By: Charlie Nocker
May 31, 2022 — Last month was financial literacy month in the US—a designation that has been in place since 2004— which included the typical congressional proclamations, appeals for more financial literacy education in high school, as well as a call for a national interagency financial inclusion strategy. These are all noble efforts, and yet don’t go nearly far enough to tackle the problem at hand.
That’s where the private sector comes in. We believe there are underappreciated and innovative opportunities for ESG-focused corporations to step up and do more on this front—bolstering their long-term competitiveness along the way. Amid the maelstrom of rising prices, product shortages, volatile financial markets, an ongoing pandemic, and a growing spotlight on racial and economic inequality, there is a critical need to heighten Americans’ financial capability and improve economic outcomes for low- and moderate-income families.
The Senate’s 2022 resolution highlighted some important realities on this issue, including that 5.4% of US households are unbanked (trailing many OECD countries, including Canada, where 99.7% of adults have a bank account), that student loan balances have doubled over the last decade, and that less than half of states require personal finance courses in high school. Last year, President Biden said that “high-quality financial education has not historically reached all Americans, especially our most underserved low-income and minority communities.” A recent study provides a stark example of widespread financial misconceptions: nearly 80% of Gen Z adults (and about two-thirds of adult Americans) believe that carrying a small balance on their credit cards each month helps their credit scores.
All of the above raises questions about what government can do to educate Americans about objective financial and economic facts along with well-recognized best practices to build wealth and prosper at every income level. Much of the prescription that’s often-discussed centers around improved financial education in schools—particularly at the high school level. Formal education is certainly an area that should be reformed and reimagined. Perhaps more salient, however, are questions exploring ways both government policy and free enterprise can effectuate better outcomes for middle- and lower-income Americans sooner. Ongoing lifelong financial literacy education would be a strong start. Two ESG key issues—whose scores flow into overall ESG ratings by firms like MSCI—are highly relevant to this discussion: consumer financial protection and access to finance.
The private sector—particularly consumer-facing financial services companies—can play a pivotal role in boosting their customers’ financial capability through good defaults, nudges, and micro-lessons on personal financial stewardship. The barrier, of course, is when those practices seemingly run contrary to corporate interests. For example, should a bank offer information to customers about Series I bonds yielding 9.62% when their own CDs and savings accounts pay a small fraction of that? Should a credit card company nudge customers who have consistently carried a low balance with information explaining why that behavior might not be in their best interest? Should online tax prep software companies mention the existence of the IRS’s perennially underutilized Free File program even when they are not a participating vendor?
Put simply, pointing out available government programs and/or providing advice on personal finance best practices may undermine a company’s profit maximization imperative. However, we think this is also myopic thinking. Firms that can provide cost-effective, value-added services to customers that are profitable over the long-term while also raising financial literacy in their communities should be handsomely rewarded in both ESG scores and risk-adjusted returns—as well as elevated consumer brand trust and loyalty.
Much of the innovation in this space has come from retirement savings account administrators. Small-business retirement plan providers like Guideline have consumer-friendly defaults as central to their business model. Federal tax credits that they pitch to new clients require the use of auto-enrollment and a default contribution percentage. Many major credit card companies have provided credit score analysis as a free service to customers in recent years. Banks like PNC and SoFi give educational tips on the benefits of psychologically separating one’s money into “buckets” or “vaults” for various goals and provide the functionality for customers to do so easily. These initiatives are a great start. Companies can make an even stronger impact by creating frictionless user experiences that start with in-the-moment financial literacy education and lead to beneficial long-term behavioral changes.
Federal, state, and local governments have a strong, vested interest in all citizens’ financial capability to foster a dynamic, inclusive economy including through implementing a robust K-12 financial literacy curriculum. A much more immediate and potentially revolutionary change in the private sector would be a groundswell of companies providing a steady trickle of targeted, in-the-moment financial advice and education with consumers’ best interests in mind.
In recent months, Capstone has published research on timely and investor-relevant consumer finance topics including buy now/pay later, earned wage access, student loan relief, retirement savings, and credit card late fees—and each of these issues has a clear nexus to considerations of consumer protection and financial well-being. As always, we will continue to follow developments in all three ESG factors—and, importantly, the marriage of public policy with investable opportunities in both the capital and private markets.
ABOUT THE AUTHOR
Vice President, Private Markets Group
Read more about Charlie here