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What is financial education?
We have used the OECD’s definition of financial education within this work:
‘The main components of financial education are understanding the key financial products one may need throughout one’s life; understanding basic financial concepts, developing skills and confidence to be aware of financial risks and opportunities and to benefit from them; making sound financial choices about saving, spending, insurance, investing; and managing debt throughout one’s life’.
Financial ‘education’ and ‘literacy’ will be used interchangeably. We will focus on companies operating at the intersection of fintech and edtech, rather than education course providers (courses at basic, sophisticated and professional levels).
Why is financial education important?
When young people enter the world of work, or leave home for college or university, their finances begin to disentangle from their parents. Are we confident that they know how to manage their finances…?
Low levels of financial competency have far-reaching consequences, both at a micro and a macro level. People who are financially competent have control over their finances and make responsible choices when faced with questions such as: which mortgage should I get, how much money can I and do I spend per month, shall I save or borrow, what kind of holiday can I pay for, which risks do I insure and what do I need to do to save for my retirement?
Often young people’s attitudes to money reflect their parents’ attitudes, whether thrifty, extravagant or somewhere between. For most, it’s a case of learning by doing i.e. making mistakes and learning from them… Hopefully these mistakes aren’t severe, but it would be preferable to avoid them.
Whose responsibility is it to provide financial education?
Put ‘education’ after something and the government is assumed to have a role. This is the case in most countries with financial education, or ‘financial literacy’ as it’s often referred by governments. Financial education, financial consumer protection and financial inclusion are recognised at the highest policy level as three essential ingredients for the financial empowerment of individuals and the overall stability of the financial system, as endorsed by G20 leaders in National Strategies for Financial Education (2012).
Many countries include some form of financial education in their national curriculum and provide some kind of adviceservice for adults. But the efficacy of this provision (whether it’s implemented comprehensively, addresses the right topics and is effective) is less clear. Some would argue that developing financial literacy should be the responsibility of providers of financial services, making sure their products are ‘safe’ for consumers to use and that their consumers understand risks.
As a general rule of thumb, governments and third sector providers tend to focus on the content, while commercial startups and scaleups focus on the doing. This is slightly different for products aimed at children: learning the fundamentals is a core part of the offer alongside the experiential elements.
Where is the opportunity?
“Why does nobody do both?”, we might ask. Why don’t organisations both educate and serve their customers? Is there a salient commercial opportunity to build companies at the intersection of these two burgeoning sectors- fintech and edtech- combining financial education with practical implementation?
Startup, scaleup and incumbents’ activity is indeed responding to this opportunity with increasing pace. From children to young adults and lifelong learners, innovative companies are addressing this latent and underserved demand. Some focus on simplicity, others produce choreographed content. The intended endgame is the same: users need to understand the services if they are to realise their full benefits. Why has this happened? Perhaps It’s because of increased regulatory pressure to operate transparently and democratise consumers’ understanding of product risks and benefits (aka. the stick) or perhaps it’s because companies are realising that transparency and improved education are appealing to consumers (aka. the carrot). An example of the latter might include companies with a specific focus on an underserved community, or with a legitimate focus on a particular societal issue (such as climate or sustainability).
To be successful, these neobanks and the like need to build the type of trust that is inherent between older consumers and more ‘traditional’ banks. The popularity and penetration of neobanks amongst younger generations suggest a generational shift has occurred.
Let’s explore this!
What do we know about financial literacy in childhood?
The importance of children understanding their way around a debit and credit card, loans and managing a budget are widely acknowledged across geographies. But a trend that’s pertinent through many developed nations is a lack of ownership over the financial education curriculum and this results in relatively poor levels of financial education. Indeed, around 22% of the 117,000 15 year-olds that took part in the OECD’s latest PISA report covering 20 countries (13 within the OECD) were found to be unable to make ‘even simple decisions on everyday spending’. The same study found that 56% of the participants had a bank account and 64% earn money from some type of work…
Some countries are performing well on the OECD’s metrics: the highest scores were recorded in Finland, Estonia, Canadian provinces, Poland and Australia. But notably absent were large parts of Western Europe, in which private sector financial literacy solutions for children are most prevalent.
Items in the assessment addressed topics such as dealing with bank accounts and debit cards, understanding interest rates on a loan, and choosing between a variety of mobile phone plans.
As we might expect, more advantaged students tended to score better on the assessment. Students who discuss money matters with their parents were also found to be more likely to score well. The study found that 38% of the variation in financial literacy is not explained by mathematics and reading skills- meaning that many features of financial education are unique to the area, hence the need for an explicit focus on financial education, whether taking place at home, in education or via financial services products.
