OBSERVATIONS FROM THE FINTECH SNARK TANK
Americans are facing a financial health crisis.
According to research from Cornerstone Advisors, roughly one in five Americans’ financial health situation is “dire.” Nearly half of the consumers in this segment can’t pay their bills on-time and in-full all of the time, and about three-quarters can’t make their loan payments every month.
Another quarter of Americans are categorized as “struggling.” Most of the consumers in this segment are paying their bills and making their loan payments, but many fall short of acceptable levels in other aspects of financial health.
This situation is not simply due to the pandemic’s impact.
Cornerstone conducted two studies—the first in January 2020, the second in July 2020. The percentage of Americans in the “dire” category rose just three percentage points since the beginning of the year.
The bigger impact was felt among those were thriving before the crisis. The percentage of Americans in that segment dropped from 33% to 26%.
Current Fintech Efforts are Admirable But Fall Short
Many fintech startups have emerged over the past 10 years to address various aspects of consumer financial health.
But that’s the problem—individually, they only address specific aspects of the problem, like developing alternative credit scores for consumers with thin credit files, or providing earned wage access solutions for consumers who would otherwise take out a payday loan.
Individually, fintech firms are offering band-aids to consumers suffering from serious (financial) health problems.
We Need Financial Health Scores
It boggles the mind when you realize that the health care industry can calculate literally hundreds of health-related scores from a few samples of blood.
But in financial services, the best we can do is a credit score.
Not knocking the credit score, but it’s good for just measuring credit worthiness. There are other aspects to financial health, however: spending health, saving and investment health, planning health, protection health.
Where are the scores for these aspects of our financial health?
Financial Health Network, based in Chicago, is working on it.
The organization, founded in 2004 by Jennifer Tescher, has more than 160 members who have measured the financial health of more than five million consumers.
Not to take anything away from this accomplishment, but there are two problems here (neither of which are Financial Health Network’s fault):
- Five million is a small number in the scheme of things. With roughly 225 million adults in the US, five million is just over 2%. But that’s a minor point—with broader adoption, that number could easily grow to a more meaningful percentage.
- Financial institutions haven’t operationalized financial health scores. This is the bigger problem. As best as I can tell, few (if any) financial services firms have made financial health measurement an integral part of how they run their business.
How Fintech Can Help
Fintech firms need to either: 1) Start a financial health consortium, or 2) Join up with Financial Health Network.
One firm can’t do it all, although a company like MX, Plaid, Yodlee, or Finicity could be a real catalyst in making something happen.
Three things need to happen:
1. Identify and implement data sourcing. Cornerstone’s financial health score—which was based on Financial Health Network’s scoring framework—is a nice attempt at creating a score, but, like the credit score, financial health scores have to be based on actual behavior, not consumer self-reported data.
With the proliferation of fintech startups professing to be financial health-focused, there are plenty of players with something to contribute. An aggregator like the four firms mentioned above could (and should) sit it in the middle of this network.
2. Develop, codify, and test a scoring algorithm. This might seem like a daunting task, but it’s really the easy part. Remember, no one knew if the FICO score was truly a good predictor of credit worthiness when it first came out. Obviously, the developers thought it was, but it had to be tested. Same thing with a set of financial health scores.
The test, however, isn’t credit loss performance. The test is a combination of simulation and real-life tests that determine how well recommendations based on the set of scores impacts those scores over a period of time.
It’s analogous to the physical health world, where a particular health score leads doctors to prescribe certain medicine, and then see if that medication improves the particular score over time.
3. Operationalizing the score. This is the hard part. If the purpose—from a financial services provider’s perspective—is using the score to make recommendations, then financial health scores have to be integrated into financial institutions’ analytics and marketing processes.
How Financial Health Scores Improve Marketing Efforts
Creating a set of financial health scores—and operationalizing them—isn’t a charitable initiative for fintech firms or financial institutions.
For financial institutions, it’s a path to more effective marketing.
Today’s database marketing efforts are driven by demographic and purchase behavior data. Providers of those types of data will claim strong marketing performance, but that’s debatable.
Financial health scores could provide a more effective way of determining “next best product” and “next best action” recommendations.
What’s missing in today’s marketing efforts is context. Financial marketers have tried to establish context for consumers’ behaviors by looking at life stage. Helpful, but only to a point.
Financial health scores provide that context. Why are we recommending that you open this product and take this action? Because it will improve one of your financial health scores by X%.
The Future of Financial Health
Some predictions about financial health:
1. Financial health will become the new basis of competition in banking. Over the past 70 years, the basis of competition has shifted from location (who has the best/most branch locations) to price (who has the best rates and fees) to convenience (who makes banking easiest). The new basis will be financial health—who best helps consumers improve their financial health (or performance). Price and convenience will still play a role—but the point of differentiation will be improving measurable financial health.
2. Financial health platforms will emerge. Or at least one will. The financial health fintech space is growing and getting too complicated for consumers to navigate and for players in the ecosystem to integrate with one another.
A financial health consortium is not the same as a financial health platform. The consortium exists to create the scoring standards, definitions, and data sources.
A financial health platform operationalizes the integration of financial health scores into financial institutions’ and fintechs’ marketing efforts. The aggregators are probably the most likely candidates to develop this kind of platform, but a database marketing firm like Acxiom or Epsilon could do this, as well.
3. The government will stick its nose into financial health. The Community Reinvestment Act was “enacted with the intent of encouraging depository institutions to help meet the credit needs of low- and moderate-income neighborhoods.”
While much good has been done as a result of the legislation (I would guess), there are two emerging issues: 1) a) What “neighborhood” does a digital bank serve? and 2) It’s not just low-to-middle income consumers that need help, and those who do need more than just credit.
Look for a future administration or Congress to require banks to monitor and improve their customers’ level of financial health.
What could this look like?
Todd Baker and Corey Stone recently proposed some ideas. The first of their three-stage proposal would require providers to “make available to regulators data that regulators can use to analyze and measure changes in customer financial health.”
How’s that going to happen if the other things described in this article don’t happen?
Interested in financial health? Join me, Jen Tescher, Adrienne Harris, Jane Barratt, and Brett King for a webinar on Financial Health in the Midst of Covid-19 on Wednesday, September 30.