In the midst of a national conversation about the secrets of the financial sector, Credi founder Tim Dean says new US research shows there are lessons to be learnt for Australian fintechs.
Since being established in December 2017, the Banking Royal Commission has dominated the headlines, revealing the often-outrageous tactics being used by banks and their subsidiaries, including life insurers and superannuation funds.
Then, only last month, the Federal Government expanded their investigatory reach, with the Senate Standing Committee on Economics being charged with investigating ‘credit and financial services targeted at Australians at risk of financial hardship.’
The inquiry’s terms of reference make it clear the examination is concerned with the likes of Afterpay, as well as other ‘buy now, pay later’ providers and payday lenders.
Now, adding to the debate over how best to regulate those in charge of our hard-earned cash is new research from the US, which suggests millennials who are jumping on board with fintechs are missing key financial skills and making worse decisions.
An April study from George Washington University’s Global Financial Literacy Excellence Centre found mobile-payment using millennials are 14 per cent more likely to overdraw their checking account occasionally, 13 per cent more likely to be charged credit card fees, and 27 per cent more likely to have used payday loans in the last five years, when compared to their non-mobile-payment using peers.
Another study, released by the Centre in September, showed at least 80 per cent of US millennials (those aged between 18 and 37) use fintech apps in some form, but were 6 per cent less likely to answer financial literacy questions correctly when compared to the general population.
Founder of relationship-based lending app Credi, Tim Dean, told Startup News he thinks we share these aspects of the fintech market with our mates across the Pacific, as evidenced by what the Royal Commission has uncovered.
“[These findings] don’t surprise me at all, and I think they would be echoed in Australia,” he said.
“I think it’s a big problem. I think the basics of education aren’t there, and the young and the old are being fed this dumbed down information, and the net result of that is the government is having to step in and almost treat the borrowers as needing increasing protection from lenders, and that’s adding more complexity.”
He said the disconnect apps can create between numbers on a screen and a person’s assets could be another factor influencing the results.
“The gamification of the process obviously drives usage and take up, but I think people are often unaware and, I’d hazard a guess, would be quite surprised at the detail of the fees and charges that exist in running the app, and what it actually means to them,” he said.
“It’s plug and play but without basic understanding.”
Lessons for fintechs
The WA Fintech Australia representative said he doesn’t believe these results will impact investment in the sector, but do serve as an important reminder for fintechs to help customers understand what they’re signing up for.
“I think these are lessons to be learned and pointers for operators to take seriously financial education, but I don’t think there will necessarily be a lack of confidence” he said.
“If you educate your customer and they make a good move and they’re better users of credit, that’s a good thing.
“Education, if put through correctly, has got a massive follow-through into better users of credit, which would directly contribute towards some lower interest costs because defaulting loans get fed back in the system for higher loan costs for everyone.”
Learning from experience
Since founding Credi in 2015, Tim said he’s seen first-hand why financial literacy is so important.
“The simple process of formalising a loan agreement between two parties and managing it in the cloud actually has turned the borrower-lender relationship into a better relationship, [one which is] more likely to be successful, more likely to be repeated again,” he said.
“Through the whole process, users are educated as to the consequences of the actions.
“[Parents] are teaching their kids to be better users of credit in a sort of benign environment, so when they go out and get, maybe a car loan and get a mortgage … they have already been schooled in simple things, such as what does a contract mean, what’s a loan agreement, what’s a repayment schedule.”
What’s the solution?
As for what can be done, Tim said while he’s waiting to hear the results of the Senate Inquiry, which are due in February 2019, he would like to see a greater emphasis on financial education in schools.
“If we’re living in a society that is to some extent defined by credit and access to credit, then financial education should be a mandatory education piece at schools so kids come out of school having those basics in place,” he said.
“I can’t comment as to what the curricula-based elements are, but I think that would be the starting off point.”
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