Thought Leadership
Fri May 27 2022

Why have banks failed middle-income Americans?

And how new tech is delivering real change

What matters in finance and financial products is the real-life outcomes they enable us to achieve.

What we really want is to have the money available to meet our needs at the right time.

Managing risks well. Preparing to meet our needs in the future. Storage, payments, accounts, new cards – these are just instruments or means to get the outcomes that matter.

Deep down we know it’s the outcomes that really matter, when we think about what we want from life. People know they want wealth for ‘financial freedom’ - the ability to do what they really want, whether vacationing, more time with family, or pursuing their niche hobbies and interests.

We know that money and how we manage it enables this. But how we actually use our money and how we make the decisions to get us the final outcomes is a fuzzy space.

We are given the banking products. Told that they will do the trick if we use them right. Here are the products: it is up to us to make the puzzle work. But there’s no sensible manual for this. And if there was, it’s volumes of unreadable financial jargon. We must figure out the ahead path all by ourselves, armed with these eccentric - and really not very helpful - products from banks.

In fact, we are lectured that it is our responsibility to figure this out. We should have the skills to do this well. If only we were those perfectly optimizing rational agents that economics has theorized for decades.

But we could be educated for a lifetime and still never have the skills to do this well or perfectly. And yet people still believe we must keep learning and practicing all these skills all by ourselves. Every year 643 new financial planning books are published in the US, and right now there are 2540 courses in financial planning skills available online and offline.

People who have the skills don’t work for middle America

There exists a sector of expert financial planners - known as CFPs - and wealth advisory services. In theory they have the skills to help us with financial planning decisions and the optimizations needed. 

However, they operate to service high net-worth individuals - typically with incomes of more than $120,000. The reason that they specialize for such income groups is that their business model - how they get paid - is majorly based on managing investments. The wealthy with incomes of $120,000 or more have enough surplus cash to be investing large amounts. Their large investments enable a CFP to earn their commissions and fees and so drive their own business models.

CFPs and wealth advisory are not developed to support people with middle incomes at less than $120,000, with major financial challenges: managing debt, managing expenses, improving credit scores and building savings and early investments. These are not their specialist areas because they would need to charge enormous fees, well beyond $2,000 per year for each client.

So there’s an entire sector of financial planning experts that first and foremost focuses on helping people make and manage investment portfolios. But these are not the major financial areas of concern for 80% of middle-class America. Financial planners are just not relevant for most Americans.

Why do banks fail so badly

We have covered how banks have evolved their product offerings and their business models over time. Over decades and even centuries.

So why can’t banks evolve to directly help middle-income consumers and their financial challenges, instead of just pushing unfit bank products one by one?

There are 5 major reasons for this.

  1. Banks have become large institutions stuck in the status quo of what it means to be a bank. Their business models are established and considered the accepted norms. They want to make money by pushing new financial products and ultimately holding savings and deposits, which they can lend, and making loans to people where they can earn interest. In short, they are stuck in their ways and too rich from what they do to make any drastic transformations.
  2. Banks could provide financial planning advice to their middle income consumers, but they would only be able to do this in a model with high ‘people touch’ involving advisors working one-by-one with each client. This is not workable or affordable for them. There aren’t enough financial advisors to hire and it would be too expensive for them to work with middle-income clients as regularly as needed. No one making $50,000 per year after taxes wants to pay $2,000 to a single bank advisor.
  3. Banks make too much money from the mistakes people make. When people leave money in a checking account or low-yield savings accounts, it works in favor of the banks. They do not want to disrupt this. When people stick with a high-cost loan or credit card and pay too much in interest and fees, this is revenue a bank is earning - they do not want to change this. The products they sell are working just as they want them to, with the revenues and profits they want. The top 5 banks in the US earned $300+ billion in profits in 2020 from these types of revenue sources.
  4. Banks are institutions carrying a lot of baggage and inertia. They have become ossified in the world-view that the way to give people financial services and support is to sell them more products, which they will eventually accept. So their entire DNA as companies have been built on pushing new and more products, and when people use these new products badly - e.g., carrying too much balance on their credit cards - the banks will benefit. When there is so much organizational momentum to sell more products, this type of organization legacy is near impossible to transform. Too tough to change to make it worth it for the banks. They have become entrenched factories of product sellers.
  5. To solve this problem for people at scale requires real expertise in technology and data sciences. Banks do not have the talent base in advanced professions to build new solutions that can actually help middle Americans.

For these 5 reasons, and probably more, banks just will not change. They are stuck in their ways.

Why hasn’t society just fixed this somehow?

Without innovation from the financial sector, our mindset has been that people will learn how to do it themselves. Education is the way to solve it.

If people don’t educate and train themselves, it is their problem to fix. We scold and even condemn people who don’t do a good job in managing their money. They should have been able to do it. It is a case of bad habits and poor will, as opposed to not having the right skills or experience or time to do it properly.

Do we even really train people how to manage their money, like the way we train people to read and write and do basic math? We do not. It’s a complex subject - as complex as anything we have learned at schools - and yet we believe we need to learn it ourselves. Or it’s the responsibility of each family to teach their own.

Even if people are educated about money, it’s still very easy to make mistakes, thanks to poor information and poor data. Or because, as I’ve noted,  there are just too many areas to manage simultaneously, impossible work for any reasonable human being. 

And so, this problem ensues. It only gets worse every year as we are sold even more complex products, as we have more financial needs and expenses to think about, as the pace of change in the financial world increases - especially in the areas of payments and investments.

We cannot have any hope that banks will help us. We cannot have any hope that governments know how to help us. And with the growing complexity and challenges, we cannot have any hope that people are going to magically figure this out for themselves and get better at it on their own. 

But there is hope. Because in the last 5 years, the setup has changed, thanks to forces in data sharing and what’s possible now with technology working directly for consumers. There is truly an alternative way, putting an end to our misguided approaches and innovating better solutions for middle-income Americans. 

It’s a world of algorithms, and at Bright, it’s a method we call MoneyScience™.

Algorithms are intelligent systems that can help people make decisions automatically.

Algorithms can be built that work automatically, where we let algorithms do the hard work for us, and work around our lives. 

And the principles behind our MoneyScience™ algorithms are clear:

  • Use your data as a force for good
  • Learn to work for you
  • Take a holistic full view of your financial life
  • Work for you on daily decision-making
  • Take less time, not more time, to do it well
  • Make sure every right decision is right for you, not for a bank or its banking products.
Avi Patchava
CEO (joint) at Bright Money
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