The financial health crisis gripping millions of Americans cannot be solely blamed on the coronavirus pandemic. The economic consequences of the COVID outbreak have certainly played a part. However, more than anything, it has exposed and shed light on a worrying financial landscape that was already there.
Research shared by Forbes and compiled by Cornerstone Advisors, an independent financial consulting firm, found that the financial health of nearly half of Americans (44 percent) can be categorized as either “dire” (19 percent) or “struggling” (25 percent). Of those in the “dire” category, around 53 percent admit they cannot pay their bills on time and in full, while only 26 percent can cover their loan payments every month.
In the slightly healthier “struggling” category, the majority can pay bills and monthly loan payments. However, they fall short in other areas of financial health indicators. Only 21 percent have enough savings to cover emergencies and six months of living expenses. Just 17 percent are on track to have sufficient long-term savings and assets.
Lest this crisis is pinned on the pandemic, it needs to be known that Cornerstone conducted two separate studies: one in January 2020 and another in July. The differences are not all that great in the “dire” and “struggling” sections, with increases of just 3 percent. The biggest shift was found in the healthiest “thriving” category that saw a 7 percent decline.
The ongoing financial health crisis is only going to deepen without effective action due to rising living expenses and workplace instability. This has led to increased calls for the introduction of financial health scores.
What Is a Financial Health Score?
A financial health score differs from a credit score. These only measure creditworthiness, which is a person’s eligibility for credit in the form of credit cards, loans, and mortgages—and at what rates.
Instead, a financial health score takes into account many more factors. These include a person’s spending habits; their outgoing expenditures weighed against income; savings and investment portfolios; planning abilities; and protection in the form of insurance and other safeguarding measures.
Rik Coeckelbergs, a pioneer of “The Banking Scene” in Belgium, wrote that banks have a duty and responsibility to ensure customers have “a financially balanced life, helping them to reduce financial stress by improving their financial wellbeing.” Financial health scores have the ability to be the cornerstone of the future of “improving financial wellbeing” for millions of Americans, with fintech firms at the forefront of the movement.
What Is Being Done So Far?
Inroads are being made to deliver financial health scores and to help “cure” the financial health of many Americans. The Chicago-based Financial Health Network as measured the financial health of 5 million people so far. While that constitutes just 2 percent of the adult population in the United States, it is at least a starting point.
Meanwhile, some fintech startups are attempting to directly address the needs of many people who would fall into the “dire” and struggling” categories of Cornerstone’s study. For instance, the mobile app Propel provides greater control and transparency to people who receive food stamps (some 40 million). It offers users the ability to check their balances, view their transaction history, and build budgets.
Elsewhere, Brigit acts as a financial safety net for low-income Americans by offering interest-free advances to prevent people relying on high-interest payday lenders. Status Money uses behavioral economics and psychology to help customers improve their financial outcomes.
The Role of Fintechs in Rolling Out Financial Health Services
The work Financial Health Network has done so far is admirable. However, it is a drop in the ocean. It needs greater support in order to deliver financial health scores to all American adults.
One proposal that experts have suggested is the creation of a financial health consortium, with a network of fintech firms collaborating in the effort. This could be beneficial in attaining accurate financial health scores by identifying and implementing data sourcing. In other words, using existing data on spending and saving behaviors of customers to form the framework of a financial health score rather than relying on consumer self-reported data.
The next stage would be to develop, codify and test a financial health scoring algorithm that can be personalized for each consumer and their specific financial needs. Once the algorithm has been tested and verified, the score then needs to be put into operation. It can then be used make appropriate recommendations for services and products based on a consumer’s actual financial health.
Financial Health Scores Can Be a Marketing Win for Fintechs
In addition to helping improve the financial health of those in “dire” and “struggling” situations, financial health scores can be implemented to improve marketing strategies for fintech firms and financial institutions. With a robust algorithm that accurately produces a financial health score derived from data and individualized context (people’s actual spending habits and behavior), products and services can be recommended based on specific needs.
A Glimpse into the Future
Financial health should be the bedrock of future financial services as consumer priority shifts towards the best offerings for their own individual needs. While price (interest rates and fees) and convivence will still be factors, how consumers can measure and improve their financial health is expected to be the primary consideration.
If, as expected, the demand for financial health services continues to increase, then new fintech startups will emerge to meet those demands in the form of financial health platforms. There is a need for platforms that can act as a bridge between financial health scores and the marketing efforts of fintechs and financial institutions.