Low financial literacy is a growing problem in the United States. A 2018 study found that the financial literacy rate among Americans decreased from 42% to 34% between 2009 and 2018, despite the fact that 71% of Americans believe they have a high level of financial knowledge. Although the most recent estimate of the effect of financial education on financial behavior is more optimistic than past estimates, it is critical to tailor the design of financial education to those who need it the most.
MX, a white label software provider that aims to create exceptional experiences by connecting customers with their financial data, is tackling this challenge head on with their new product, FinStrong, which the company recently unveiled at their 2020 Money Experience Summit. The fintech has partnered with the Common Cents Lab and BlackRock’s Emergency Savings Initiative, to leverage behavioral science to build a product that sits at the heart of their mission: to empower the world to be financially strong. This digital product reimagines financial education by calculating information on behalf of users, breaking the larger goal of “becoming financially strong” down into sub-goals, and providing clear, actionable next steps.
Minimizing friction costs through account aggregation
Although most individuals would say they care about improving their financial health, there can be many obstacles that constrain their ability to work towards this goal. Even small, seemingly irrelevant details that make a task more challenging and effortful, referred to as “friction costs,” can make the difference between an individual doing something or putting it off.
For example, do users need to consult paperwork multiple times because a product is asking for unfamiliar information? Do they need to dedicate a chunk of time to completing the task? Lower income earners, those who benefit most from working towards improved financial health, are typically already low on mental bandwidth – the ability to pay attention, make good decisions, stick with plans, and resist temptations. This has nothing to do with laziness or lack of values; rather, the mental energy they expend managing their scarce resources leaves less energy for other things. This low bandwidth amplifies these friction costs, making it less likely that an individual will overcome them to make progress towards the goal.
FinStrong works to minimize friction costs by limiting the amount of information users need to dig up, as well as the number of calculations they need to perform themselves. Most users have already connected their accounts to one of MX’s other products, and that information is used to automatically assess a user’s financial situation and provide them a financial strength score.
“We’ve taken a lot of time and effort to automate as much as possible,” said Greg Slade, Product General Manager at MX. “We can do the heavy lifting for users to understand their financial information, their financial score, and then very quickly present the tangible next steps they can take to become financially strong.”
Reducing present bias through sub-indicators
Becoming financially healthy can often feel out of reach because it’s a large, nebulous goal without a clear starting place. Working towards this large goal is further complicated by present bias, a cognitive bias in which humans overvalue immediate costs and benefits and undervalue future costs and benefits. For example, putting extra money towards paying down debt may require deciding not to eat out tonight, but while the benefit of eating out tonight is immediate, the benefit of putting that money towards debt comes in the form of less future interest – something that can feel far off, intangible, and consequently, unmotivating.
Sub-goals can help. One study found that participants expressed more willingness to forgo purchases and put the money towards savings goals when the goal was broken down into smaller subgoals. Building on that science, FinStrong’s new product breaks the path to financial strength into six sub-indicators (spend less than you make, pay bills on time, save enough to live on, maintain emergency savings, have manageable debt, and have a good credit score), each with its own sub-score.
“It always starts with emergency savings,” said West Vegh, a FinStrong product manager. “We need them to be financially resilient, so that they can really build off of that foundation to become financially strong.”
Mitigating choice overload through concrete next steps
Even after breaking the goal to “become financially strong” down into six key indicators, there are still a vast number of actions users could take to improve any given key indicator. Behavioral science tells us users value autonomy, and are typically more likely to stick with choices they’ve made themselves than with ones that have been imposed on them. That is especially the case when something is challenging, for example when sacrifices are required to build savings, pay down debt, or forgo charging credit cards. On the flip side, too many options can make it difficult to make a decision, and easier to make no decision at all.
“We’ve learned that providing financial education in and of itself doesn’t actually lead the user to become more financially strong…” said Slade. “They want specific guidance – they don’t just want to be educated.” While users can choose to work on any key indicator to improve their score, FinStrong suggests a concrete next step a user can take to improve their financial strength within that indicator. For example users who could stand to improve on the key indicator, “Spend less than you make,” are prompted to skip a $50 purchase this week. This design strikes a nice balance between providing choice and structuring choice.
Financial education has left the classroom
Low financial literacy is a problem worthy of innovative solutions. By designing with low bandwidth in mind, breaking an intimidating goal down into sub-goals, and highlighting actionable next steps, MX is placing a tool in the hands of users that both educates them with just-in-time information, and enables them to act on that information. FinStrong sets an example for other products and services to follow of how financial education can be reimagined outside of the classroom.
BlackRock’s Emergency Savings Initiative
BlackRock announced a $50 million commitment to help millions of people living on low to moderate incomes gain access to and increase usage of proven savings strategies and tools – ultimately helping them establish an important safety net. The size and scale of the savings problem requires the knowledge and expertise of established industry experts that are recognized leaders in savings research and interventions on an individual and corporate level. Led by its Social Impact team, BlackRock is partnering with innovative industry experts Common Cents Lab, Commonwealth, and the Financial Health Network to give the initiative a comprehensive and multilayered approach to address the savings crisis. UPS, Uber, Mastercard, Etsy, Brightside, Arizona State University, and Acorns have joined BlackRock’s Emergency Savings Initiative to help their employees, customers, gig workers, and college students take the essential first step toward long-term financial well-being.