This is interesting. It suggests, rightly or wrongly, that at present, the weight of delivering financial education rests on the individual (and their family). In other words, if individuals want to improve their financial astuteness, they must take responsibility for it. The curriculum is failing to equip our children with appropriate skills to navigate and thrive in life.
What do we know about financial literacy in adulthood?
Similar trends can be observed in the equivalent adult study, led by the OECD, published in 2020. which assessed participants’ financial knowledge, behaviour and attitudes. The average participant across the 26 participating countries scored 12.7/21 (21 being a basic level of financial literacy). Hong Kong scored the highest (14.8), while Italy scored the lowest (11.1). Only 26% of participants responded correctly to questions on simple interest and 49% scored the minimum target behaviour score, assessed on saving, planning, maintaining and control behaviours. It is therefore unsurprising that 28% of adults across the sample reported having a financial cushion of circa. 1 week while 14% didn’t know how long their cushion would support them, which is revealing in itself. 25% reported that they could support themselves for about 1 month and 18% could sustain themselves for more than 6 months.
Young people (aged 18-29) appear to have lower financial literacy and attitude scores than the rest of the sample consistently and significantly. They also tend to have lower financial knowledge scores and less prudent financial behaviour. Interestingly, respondents who used digital devices or services have consistently and significantly higher financial literacy, knowledge and behaviour and wellbeing scores. That young adults’ scores are worse suggests either that financial literacy is experiential and thus gained with life experience or that formal education is losing touch with important life skills.
Zeroing in on provision in formal education in the UK
The UK is quite typical of OECD nations in its approach to financial education, despite not participating in either the youth or adult OECD study. Content covered in the UK curriculum is divided between Citizenship and Maths:
What sounds quite comprehensive on the surface is far from it in practice. This is partially due to the informal nature of the citizenship curriculum- it isn’t formally assessed and teachers teach it alongside their specialist/other subject(s). Therefore, teachers’ incentive structures are not set up to ensure that children become financially literate- financial education remains a ‘nice-to-have’.
This is one of the reasons there is such significant charitable activity focused on addressing the shortfall- YoungMoney, a national, UK-focused charity with mailing lists of 50,000 individuals in the UK, has developed its own Financial Education Planning Framework. Its partners speak for themselves: the Citi Foundation, Disney, Visa, HSBC and Santander, to name a few. Partners support the organisation’s programmes, including Centres of Excellence (schools recognised as leading providers of financial education), MyMoneyWeek (a week-long campaign focused on getting pupils to focus on financial education), and a suite of others. But naturally, the organisation doesn’t have the necessary funding and infrastructure to deliver programmes to every school in the UK. YoungMoney is part of YoungEnterprise, the UK arm of Junior Achievement, a US-based enterprise with affiliated organisations in over 150 countries.
While a formal accreditation for financial education products doesn’t exist, YoungMoney does provide quality marks and accreditations to programmes formed by organisations wanting to share their content with schools. This is intended to make sure that the financial education received by pupils in schools reaches a good standard.
Similarly, the Financial Times has formed a number of relevant programmes to support young people with their financial education. It provides free Financial Times access to more than 3,500 schools around the world and its ‘Road to Riches’ boardgame has also proved popular, but it’s difficult to tell how effective these kind of programmes are relative to usual school teaching.
Views on provision in formal education in the UK
Zeroing in on a high-performance country: a Finland focus
Finland scored well on the OECD’s PISA assessment of financial literacy, placing joint second behind Estonia. The government takes financial education seriously and the Bank of Finland recently set the goal of becoming the most financially literate country in the world by 2030. Earlier this year, the Bank of Finland proposed a national strategy for financial literacy, focused on the importance of financial education throughout life. The strategy focuses on three life stages: childhood, adulthood and retirement.
Compared to the 56% of young people across the OECD study that had their own bank account, 89% of young Finns had access to their own bank account and 78% had their own bank or payment card. They also reported the highest level of interest in monetary matters and demonstrated a high level of readiness to make decisions about their own finances. Over 70% reported receiving financial education information from teachers, the highest of any of the participating countries. Like the UK, there was a strong relationship between financial literacy and socio-economic background, with pupils in the lowest socio-economic quartile faring poorly.
Why does Finland perform well on the rankings?
Is this an example to follow or is it irreplicable?
