aims to provide this holistic customer wealth overview.
- Liquidity: this scoring determines how liquid your assets are, compared to your financing needs. In other words, how much money you can make available right now, in a few days, in a few weeks or even in a few months.
- Risk/protection: this scoring expresses the degree of risk you are taking with your assets, but also with your liabilities. Obviously at the asset side, the risk is higher when invested in speculative products. On liabilities side for example, a variable interest rate loan will be riskier than a fixed interest rate loan. This scoring also reflects how well the risks you are taking fit with your customer risk profile.
- Trustworthiness: this expresses how reliable you are as an individual when it comes to finances. This is mainly linked to your payment history, with penalizing factors like late payments, missed payments… Obviously it is important here to score the customer behavior’s and not their solvability (which is part of Health scoring #3 above). Customers who were not able to correctly repay their credits in the past due to solvability issues, might today be very trustworthy, especially if their solvability situation has improved.
Banks implementing – even if only partially – these tools and processes will make their customers financially fitter. By providing better insights into financial health and behavior, they will enable their customers to take the first step towards financial freedom.