Financial Health as a Consumer Journey
Financial health (or well-being) is an intuitive concept that captures the notion of a well-functioning financial life – now and over time. The term echoes the concept of physical health, and, like physical health, it consists of a cluster of attributes that jointly create a positive state of being. While for some, it is not clear how the concept is best applied in the financial inclusion sector, I suggest that
Reaching financial health is an important life goal for millions of people
My commitment to financial health began during interviews I participated in through a 2017 study carried out by Dalberg, the Financial Health Network and the Center for Financial Inclusion. When we asked people in Kenya and India to tell us what financial health meant to them, we heard that financial health is when you:
- Have what you need every day (India).
- Have no debt (India).
- Can pay your bills and have money left over (Kenya).
- Don’t have to ask other people for help (Kenya).
Interviewees told us that they want to manage their money effectively to meet day-to-day needs, withstand shocks, and pursue long term goals. They want to feel confident in their financial future. These are the components that are increasingly used by policy makers and providers in defining financial health.
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The most convincing thing was hearing that striving to be financially healthy occupies a large and central place in people’s lives. Just as setting out to “seek one’s fortune” is at the heart of folklore across the ages, so becoming financially healthy is a life narrative for millions or even billions of people. This realization compels those working in the financial sector – providers and regulators – to take consumer financial health seriously.
A financial health framework illuminates the customers’ perspective
In this narrative, consumers continually select strategies to reach financial health, using the financial tools they find along the way. The tools may be formal or informal, helpful or predatory. As providers and policy makers accompany these protagonists on their journeys, they must challenge themselves to consider whether their interventions are more like the poisoned apples or the magic beans of folk tales.
This way of thinking challenges providers to enter into the customer’s own narrative and understand how they are attempting to manage their financial lives. It challenges policy makers to look beyond the proximate results of product use toward a broader concept of successful outcomes. Financial educators need to find more powerful ways to support healthy financial behaviors. Indeed, efforts in these areas have been underway for some time, not necessarily under the financial health banner. The concept of financial health helps bring these ideas together into a more comprehensive point of view and highlight their urgency.
Measurement is a starting point
For those who wish to take up a financial health perspective, the starting point is determining consumers' current level of financial health, and identifying the greatest gaps. Accordingly, much effort is going into measuring financial health. There is increasing agreement about the value of a short set of indicators, such as a financial well-being scale, to provide quick readings, analogous to physical “vital signs.” Financial regulators in dozens of countries have conducted surveys containing such indicators, revealing enormous financial health deficits across the world, including deficits that may have broader macroeconomic consequences. Banks, too, are searching for reliable metrics within their own data that can help them identify customers with poor financial health.
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Such surveys confirm that a person’s (or a population’s) financial health depends greatly on employment/income, macroeconomic conditions, and exposure to risks. Use of financial services is only one part of a complex picture. Well-deployed financial services enable users to become as financially healthy as possible, given their economic and life circumstances. Thus, providers and policy makers need to recognize that theirs is an important, but supporting, role in the financial health story.
How a financial health perspective can inform policies and services
The sector is still exploring how to translate data-generated insights about financial health into policies and services. The opportunities are myriad and depend on the type of player.
For financial service providers, for example, a financial health perspective suggests a need to adjust approaches to product development. More than just a specific product, consumers on their journey towards financial health seek a toolbox that gives them the agency they need to confront various obstacles. But service providers have traditionally looked at products in isolation. A financial health perspective would suggest a more holistic approach, considering product suites that mirror consumers’ money management and coping strategies. Evidence shows that informal savings groups reflect such a holistic approach.
The financial health perspective can also inform policies by elevating the focus on risks and mitigants. Risks that consumers encounter, from external shocks to predatory practices, can greatly disrupt and even permanently damage financial health. Without alternatives, people experiencing shocks may turn to drastic coping strategies that throw them well off the path to return to financial health. Consideration of how shocks block financial health suggests major action mandates: to shore up consumer protections, to expand insurance availability, and to improve social safety nets.
Tools that assist customers with good money management practices were also created in response to a growing interest in financial health. In fact, much of the early interest in financial well-being arose among financial educators who wished to improve the efficacy of their programs and were dissatisfied with the results of pure knowledge transfer methods. Since then, efforts have turned toward product design that supports healthy financial management habits, from budgeting tools to automatic savings programs to alerts. Such financial health tools are rapidly being incorporated into digital banking interfaces and benefiting consumers.
The examples above are only a brief and partial sketch of the implications of financial health for consumer-oriented policies and products. While a handful of leading banks are starting to place customer journeys at the heart of their thinking, more experimentation is needed to continue developing financial services and policies that truly help people advance their financial health goals. Consumers have been seeking their fortunes for millennia, but the financial inclusion sector has far to go in understanding and responding to their narratives.
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