Daria Sheehan and Joshua Sledge

NexThought Monday – Financial Capability: Where Do We Go From Here?

As a concept, financial capability has come a long way in the United States over the past decade. Many nonprofit organizations and financial services providers have recognized a need to go deeper than financial education to equip people with the products, guidance and support to help them turn knowledge into behavior.

Our organizations – the Citi Foundation and the Center for Financial Services Innovation – partnered in 2009 to better understand what it means to be financially capable and how a greater focus on behavior could potentially move the needle on Americans’ financial health. We conducted research on the state of the field and became convinced that pairing relevant and timely advice with high-quality financial products stood at the core of effective financial capability strategies. To test our theory, we teamed with a collaborative of funders to launch the Financial Capability Innovation Fund. Over the past five years, this fund has invested nearly $5 million in innovative organizations with new ideas on how to impact consumer behavior for the better. These investments are beginning to pay off – grantee projects have demonstrated the ability to increase savings, build credit scores and keep clients on track toward financial goals.

Our work has not been done in a vacuum. Instead, we have seen a broader shift in focus across the nonprofit and philanthropic space as organizations have adapted their work to more directly affect positive change in people’s financial behavior. Others have joined us in driving innovation in the space and taking a measured approach to figuring out what works. Collectively, the financial capability field has arrived at a key point in its evolution. The concept has reached widespread adoption and our attempts at innovation are yielding new and effective models for helping people better manage their money. With so much accomplished in the recent past, what will it take to continue the momentum for the future?

To date, the story of the financial capability field has been about transformation – shifting the focus from greater financial knowledge to better financial behavior. With a new direction being set, we believe the next challenge is scaling effective financial capability strategies to size our efforts to the need we see across the country. According to recent CFSI research, 57 percent of American households are struggling financially. Many have trouble managing their bills, have little in the way of savings for an emergency, and find it difficult to pursue long-term financial goals like saving for retirement. While other factors – particularly income – certainly play a role, we know that people can improve their financial health when they have access to safe financial products and the guidance they need to use them effectively. The trick is figuring out how to deliver that combination to the millions of households that need it.

Technology can help. We first became interested in the role of technology when we launched the Financial Capability Innovation Fund. Specifically, utilizing mobile and online platforms creates an opportunity to reach people more frequently and closer to the points at which they make financial decisions. Several fund projects have shown us that this approach has legs. Clarifi, a credit counseling agency based in Philadelphia, found that sending timely and task-oriented text messages helped clients stay on track with debt reduction. PiggyMojo, a financial technology company, gave its users the ability to capitalize on “impulse savings” moments by sending texts to make contributions towards savings goals when they made the decision not to buy something. These strategies are not only effective – they’re also scalable with the potential to cost-effectively serve a large number of people.

Technology can also help to create efficiencies in the very practical process of administering a program at scale. For any one program to grow, organizations have to manage staff time, training, process management, client acquisition, evaluation and quality assurance. Growing a project through partnerships adds another layer of complexity. Managing it all requires a tremendous amount of coordination, funding and hard work which can limit the pace and prospect of growth. Tech platforms focused on operations can help to reduce the administrative burden and increase the return on investment of scale efforts. For example, Mission Asset Fund, a community organization based in San Francisco, recently developed an online platform and website that allows other nonprofits to offer its successful Lending Circles program. With the help of the platform, the program is now being offered by over 30 partner organizations across the United States.

The emergence of the financial capability concept over the past decade has been a step in the right direction with great promise for American households. But it is only one step in a longer journey toward empowering consumers to better their financial health. Growing the presence of financial capability resources will be critical to keeping the momentum. It’s a big challenge for the future and there’s certainly a role for everyone to play.

Want to learn more? Hear from industry experts in this video on the Future of Financial Capability.

Daria Sheehan is a Senior Program Officer at the Citi Foundation.

Joshua Sledge is a Manager at the Center for Financial Services Innovation.

The Financial Capability Innovation Fund is supported by a collaborative of funders led by the Citi Foundation and also including Capital One Foundation, NYSE Euronext Foundation, Charles Schwab Bank, Charles Schwab Foundation, and Experian.