Can Technology Innovation Improve Financial Capability?

Content sponsored by PwC

This is part three of our four-part technology and finance discussion with Wharton International Management professor Mauro Guillén and PwC Partner Elizabeth Diep. Here, we take a look at the impact on financial capability.

Welcome to the PwC-KWHS Podcast Series for High School Educators on Business & Financial Responsibility.

I’m Diana Drake, managing editor of Knowledge@Wharton High School, and today we are discussing the intersection of technology and finance. Technology is dramatically changing the way consumers handle personal financial transactions, everything from online and mobile banking and virtual wallets to bar code-based mobile payments and cryptocurrencies. We are here to explore what that changing landscape looks like, and what the technological shift means for the future of money management and financial capability. Also, how can educators prepare students to use these high-tech tools to manage their finances responsibly and successfully?

Two experts from academia and business will be helping us to explore this critical intersection of technology and personal finance. Mauro Guillén is director of the Wharton School’s Joseph H. Lauder Institute, a research and teaching program on management and international relations at the University of Pennsylvania, and he is also a professor of international management.

Elizabeth Diep is a partner with PwC’s Asset Management Practice in New York City. Liz is a strong supporter of the firm’s “Earn Your Future” program, a $190-million commitment to improve the financial competency of youth and educators.

Thank you both for agreeing to share your knowledge and insights about technology and personal finance. During our discussion, we will also be addressing questions sent in from high school educators.

Below is an edited transcript of the conversation.

Knowledge@Wharton High School: We are taping this podcast in April, which also happens to be Financial Capability Month. I think it’s a good idea to explore some broader questions about the impact of technology on people’s ability to process economic information and make informed decisions about their money. So, let’s dive deeper into this question of technology versus human touch. Think the bank teller handshake versus the computer keyboard. How much of a role does human interaction play in influencing financial behavior? And what role does the physical bank branch still play in educating young consumers?

Elizabeth Diep: I think this is one of those questions that, unfortunately, the answer comes down to, ‘it depends.’ And it very much depends on what generation we’re referring to and what transactions we’re looking at. The reality is that banks struggle and are balancing automation with that human touch. We’ve seen some data where 60% of great experiences with a bank are still attributable to great staff interactions at the bank branches themselves.

We often hear a viewpoint that traditional bank branches are going to disappear given all of that innovation that we’re seeing in banking technology. Yet, despite the emergence of all that new technology and competition and models, … the research that we’ve conducted still shows that traditional banks have a bright future and that the fundamental concept of this trusted institution as the store value and a source of finance and of facilitative transactions is not about to change. But it certainly will evolve.

Much of the landscape will change significantly. [Banks need] a model that responds to these consumer expectations. It’s coming through technology and demographics — the shifting economics and how young people are really impacting and using technology today.

So, banks need to choose what posture to adopt against this change — whether to be a shaper of the future, to change with technology or manage defensively, putting off this change. But the reality is that staying the same is not really an option. I’ll tell you that the most affluent and educated segment of society that is nearing or in retirement right now with many assets and complex financial needs values that banking experience. This segment wants the specialized treatment; the human interaction and some digital support. They value much more that human one-on-one branch interaction that we’ve seen traditionally.

When we look at the younger segment, with many in college or even in high schools, [who tend to be] lower earning [and focused on] building a future, they’re looking for efficiency — whatever will get them the answer faster with the shortest waiting time, which is often mobile access. With limited assets, this group of individuals is looking for how quickly can I get the answers that I need? And [they] are looking for the cheapest and the best rates that you can get from banking technology.

To better understand these consumer preferences, [whether] online banking or more of a face-to-face interaction, and how they affect customers’ engagements with their banks, we looked at some research that was done by Gallup. They conducted a nationwide retail banking study that explored what channels customers prefer to use and what were those transactions that customers look to either go online for or go into a branch.

What the analysts suggest is that banks should not try to push customers [away] from doing what they feel most comfortable with. If an individual feels comfortable opening or closing a bank account in a physical branch, don’t push some of those transactions online. In reality, what we’ve found is that three out of four customers prefer interacting in person when it comes to opening or closing an account or opening a bank loan of some sort.

