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Rethinking Financial Literacy

This blog originally appeared in Mortgage business in 2014, by Kym Dalton. With current attention around ensuring enhanced consumer outcomes, it’s even more relevant now.

Here are a couple of quotes from a recent housing think tank that I attended in the US:

“It all begins with financial literacy” and “Financial literacy is the key to getting out of the current mess and avoiding social dislocation”.

So it’s clearly financial literacy to the rescue! But here’s the thing: people are not seeing benefits from the current rescue efforts or showing a marked disinterest in being rescued.

You’d think consumers would be lining up to receive the benefits of financial literacy to assist in making better decisions, given that we live in an increasingly financial world and finance is becoming increasingly complex.

Yet a recent US survey of over 200 financial literacy programs revealed that they resulted in ‘negligible impact’ on subsequent financial decisions and behaviour.

Another study, from 2009, found that those who had taken a respected broad-based financial literacy course in the last year of high school fared no better in making sound financial decisions in college and beyond when compared with those who didn’t take the course.

Why isn’t financial literacy education working? I believe it’s for a couple of reasons. Firstly, our human DNA is hard-wired to satisfy needs and wants in the shortest time with the least effort. We want the ‘bright shiny things’ and we want them now. Our acquisition gene is encouraged by a marketing machine that urges people to acquire and a financial services industry that makes it easy to acquire with ‘speed to yes’ being seen as a key point of competition.

When presented with the abundant opportunities to get more faster, it’s a rare consumer that will stop to take the time to educate themselves – at least not voluntarily.

Secondly, and more importantly, ‘conventional’ financial literacy education is too broad-based, lacks relevance to most and isn’t delivered in a timely manner.

The financial world is complex. Trying to cram everything into a single course or on a single website brings about results similar to cramming for exams – there’s little learning, little knowledge transfer and precious little retention.

I know many people who did poorly at high school or at their first attempt at university (this includes me), only to blitz higher education later, as the subject matter had relevance to ‘real life’ with a bit more life experience under the belt.

It’s the same with financial literacy education – a broad, school-based financial literacy course lacks relevance to those who have never purchased a financial product and have little experience with money. It’s simply theory.

For financial literacy to be effective and for it to make a real difference, it needs to be delivered on a ‘proximate to purchase’ basis, so that it has real context and assists people to make sound decisions. It needs to be ‘just in time’ education and it almost certainly needs to be compulsory. Education should be provided that is directly relevant to an imminent financial decision. And it should be provided to consumers in bite-sized pieces, one product at a time.

Of course, relevant, compulsory financial literacy education provided just ahead of procurement will need to be mandated by the financial services industry.

A major change in attitudes toward education on the part of industry is required. Rather than being a conscience salve, a faith-based mission or, more sinisterly, being viewed as an impediment to a sale, true financial literacy education should be seen by industry as a key component of providing financial services in a complex, financialised world.

By embracing truly meaningful education, industry will not only reap compliance benefits but will build trust through transparency – leading to deeper and more rewarding customer relationships founded an a basis of mutual understanding and respect.