Why is financial literacy important?
Financial knowledge is important for everyone, no matter what their level of income or where they live. An understanding of finance means people can make informed decisions about how they spend and save their money, and this can have a huge impact on their standard of living. A lack of financial knowledge means people can more easily get into debt and this may lead to situations such as bankruptcy. Being declared bankrupt can have major repercussions on someone’s life, including the effect on their credit rating, which could limit their ability to get themselves back on track financially.
Financial literacy is also important because of the growing digitisation of financial products and the move towards customers wanting to self-serve through apps and online services. While this is a positive for organizations in that they don’t need to spend as much on sales representatives or support, it does put the onus on customers to make the most appropriate financial decisions for their needs.
Not making appropriate financial decisions can soon lead to a situation where payments start to become overdue. One missed payment could soon become the tip of a financial iceberg for some customers. Being behind with one organization could easily tip over into being behind with several others and a vicious spiral of unpaid debts can result.
A University of Melbourne study found that while there’s no straightforward relationship between low financial literacy and severity of financial hardship, lower literacy levels may reduce a customer’s ability to avoid some of the more serious consequences of default, particularly if it’s coupled with overconfidence about an ability to manage their spending.
Those who are financially savvy are more likely to make smarter financial decisions and are therefore less likely to default on loans or not pay their debts.
Why Organizations' Should Care About Their Customers' Financial Fitness
Customers deal with many types of debt daily, be it mortgages, student or personal loans, or credit card and buy now, pay later repayments. Having the financial knowledge to deal with these types of debts is important as unpaid or overdue debts leads to financial stress. Long-term financial stress is increasingly recognized around the world for its impact on happiness and productivity. A report that examined the impact of financial stress found money worries affected mental and physical health, as well as productivity levels and social engagement.
An increase in levels of financial literacy means customers can make more informed decisions around their spending and repayments. Understanding that being in debt can affect factors such as their credit rating can have a major influence on ensuring debts are paid.
Customers who feel they are looked after by their organizations are more loyal, which is important at a time when it’s so easy to switch between providers.
No matter where organizations are based in the world, they want loyal customers; they want them to remain affiliated with their brand because those that do, return to make additional purchases or continue to use their financial products or services. Therefore, helping customers become more financially fit is in an organization’s best interests – not only from a socially responsible point of view, but also a business one.
Customers who feel they are looked after by their organizations are more loyal, which is important at a time when it’s so easy to switch between providers. More loyal customers are a key way for businesses to secure long-term and stable revenue. Concepts such as “personalization” are being used to deliver relevant product or service information, which can help develop deeper relationships with customers that result in greater trust.
Developing financial literacy skills
But organizations also want to help their customers avoid getting into debt in the first place and one way to do this is to help them improve their financial literacy skills. Educational programs or messages that focus on financial knowledge are some of the more common approaches that can help achieve this.
Customers who have poor financial literacy are said to spend more, especially on credit and end up paying more in fees and fines. This results in lower levels of overall wealth. Good financial education helps with making better financial decisions and better choices, which can improve customers’ ability to save and invest and lead to enhanced financial well-being.
Good financial literacy also benefits organizations as their customers are more likely to pay on time, are less likely to default on their payments or enter into bankruptcy. Not only does this reduce the burden on their customer service departments but will improve their bottom line as more of their debts are recovered.
How going digital deepens relationships
Another way organizations can help improve their customers’ financial fitness is through the digital tools they use. Customers these days increasingly operate in digital environments and the way they use and handle money has changed dramatically. Organizations that are set up to communicate with their customers in the way they want, are more likely to develop stronger and more long-term relationships with them.
In every aspect of a customer’s life, including the physical and emotional elements of it, achieving fitness is considered beneficial.
This use of digital infrastructure also needs to be extended to an organization’s debt-collection operations. If they know their customers prefer to self-serve when they deal with them, then it’s likely they prefer to deal with debt collectors in the same way. This is where digital debt collection agencies, such as InDebted, come into their own.