But when it comes to paying bills, receiving statements, mail [and other activities that are similar,] online interaction is the preferred method. So … whether [a bank should focus on providing] a personal, physical experience or an online experience very much depends on what generation we’re thinking about and what transactions we’re talking about and how comfortable each one of those groups is with this digital technology.

KWHS: How far do you feel technology can take us in terms of expanding the financial capability of consumers?

Diep: The reality is that there’s still a significant gap between the number of people who have physical access to financial services and the numbers that actually use them. Existing technologies could make financial services available any time, any place and at a lower price than ever before. This available technology is opening doors for millions of people who were previously excluded, either because of location or quite honestly, pricing.

So, because of this, there’s never been a better time to be a financial consumer in my opinion. I think that the advances in technology have allowed individual consumers to access many of the same tools that previously were only available to professionals. Consumers today with a brokerage account and a computer can create an incredible portfolio with research ideas and can discuss and share ideas openly with the masses — and we’re doing all this for free.

The proliferation of financial information and advice is [there] to such a degree that anyone with an interest can obtain an understanding of financial tools, of options that you have right from your own computer. There are so many periodicals now online — like Money Magazine … we see the millennials that we work with access articles online and for free.

So, anyone right now with a computer can put their ideas into the Internet and put their money to work. In terms of making decisions, investors now have access to much more information and a network of available professionals than ever before. If consumers are willing to embrace these enhancements in technology, they will find that they’re now able to expand their financial capabilities a great deal and get access to financial data and advice that were previously only available to a pretty exclusive group.

KWHS: Socioeconomic challenges accompany the increased use of financial technologies. For instance, children from wealthy families are more likely to have access to computers and other high-tech tools. Laverne Dixon, a teacher in Pennsylvania asks, how can we ensure broader access to technology for self-banking and other services?

Mauro Guillén: This is a very important issue and I’d like to answer the question that Laverne has posed in two steps. The first step is, yes, when you compare different kinds of people within a given country, let’s say here in the United States, it is undeniably true that some people have access to all of the latest technologies, all of the latest gadgets. They have a better Internet connection and so on and so forth. Smartphone use in the United States is not universal. Although a lot of people have a phone, we still have a significant proportion of the population using the old-fashioned phones as opposed to smartphones. So, their functionality is a little bit limited.

The only thing that can be done, obviously, is to approach the problem from two perspectives. One is for regulators to continue putting a lot of pressure on the providers of services, meaning telecommunications firms and Internet service providers so that they compete in price. It’s important to make sure that with mergers, for example, whatever decisions these companies make actually in the end benefit the consumer through lower prices.

And the other is, I think, to help people understand the use of this technology. So, education is also very important. I think high school teachers can play a very important role in this. But there’s another aspect [to this] … — when you compare poor countries and rich countries such as the United States, you find something quite astonishing, which is that the use of mobile phones, for instance, for making payments is so much more widespread in poor countries than in the United States.

The example that everybody mentions is Kenya, where about half of the population uses the phone to make payments. That’s a much higher proportion than here in the United States. But the reason for that is not that the Kenyans are just better at technology. The reason for that is that in Kenya there wasn’t a traditional banking sector to begin with — only 5% or 7% of the population had a bank account. When mobile technology came along about seven or eight years ago, then people didn’t have to abandon their old habits. They were just acquiring a completely new way of handling their money, whereas before they would just physically move the cash as opposed to use the banking system.

The reason why sometimes we see this leapfrogging of less developed markets actually surging ahead in terms of use of these technologies is because there are no legacy costs. There are no habits that need to be changed. … The picture of inequality is very important to consider but sometimes you get surprised, and sometimes the poor are actually early adopters of the new technology. The reason for that is that they didn’t have any access to any kind of technology to begin with … and so it’s easier for them to adopt this new mobile technology that has become available over the last eight years or so.

Conversation Starters

Do you prefer visiting your bank branch or doing all your banking from your mobile phone or computer? Why or why not? How about your parents? Your teachers? Interview them and share ideas with the group about how generation influences the use of and ease with financial technology.

Why does Professor Mauro Guillén bring up Kenya in this podcast? What is the point that he is trying to make regarding legacy costs? Discuss what that means in terms of adoption in the U.S. of financial technology. What are the implications for consumers, financial institutions and even technology innovators?

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