Financial Wellness as a Profit Center for Financial Institutions

So many financial institutions list "financial literacy" or customer "financial wellness" as one of their higher purposes. Which makes immeasurable sense given how defined benefit pension plans are now the exception and households are left to fend for themselves when it comes to their own financial wellness. 

And by objective measures they are not doing too well. According to a 2023 Payroll.org study, 78 percent of Americans live paycheck to paycheck, meaning if they miss a paycheck they would have trouble paying their bills.  That is up 6 percent from the prior year. 

Further, in 2022, only about 46% of households reported any savings in retirement accounts. Twenty-six percent had saved more than $100,000, and 9% had more than $500,000. This was why my firm did a recent This Month in Banking podcast with our friends from CentSai as our guests on how promoting financial literacy can help financial institutions perform better. You read that right. 

The need for someone, anyone to help Americans become first financially sound and then financially free was driven home by Anne Shutt of Midwestern Securities, presenting Creating a Financial Oasis at a recent banking conference I attended. Anne said that only 14 percent of respondents of a recent survey said their financial institution helped them with their financial wellness. 

I contend that financial institutions should serve a higher purpose other than maximizing profit to benefit shareholders. But in serving your communities, employees, customers and shareholders, profit should be your yardstick in a stakeholder driven, higher purpose financial institution. And right now, financial literacy is executed for the benefit of one, maybe two constituencies, at the expense of the others. To create alignment, I propose a different path.

Make financial wellness a profit center. Like a branch. Assign personnel to it. Like a branch. Instead of branch manager, assistant branch manager, and three universal bankers, staff with two financial coaches, and a financial wellness assistant. 

When we onboard new customers, as part of our Know Your Customer, determine their financial well-being. Ask if they would like, as part of being a customer of the bank and for a small quarterly fee (perhaps... might waive this as the Financial Wellness Center (FWC) builds its customer base) they can opt-in to improve their financial well-being. If they opt yes, then their account, balances, spread, fees are part of the balances and revenue streams of the FWC. 

In addition, we can market to existing customers that struggle financially based on observable criteria, human judgment, or generative AI. At first, this center will bleed red ink. So do new branches. Even some mature branches that banks refuse to close. But red ink should not be the goal, as many altruistic, CRA-driven community initiatives are.

The challenge is that those most in need of the FWC will likely carry low balances and are in the Cash Flow & Basic Needs or the Financial Safety rungs in the chart below, presented by Anne. Low balances per account have a strong correlation to low profits, as spread represents so much of profit in community financial institutions. Revenues are generally driven by balances, where expenses are driven by number of accounts. Not a great mix for the FWC.

But we don't have a physical facility, like a branch. Although the FWC might have to absorb or incur some sort of internal transfer payment to branches servicing their accounts. That said, there would be less expenses than a branch that would have more employees and physical plant than the FWC. The FWC would likely have more fees, as lower average balances and the need for a financial coach probably equates to more insufficient funds charges, etc. This has consistently been the case when we measure the profitability of higher versus lower average balance accounts in our profitability outsourcing service. And there would be those coaching fees. 

In addition, I find it plausible, even likely that a bank with an FWC designed to improve their customers' financial well-being will include some account ornamentation, such as credit score monitoring, lower my bills services, etc. that the bank can charge a fee for service. 

I don't think the FWC could achieve the same level of profit as some of the bank's larger branches, commercial lending center(s), or mortgage department (during good times). The FWC could strive to achieve some pre-tax profit number as a percent of average deposits of, say, 50 basis points for a bank that strives to achieve over a one percent ROA. In addition to that accountability metric, the FWC could ensure all of their clients are on the bank's personal financial management tool, and gauge improvements in customers' net worth as a sign of success. Lastly, the FWC could use improvement in customers' credit score as objective evidence of success. 

And when customers elevate to Accumulating Wealth or higher in the chart above, they can graduate from the FWC with a natural referral to our wealth group. Because right now, wealth groups are not seeking many customers at or below the Accumulating Wealth level. They just can't make any money doing it. So we let customers seek other alternatives and hope we win them back when they have $500,000 or more in investible or bankable balances.

Financial Wellness Centers can work. But we have to elevate beyond altruism and CRA and migrate to profit to make it a viable line of business to our financial institution.

~ Jeff