InDebted chief strategy officer Lachlan Heussler believes a debt collection agency needs to be very much involved in helping businesses’ customers become financially fit. “In every aspect of a customer’s life, including the physical and emotional elements of it, achieving fitness is considered beneficial,” he says. “The same applies to being financially fit.”
Heussler says while people can fall behind on some of their payment obligations, InDebted’s goal is to provide the tools and processes for them to better understand and resolve their situation.
“This also helps our businesses – the organizations who have customers with late payments – to not only improve their bottom line but to also build stronger relationships with them.”
How Digitial Debt Collection Builds Financial Fitness
As more customers prefer to deal with organizations that use digital channels, it makes sense that when it comes to using a debt collection agency, it should be one that is also digital. Digital debt collection agencies contact businesses’ customers about their overdue debts through digital channels, such as email, SMS or WhatsApp. The idea being that the customers then respond and make payments digitally as well and this eliminates any need to talk to a person unless they want to, in turn reducing the risk of human errors such as being given the wrong information.
Opportunity to educate customers
There is a key role for digital debt collection agencies when it comes to helping businesses improve the financial fitness of their customers. It’s important to remember that financial stress is a worldwide issue that affects all organizations if handled incorrectly. So, helping customers to better understand how to manage their finances benefits both the customer and the organization. InDebted realizes that when debts are referred to it for collection, it’s an opportunity to help educate their businesses’ customers about their finances.
“The majority of our businesses’ customers self-serve,” InDebted CEO Josh Foreman says. “And because we have a digital business, those customers are better able to control how they deal with their liabilities. Our philosophy when it comes to the collections business is less about collecting and more about developing financial fitness for those customers.”
Unfortunately, the recent pandemic means more customers are likely to fall behind in their debt payments, Foreman says. “This is why the more traditional method of debt collecting doesn’t work; having a debt collector on the phone chasing down debts and harassing people to pay only exacerbates the situation.”
InDebted offers payment plans to resolve an overdue debt and each payment made is viewed as another step towards financial fitness.
He adds InDebted’s platform offers flexibility around payment options, which assists with helping achieve financial fitness. “Having flexibility gives customers time to reassess their situation and plan for how they want to act based on what is the best solution for their needs,” he says.
Providing payment solutions increases confidence
While it is preferable to pay an overdue debt off in full, this isn’t always possible. “Our customer service team works with our businesses’ customers to help them find solutions to their payment issues,” Foreman says. “Once the financial goal of paying a debt is achieved, then they’re able to move towards their next goal, which may be to boost their savings or start an investment portfolio.”
This process of delivering positive customer experiences that improve their financial fitness results in more loyal customers and an improved bottom line to businesses as customers better manage their finances.
InDebted’s digital platform also means customers don’t need to spend as much time and effort resolving their accounts. “Our businesses ultimately benefit because their customers are less stressed and their financial fitness is improved. We believe debt collection is not about cost savings but about implementing efficiencies that allow our businesses to recover more – and only a digital debt collection such as ours has the technology to be able to deliver this.”
Benefits of a Digital Approach
The COVID-19 pandemic has increased the amount of global debt by $US24 trillion over the past year. This puts the debt level at a record $US281 trillion while the worldwide debt-to-GDP ratio stands at 355%.
Borrowing levels are expected to continue to be high as countries around the world move into recovery mode. Household debt levels are also higher as customers borrow more to cope in times of reduced work or redundancies. It’s never been more important for organizations to prioritize the welfare of their customers who may be struggling with their payments. Increasingly, this help comes through providing more options and support around debts.
Digital debt collection agencies are the way of the future thanks to their digital-first approach, which puts customers first. Taking a digital approach not only improves customers’ financial fitness but also benefits organizations through:
- Helping customers stay loyal
- Higher recovery rates which boost commercial outcomes
- Mitigating compliance risks