Moving From Financial Literacy to Financial Capability

Filene Research Institute convened a colloquium on May 22nd to examine the importance of consumer financial capability and the role credit unions can play in developing, implementing and promoting financial capability initiatives. Representatives from government, non-profits, research institutions, and credit unions spoke during the day about the current landscape of financial capability and the policy and regulatory challenges of implementing programs.

Annamaria Lusardi spoke about data on financial capability and current economic conditions. Several macro-level factors have pushed consumers to be increasingly responsible for their own finances: the shift away from defined benefit pension plans, labor market changes that make retirement plan portability more critical, and shifts in financial markets such as increased complexity coupled with greater opportunity to borrow. She cited the 2009 Financial Capability survey (conducted by FINRA Foundation) which shows that in large numbers Americans struggle to make ends meet, to plan ahead, to manage the complexity of financial products, and to understand personal finance principles. Lusardi is particularly concerned that Americans do not grasp concepts like interest, inflation and the diversification of risk. She also argued that credit unions are uniquely poised to help younger generations deal with the dual burden of student debt and credit card debt.

Ron Borzekowski from the Consumer Financial Protection Bureau outlined the research priorities of the CFPB and answered audience questions about the impact CFPB regulation might have on credit union regulation. He outlined the CFPB’s goals to create a consumer financial marketplace that is transparent for consumers, does not tolerate deceptive or abusive practices, and works well for consumers and “responsible providers” alike. Research projects at the CFPB span a range of topics and are designed to complement work already being done in the academic community. The CFPB is embarking on research projects with the Urban Institute to examine financial education through randomized controlled trials of two program models. Borzekowski emphasized the importance of testing models to determine what works best so that the most effective models for financial education can be scaled up.

Jean Chatzky, an author and contributor to the Today Show, spoke about the approaches she perceives to be most promising for developing financial capability for individuals. She is a fan of automation and defaults for workplace savings, but recognizes that many workers do not have access to retirement savings at work. She drew on insights from human behavior, such as our adaptability, tendency to compare ourselves to others, and process of habit formation to make some recommendations. For example, she is interested in seeing technological help for people in visualizing their financial goals (for example through phone apps).

Lois Kitsch from the National Credit Union Foundation spoke about a variety of opportunities for credit unions to promote financial capability for customers. Experiential learning tools that help teenagers and adults practice money management and engage with challenging financial scenarios show promise for helping individuals develop a greater capacity to make sound financial decisions. Kitsch was particularly excited to report on the success of Financial Reality Fairs, which high schoolers across the U.S. have participated in. She also shared anecdotal evidence from a life simulator activity with credit union employees directed at helping credit union professionals better understand the life circumstances of their frequently lower-income customers.

Nick Maynard from the Doorways to Dreams (D2D) Fund spoke about the role casual games can play in promoting financial capability. Games can help financial education and asset building practitioners frame their work in a fresh way and have the potential to be scaled up cheaply and easily. D2D Fund has prioritized evaluation of its approaches and sees games as a powerful tool for a variety of reasons. Games appeal to a wide range of people and reach demographics that may not be accessible with other approaches. Furthermore, games offer a safe place for people to practice making financial decisions and build up confidence in their knowledge of concepts. By involving low and moderate income people in the product development and design process, D2D is confident they are meeting learners where they’re at. Maynard pointed out the success they’ve had with using games in military communities, community college settings, and at major companies.

Piyush Tantia and Alex Fiorillo from ideas42 discussed concepts from psychology to demonstrate what a behavioral economics perspective can offer to financial capability work. ideas42 has found that many consumers are simply unaware of the terms of financial products, that if they do read them they remain confused, and that even if people understand product terms they are still prone to make “poor decisions.” They emphasized the importance of framing and understanding context using examples and highlighted a number of their domestic and international initiatives. 

Ultimately, credit unions can play a promising role in developing financial capability. Through better messaging, client-centered initiatives, and empathetic financial service provision, credit unions are well-positioned to integrate financial capability approaches into their existing services. The insights of the researchers and government officials present at Filene’s colloquium will hopefully help make this integration successful.