The trust deficit, financial literacy gap, and resulting brand erosion

08/13/2024

by Scott Simari and Brendan Hopper

Customers increasingly don’t understand or trust banks. Throughout the last decade, only 50% of Americans have been considered financially literate, and only 10% of Americans have high confidence in the banking system. There is a huge opportunity for financial institutions to drive customer acquisition and loyalty by addressing trust and financial literacy.

Factors That Have Eroded Trust

Predatory Behavior: This includes aggressive lending, buy now and pay later (BNPL) products, deceptive marketing, hidden fees, targeting vulnerable borrowers, and difficult repayment plans.
Fear of Banking Instability: Public debacles—FTX’s fraud, Silicon Valley Bank’s bankruptcy, and subsequent failures of Signature Bank and First Republic—all weigh heavily on public perception. Not only because the banks failed, but also due to the speed with which they failed.
Institutional Mistrust: Beyond banking, surveys and studies show an increasing lack of confidence in major institutions.

Eroded trust comes at a cost, resulting in higher customer churn and a reduced ability to grow and diversify products and services.

Factors That Have Contributed to Financial Illiteracy

Lack of Education: It’s not being taught enough at home and in schools, as more than 40% of parents are not teaching their children financial literacy. While there has been positive momentum with 25 states now requiring a personal finance course, there are still concerns regarding insufficient training resources for teachers and a lack of a standard curriculum.
Misinformation: Influencers and others have found a path to grow impressions and ad revenue with “hustle culture” and “life-hacks” to build wealth that leads to poor decisions that do not appropriately consider personal finances and goals.
Increasing Complexity: The investment opportunities, loan products, and financial service offerings are becoming increasingly diverse and complex, widening the knowledge gap.

Bridging the gap to address bank’s brand erosion

There are several areas that banks can focus on to address trust and financial literacy that promote customer loyalty and growth. Each aspect offers unique benefits and opportunities for banks:

AI-Enabled Services

AI-enabled services leverage artificial intelligence to provide smarter and more personalized financial solutions, enhancing customer experience and operational efficiency. AI technology can develop and offer tools that incentivize and reward budgeting, savings, and financial planning. Additionally, it can augment or enhance:

Personalized advice and asset management
Customer experience and service
Predictive models for churn and bad debt

Simplified Products

Simplified products are designed to be user-friendly and transparent, making financial services more accessible to customers with less financial experience. Financial institutions should invest in products specifically designed to meet the needs of financial inexperienced customers and offer straightforward products with transparent pricing and fees.

Open Banking

Open banking involves the secure sharing of financial data between institutions, fostering innovation and competition, and providing customers with better tools and services. In order to sharpen their competitive edge, organizations should participate in the open banking ecosystem to enhance the quality of tools and services.

Financial Education Initiatives

Financial education initiatives focus on increasing financial literacy and awareness among consumers, empowering them to make informed financial decisions. These initiatives might include:

Free financial literacy programs for the community
Partnerships with schools to develop curriculums
Regularly published educational content on websites and social platforms

There’s pent-up demand ready to be unlocked for banks that find ways to navigate issues of trust and financial literacy. Reach out to Sendero today to explore how we can help your organization address these challenges to benefit both your clients and the community.