Finland has an unusually coherent financial services sector, united under a single financial services industry body (Finance Finland). This, in theory, simplifies the structure of responsibility for financial education- to the government, Bank of Finland and the financial services industry. However, the Bank’s proposed new strategy notes the fragmented nature of current financial education provision, citing the ‘many partners’ that have established themselves in schools: banks, Finance Finland, Economy and Youth TAT, Finnish Foundation for Share Promotion, etc.. It also notes that the strategy will need to ‘help steer the work of dozens of private and third-sector actors…currently fragmented and…duplicated’ and five ministries (Justice; Education; Economic Affairs; Finance; Social Affairs and Health).
Views on provision in formal education in Finland
An international comparison
Can individuals count on education systems to provide adequate financial education?
We have presented the considerable gaps in government and third sector provision of financial literacy. These gaps are being filled by startups, scaleups and incumbents that deliver products which enable children and their parents and young adults to boost their knowledge and improve their own financial management.
Given the digitisation of older, traditional banks and neobanks existing digitally without physical stores, content is more freely available, more easily personalised and acknowledges the declining role of ‘hard cash’.
Each company has its own approach to providing understanding (rather than education) to their customers, possible because there is no perfect solution, no perfect curriculum to follow, and no perfect endgame in terms of qualifications or measurement of skills.
Companies are free to define their own user journeys.
The start-up and scale-up context: the hive
The startup scene at the intersection of fintech and edtech is quite crowded. Banking is no longer boring! This is a good thing if consumers’ needs are better met but a bad thing if consumers are misled or bamboozled by the available options (particularly those with low levels of financial education).
It’s an enormous and varied market. Everyone needs ways of managing their money- everyone is paid, everyone spends, everyone (should!) saves…financial management skills need to be honed at all ages, hence the prominence of neobanks targeting adult customers and wealth managers intending to help customers make the most of their savings.
Such significant activity in the market highlights the scale of consumer interest in improving financial management. Activity is greatest in more developed countries, with high portions of smart phone holders and the highest levels of internet coverage. But direct comparisons between countries are often incomplete as cultural specificities and nuances bias results, both from an availability and thus educational standpoint as well as cultural perceptions of risk, financial freedoms and relative democratisation of wealth. An example would be debt aversion in Finland, outlined previously.
Educational content can rarely be considered a true point of differentiation, given that most startups focus on practical learning and have some internal learning content. All of the content can be placed on a spectrum from purely theoretical (content-focused) to entirely practical (learning by doing with no guidance). For example, some startups focus on gamification or simulation rather than using actual money, whilst others focus on simple use of debit cards and limited educational content or guidance. This is true of both products targeting children and adolescents as well as those targeting young adults and millennials.
Part of the reason for high levels of activity might be the increasingly complicated range of financial products offered by neobanks and other financial services companies. Indeed, the products seeking to provide simplicity to their customers, removing ambiguity via clean interfaces, are necessary because of the availability of such varied products (such as short-term loans, an increasing range of available insurances and varied investment platforms). These increasingly complicated products are increasingly high stakes, given evolving attitudes to taking on debt for everything from clothes to student loans to cars.
The other reason might be that there are relatively few points of true, irreplicable differentiation- colourful debit cards have quickly become the norm, for example, as have round-ups on payments to boost saving. These innovations are effective in securing initial customer acquisition, but few are patentable. It’s increasingly easy to switch between financial services providers- which is both a boon and a bane for startups seeking to differentiate… The focus, therefore, must be doing it well and building a compelling brand narrative.
Views from a founder and investor
The market map
Target markets by age and geography
Categorising the market
Four business models
Avenues of differentiation
Many entrepreneurs are seizing the huge opportunities at the intersection of fintech and edtech to create successful companies. Given the breadth of the fintech / edtech intersection, this analysis is by its nature, incomplete, but it’s all inter-related- when considering the role of financial education within financial services, it makes sense to consider it as a whole. The companies included in this analysis span simple daily spending and savings habits for young children, to sophisticated investment platforms for adults. What’s clear is that state financial education provision only goes so far, focusing on theoretical application rather than experiential learning.
Companies need consumers capable of understanding and making the most of their products. As the breadth of available products broadens and consumers have increasing choice over how they manage their finances, companies play an important role in helping consumers understand the risks and opportunities associated with their offering and make decisions that best match their preferences. Hence, it is increasingly common for companies to develop their own content for users, most of which revolves closely around how to use specific products, rather than purely for its education value.
Our top four takeaways on the financial literacy competitive landscape are: