Scoring Solutions
Financial wellness is a complex topic with many layers. It encompasses several important aspects of a person’s life – including financial security, financial resilience, financial control, and financial freedom.
The truth is that most of us have a long way to go when it comes to personal finance and money management. Moving the needle on financial health and preparing for retirement can feel like a daunting task to many people. So, what resources can banks provide to help consumers manage their financial wellness – and can it be profitable?
In Pursuit of Financial Health
A UNCDF financial health white paper defines a financially healthy person as someone who “can meet current needs, absorb financial shocks, and pursue financial goals.” However, research indicates that the majority of people are not financially healthy. Although the U.S. has near-universal financial inclusion, a 2021 study by Financial Health Network shows that only 34% of Americans are financially healthy.
The COVID-19 pandemic and the rising cost of living have intensified this issue – however, there may be opportunity for banks that are willing and able to help consumers improve their financial future.
Below is a Q&A discussion about the role banks can/should play in their customers’ financial wellness. Our panel of experts are:
- Glenn Grossman, FICO Principal Consultant for Deposit Solution
- Gerald Fahner, FICO Senior Principal Scientist
- Larry Rosenberger, FICO Analytics Fellow and Former CEO
What Is Financial Wellness?
Glenn: Everyone has their own definition of financial wellness. It’s personal. For banks, financial wellness is about enabling our customer to handle the ups and downs of their personal economy – in other words, resilience.
Gerald: I can appreciate how financial wellness is a personal matter and quite situational. After immigrating to the US, I wasn’t aware of deposit holding times and made a mistake that led to a bounced check – this could have spiraled out of control and I felt pretty financially unwell after that! But in my role where I’m responsible for analytic research in FICO’s Scores team, I’m moving beyond subjective towards empirical. Sixty years ago, creditworthiness was a rather subjective notion, then credit scoring came along and changed the world. Next is to quantify notions of financial wellness and resilience and make them predictable.
Larry: Using Glenn’s definition, we are using both “personalized data” and “personalized analytics” to create a solution that works for the financial services provider and its customers.
How Are Banks Performing When It Comes to Financial Wellness?
Glenn: In my opinion, banks – especially US banks – aren’t doing a great job of focusing on financial wellness. There’s room for improvement and an opportunity for banks to enable their customers to handle the ups and downs of their personal economy with liquidity, insurance, and responsible use of credit.
What Should Banks Be Doing About Financial Wellness?
Gerald: “We’re drowning in data and starving for knowledge,” as the saying goes. Banks often have zillions of data points on each customer, especially when you consider the richness of transaction data. They could be distilling this deluge into a handful of insightful and actionable key measures (through behavior scoring, for example) so each customer can be characterized by a financial wellness score, resilience score, liquidity loan propensity score, and/or savings propensity score. Having this suite of scores makes it easier to design powerful customer management decision logic that make both the bank and its customers more successful.
Larry: Continue to work together on the journey. We like to bring more personalized data, using SMS for one-on-one dialogue with individual customers. Given the providers existing data and this new data, there’s opportunity for financial services providers to use it as input for better predictions and better actions for their customers. With better predictions and personalized associated “nudges” provided to customers over time, customers will have the opportunity to adjust their behavior by themselves and make smarter choices with their money. You can think about this as “hyper-personalized financial literacy” or “personalized financial health benchmarks.” Even beyond that, we have a way to learn how to improve this data and analytics over time.
Can Financial Wellness Be Profitable for Banks?
Glenn: The marketplace for consumer banking just gets more competitive each year. Financial wellness is highly desired by consumers and can differentiate a bank from the competition. FinTechs are taking a stab at this strategy by designing their solutions to address needs such as saving or building credit. Bank of America has made their customer’s financial wellness journey a centerpiece of their marketing and product strategy. There is a revenue stream when it’s executed well. Savings goals can sometimes lead to borrowing events. Furthermore, increase retention and loyalty. We all know the cost to retain customers is much lower than the cost to acquire.
What Is the Path Forward?
Glenn: A key way to operationalize this is a blending of two capabilities. Scoring is one key piece – it gives us a guide, but by itself it needs a little help. The second piece is decisioning – adding decision logic so that it becomes meaningful, which helps with delivering a relevant action to the customer (such as the next best action to take on their savings journey). We can look to the credit decision sector to see how well scoring and decisioning have delivered outstanding results for banks. It is a perfect match, like peanut butter and chocolate in a Reese’s cup.
Gerald: The chocolate and peanut butter analogy also works well for developing powerful scores. “Highly predictive” is the chocolate and “explainability” is the peanut butter we’re always eager to heap on our scores. Why is this so important? An explanation-friendly score goes beyond merely predicting. Take resilience – it lets you understand how a customer’s resilience can be improved in a personalized way (be it through bank actions or through feedback to customers). For example, a customer could be alerted if they deplete their checking account balance below a certain ‘safety buffer’ level that could be a function of their personal cashflow volatility. Imagine the analogue of a modern car’s collision warning system, but for financial account management. That elevates resilience from a mere prediction to an objective or goal that the bank can help to improve!
Larry: Glenn has focused on operationalizing scoring and decisioning. Gerald has focused on balancing predictive accuracy and useful feedback factors for customers, especially in the context of resilience. To their foci, I’ll add that by using “plausibly causal variables” to available “financial facts variables,” you can help your customers with their personal financial wellness to help them to be better customers for you – today and in the future.
Conclusion
“While probabilities encode our beliefs about a static world, causality tells us whether and how probabilities change when the world changes, be it by intervention or by act of imagination.” – Prof. Judea Perl
Everyone wants to be financially healthy, but many people have difficulty attaining that goal. According to a report by Reuters, U.S. household debt grew to a record $16.15 trillion in the second quarter of 2022.
However, where there’s a challenge, there’s opportunity – and banks that want to be customer-centric should be looking for ways to help customers manage their money and improve their financial wellness.
The path to financial security (and ultimately, financial freedom) requires more than providing people with access to tools and information. There’s an underlying psychology driving all our choices and behaviors, which should be acknowledged and combined with the power of modern scoring and decisioning technology. An applied intelligence platform enables banks to leverage their data to better understand customers’ behaviors, create more personalized experiences, and help define each customer’s path to achieving better financial health.
If you want to increase customer satisfaction, retention, and loyalty, show them you care and take actions that improve their lives.
Learn How FICO Helps with Financial Wellness:
- See how Círculo de Crédito boosts financial inclusion in Mexico for 20 million citizens.
- Read how we’re supporting continuous financial education for women who are small business owners.
- How financial inclusion is being delivered using analytics.
