Wise counsel for customer-centric banks: Buy into financial health, not money myth

While banks as institutions don’t always put it front of mind, odds are their employees do outside working hours: financial health, or the lack of it. To that end (and not unlike dieting and exercise), all of us could use a life coach, someone who supports us in leading healthy lifestyles day in and day out.

To stay on track, particularly with our money, we need consistent, personalized, positive reinforcement.  The one in two Americans who struggle financially can also benefit from helpful nudges. Yet the banking community tends to overlook or underestimate their capacity to improve—in large part because of a few basic myths.

Myth no. 1:  Americans never saved much

False. It wasn’t too long ago that 90 percent of American households saved 10 percent of their income. But by 2006, the savings rate was negative 10 percent. Stagnant growth of real income over the years means savings today is harder, but not impossible.

Myth no. 2: Americans would save if they could

That doesn’t seem to be the case. A recent Bankrate.com survey found that only 63 percent of Americans do not have sufficient savings to cover a $500 or $1,000 emergency; think of a broken-down car or a medical test. As shocking as this figure sounds, the same response group acknowledged that they would manage by spending less on non-essentials, such as lattes or movies. This means savings boils down to a matter of will rather than a matter of course.

Myth no. 3: Americans who earn more save more

While savings rates generally run higher among people with larger incomes, the latest  Financial Security Index found that more than a quarter of Americans with incomes ranging from $30,000 to $50,000 save more than 10 percent of what they make, outpacing the next income bracket of $50,000 to $75,000.

The bottom line: Saving is not only a function of income but of behavior—healthy, repeated, smart behavior.

Automate steps to improve customers’ well-being

Consumer banks are uniquely positioned to turn saving into a habitual practice among Americans. They know their customers, can leverage technologies to aid them, and can profit from larger savings balances.

A customer’s primary bank can employ advanced analytics to understand one’s typical monthly budget—expected income and payments—down to the day. Given the high volatility and unpredictable nature of the average person’s cash flow, banks must use rigorous analytics and sophisticated artificial intelligence: sensitive to even the slightest fluctuations in activity as they to perform these continuous calculations. Done correctly, this yields a smart prediction of how much money the customer has to spend and save.

While some banks inch toward simplified savings through automated programs, today’s solutions fall short of significantly impacting customers. Bank of America’s “Keep the Change” program is one of the better-known attempts; it rounds up debit card purchases and transfers the change to the customer’s savings account. 

The ideal solution automatically transfers available-to-save funds based on smart predictions tailored to the customer’s cash flow patterns—and continuously adjusts these amounts based on fluctuations in activity.

Breadth of a salesman: Arnold the customer’s hypothetical savings journey

Think of Arnold, a 36-year-old suburban father and loyal bank customer for the past 15 years. Arnold receives a paycheck every two weeks; being a successful salesperson, his quarterly bonuses can be sizeable but somewhat inconsistent. So are his expenses—which trend higher following a large bonus and prior to the holidays. Arnold is a prime auto-save candidate.

If Arnold enrolled in such a program, then every week, his bank would run predictive algorithms on his cash flow. His bank would pull a small amount that Arnold could afford from his checking and transfer it automatically into his savings account. This is the pocket change people could save but don’t.

Most importantly, Arnold’s bank would reinforce his savings actions: It will congratulate him on his progress and inspire him to take other measures to adopt a healthier financial lifestyle.

Granted: Moving money on behalf of the customer comes with risks. Customers must understand clearly the terms of service prior to sign-up and should be reminded often about their participation. Providers should use learning algorithms that detect unexpected changes in activity—such as a late paycheck or a five-weekend month approaching that usually results in higher spending—and adjust accordingly. To financially empower banking customers, transparency and adaptability in smart auto-save services are critical.

But in the end, those potential potholes should not block the mutually advantageous road ahead, and its further vistas. The mix of advanced analytics, digital engagement and automated servicing applies beyond savings. Successful automated money management can  help customers stick to their budgets and accelerate loan payoff.

What we believe as consumers and financial services professionals has a way of coming to pass. No longer can we accept myths that half of Americans cannot save more. The tools finally exist to optimize, simplify, and reinforce the path towards healthy financial behavior.

Consumers need a life coach and a helping hand to ease their anxieties and get them in the game. Now is the time to show them how strong you are—and how strong they can be.

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Nicole Meyers manages strategy and innovation at Personetics, a provider of personalized digital guidance solutions for the financial industry.