Who shall provide financial education?

In a recent post, I wrote – maybe a bit provocatively – that banks are not in charge of their customer’s financial education. Well, then: Who is or should be in charge? Obviously, two other sources of financial education come to mind – parents and school. This article explores both of these options and gives some recommendations on how to achieve this. So: Happy reading 🙂

Why banks are not in charge

Banks (actually companies in general) have a clear mission, which is to make a profit. This quest for profitability is a major principle of the capitalist model. It gives clear direction to strategy and avoids difficult trade-offs, e.g., when having to balance interests. A bank’s basic functionalities (help those who have money, help those who need money and help people transact – cf. one of my previous articles) are also undertaken in search of profits for the bank, ultimately earning a decent return on the capital invested by shareholders. In this pure interpretation, financial education is not much part of the mission of a bank.

You could now argue that providing financial education would further this quest for profitability. This might be actually true in some aspects. Consider a retail banking customer who has saved up money in his savings account. Investing these funds in higher-yielding long-term investment products should be in the best interest of the customer as well as in the interest of the bank. Banks would typically earn a better return on these investment products (it’s not the 0.05% TER ETF I am thinking of…) than on deposits which are a loss making business for the bank in today’s negative interest rate environment. There are, however, also situations where this alignment of interests is not so clear. Think of the customer who is heavily using their overdraft facility, earning the bank hefty profits. The best advice to the customer would be to start applying a strict budget and getting out of debt as fast as possible. This advice would significantly harm the bank’s financial position. This makes me conclude that banks cannot per se be expected to do the right thing for their customers as they seek profits.

Certainly, there is value for banks in serving their customers well. This means understanding customer needs well, either through a qualified sales force or through data & analytics methods which derive valuable insights. This also means investing in customer service to meet these needs in an outstanding way, i.e., fast, flawless and in a convenient way/through the channel chosen by the customer. Doing so will ensure that product needs are known and served well, which will yield superior customer satisfaction, higher shares of wallet as customers as customers move their relationship to this bank, an ultimately increasing customer numbers as the word spreads.

Out of their own right, however, banks will never go as far as pushing decisions which harm their profitability. I certainly would not see a bank encouraging a comparison of prices, e.g., for a mortgage and being willing to see the customer close the transaction with a competitor. I would also not see a relationship manager offering the customer the lowest possible interest rate for a consumer loan if there is potential for up-pricing. There are other forces at play which should ensure this, notably healthy competition among banks.

Rising levels of consumer protection in many markets have led to a counter-balance to this quest for profitability which reach way beyond competitive forces. Not only extensive information obligations but also best execution requirements and obligations to contract have become limiting factors put in place by legislation in many markets. It seems that some level of financial education can come through such mechanisms of consumer protection. My perception is, however, that consumer protection only helps to ensure informed decisions. The “right” decisions are still up to the customer. To make this argument very clear: Even the most transparent consumer loan pricing might not prevent the customer from taking out a loan which will significantly harm the customer’s financial position rather than consolidating debt and repaying the loan as fast as possible.

To conclude, from my point of view there is nothing wrong with banks not providing financial education. It is simply not their job and not part of their business model. I would still encourage banks to employ the strategies described before which help drive customer satisfaction up. At the same time, I would not expect consumer protection to
take over and ensure financial education to the back door.

Remaining Option #1: Parents

Our parent teach us some of our most important lessons in life. Not only do they teach us to walk, talk, eat and behave somewhat appropriately, they form and substantially shape our beliefs and habits early on in life. So, it is quite apparent, that also our beliefs regarding money and personal finances are determined by our parents.

Therefore, I believe that parents should take a very active role in teaching their kids financial responsibility and how to handle their finances. This education should come in three different forms

• Positive framing of earning, spending, saving and investing – this will mostly come from the conversations parents have among themselves while their children will listen anyways. There is a huge difference between: “Mark has worked very hard to afford the house his family lives in.” vs. “Mark and his family live in a very posh house, probably they can only afford because he rips of his customers” – don’t you agree?
• Discussion of financial topics with kids – there is nothing wrong about talking money with kids. Simple explanations on how money, its management and risks/opportunities work, will suffice and kids will find their very own way to understand.
• Giving an allowance to kids – it’s typically recommended to start early (e.g., at age 4 or 5) to give an allowance to kids to have them learn financial responsibility, the value of money, spending/saving, and budgeting.

Easier said than done? Maybe. As a matter of fact, many parents will not have had the pleasure to receive sound financial education from their parents when they were kids. So which resources to draw upon? Most kids’ books do a miserable job in conveying that managing one’s personal finances well, is a good thing. I recently read a book to my kids, Leo Lausemaus – in German*. The family in the book needed to save for a new kitchen – no information provided whether a new kitchen was necessary, except for Mom wanting to have it. As the family was saving, they were eating carrot soup and applied a frugal lifestyle. This really made me think: Do I want to teach my kids that frugality is the way to go, ultimately to finance potentially useless assets?

Remaining Option #2: School

If financial education by parents can have its shortcomings, school should definitely step in. For me this is not a question of “either parents or school” but rather a question of “parents and school”. Certainly, school should not substitute what parents ought to do.

While parents should form beliefs and teach their kids basic financial mechanics, school should still fill potential gaps and build on the basics already taught. It seems, this is all but the norm just yet.

How do I envisage this to happen that school take a substantial role in delivering financial education? At the latest in high school, i.e., at age 10 or above, the curriculum should include personal finance topics. I would consider the following lessons quite essential:

• How to handle a current account, a debit and a credit card?
• How to budget and manage monthly expenses, save for one-off expenses?
• How to save systematically and build assets over time?
• How to handle debt, consumer loans and a mortgage? How much can I afford?
• How does the financial system work, esp. banks and their role in the economy?

That sounds too much like teaching kids how to use financial products or even irresponsible to you? I am certainly not asking for an advanced finance degree for everyone, but some basics which should be really helpful. The topics listed above should probably be the bare minimum. I don’t see objective information coming along through other sources, as outlined above.

Again, there might be the challenge of teachers lacking this helpful information themselves. It would be naive to expect teacher to be fully financially literate themselves. This implies that some sort of push will be required as curricula are amended. I do have sufficient trust in the educational system as “teaching of teachers” is accomplished in other domains as well!

What is true for education in general should be also true for personal finance topics: Teaching of methods and tools should be prioritized over just pure nice-to-know things. Ultimately, kids should learn the functionalities of personal finance and be able to explore additional questions further based on this knowledge. If you already lack the knowledge of the basics, it will be almost impossible to seek out more information to become really proficient over time.

From my personal high school days I don’t remember a single piece of information on personal finance. I just don’t believe we ever talked about what a credit card was or how a mortgage would work. This is a shame! I would have loved the discussion about such topics, already at that time. Who knows, I might have started to write about financial education earlier in my life! 😉

So let’s have courage! While banks are not expected to provide financial education, parents play a crucial role. Every parent can therefore make a difference by only taking baby steps such as framing finance topics positively and giving kids an allowance. As financial illiteracy increasingly brings young folks in trouble (think high consumer debt!), the need to adjust school curricula accordingly, will mount and become more apparent. I would wholeheartedly support each and every such initiative to bring financial education to kids and youth!

Please do share your perspective on this important topic! I would be most curious how you handle your kid’s financial education, what you have learned or what you are teaching in school if you are a teacher! Let us know your comments below. Thanks!