Arro’s Commitment to Financial Literacy
How can companies and innovators provide real pathways for people to achieve their financial goals?
Author: Gabe Kahn
April 13, 2023|Insight
At Arro, we’re committed to finding a way to give our customers access to credit while also supporting them toward a better financial future. Many people believe that financial education is the foundation that makes achieving this goal possible, but finding an effective way to teach personal finance is a challenge that policymakers, educators, and parents continue to face.
This April will mark 19 years since the United States Senate passed Resolution 316 by unanimous consent, designating April 2004 the first Financial Literacy Month. Since then, we’ve experienced the largest economic crisis in most Americans’ lifetimes and have seen total credit card balances increase from $700 billion in 2004 to nearly a trillion dollars today.
This is not to say that “Financial Literacy Month” has been a failure – in fact, over this past year more than 30 US state legislatures have debated bills offering or requiring a financial literacy class before students graduate high school, with pushes coming from both major political parties – but rather to say that many of the problems that drove the push for increased financial literacy aren’t going away. And while few people would argue that financial literacy is a cure-all for all financial problems or, on the other side, that it is irrelevant, a lot of the research done on programs’ effectiveness is inconclusive.
What is financial education?
Financial education is designed to give people the information they need to be able to make good financial decisions. This is commonly referred to as ‘financial literacy’ or the ability to use and understand key financial products and skills such as budgeting, saving, and debt management. Financial education could refer to formal classes, taught through schools, coaches, and continuing education programs, or to less formal resources such as blogs or social media. All of these resources are connected in their goal of helping people use financial products and apply skills more effectively to achieve their goals and navigate challenges.
How can financial education help me?
The negative experiences that people have endured around navigating their finances shape the narrative around financial literacy.In our research, we spoke with one person who got his first credit card because his friend suggested it, and then promptly racked up $2,000 on unnecessary clothes and shoes that took him years to pay back. Another person we spoke with avoided getting any type of credit because she saw her parents go through a bad experience. However, when she desperately needed a new car, she was denied an auto loan because she didn’t have a credit score. These stories are common, but because personal finance is a highly sensitive topic, most people don’t feel comfortable discussing it, even with their closest friends and family.
Could financial education have improved these situations? Even if everyone received standard financial education, unfortunately, measuring the efficacy of programs isn’t straightforward. Especially in schools, where running tests is often either impractical or unethical, it is easier to understand the proliferation of programs than their effectiveness.
The evolution of financial education
Although it has been nearly 20 years since the first financial literacy month, adoption of financial literacy classes for students is a more recent trend. Today, only seven states require financial literacy education in schools and only an estimated 30% of public school students have access to courses. Parallels can be drawn to the adoption of broader health education in high schools over time, which is now required in some form by 39 states and available to most students. Studies have shown that comprehensive programs are effective in driving successful health outcomes – results that may be able to be replicated with financial education.
Even as financial education programs become more widespread in schools, however, there are still lingering problems. Firstly, this ignores the millions of people who have already finished high school. Secondly, studies evaluating financial literacy programs for adults have been successful teaching some topics, such as encouraging saving for retirement and planning, but have struggled to drive positive outcomes in areas such as debt management and budgeting. Many financial challenges a person may face across their adult life are nearly impossible to prepare for and teach in a single class. Instead, many Americans rely on their credit card companies or their friends and family to get advice about topics like using a credit card or investing.
I want to learn more and become more financially literate. Where do I begin?
People want to improve their finances and financial security. In their survey of 2023 New Year’s resolutions, Forbes found that only goals about improving physical and mental health ranked higher than improving finances. And there is plenty of high quality information available online to help people improve their financial literacy. Large banks such as Bank of America, Capital One, and Chase all link to learning resources on the front page of their websites and sites such as NerdWallet, Credit Karma, Bankrate offer a myriad of resources and blogs for people with pressing financial questions. So what stops people from using these resources to answer their financial questions and achieve their goals? Incentives and Timing.
People respond to incentives. A sale offered by a department store helps encourage people to visit. Lower insurance premiums encourage people to take defensive driving courses. Lottery drawings helped to encourage people to get the COVID-19 vaccine. For some people, learning can be its own incentive, but this often isn’t powerful enough to encourage people to make time in their stressful and busy lives. The most successful programs, whether for-profit or not, provide an additional incentive for people to engage whether by providing a financial reward or making it easier for someone to accomplish their goals. Programs like savings matching and making 401(k)s opt-out instead of opt-in have helped people to build emergency and retirement savings for this reason.
Secondly, Financial Literacy is only helpful to the extent that it is accessible in the moment where it is needed. This can be accomplished by providing people with easy to remember rules or by integrating the education directly within a product. For example, it is easy to find resources on the internet about how to minimize credit card interest charges, but this information needs to be easily accessible at two key points in time: 1) when someone is making their monthly budget and 2) when they are paying off their balance. A credit card attempting to encourage better financial habits needs to provide this information to customers at these key points in time and provide them with a strong incentive to engage with it.
Arro’s mission is to help customers succeed
Arro is designed to integrate financial education by providing the right timing and incentives to help customers succeed. We are the only credit card company that uses financial literacy as the pathway to a higher credit line and a lower interest rate. Our learning platform is integrated directly with the credit card product and mobile app. This is done to help customers effectively use a credit card, budget, and save before they have access to a high credit line to decrease their risk of accumulating debt.
Customers also have a strong incentive to engage with Arro’s financial literacy content. Most credit card companies use black box models to determine whether customers are eligible for increased credit lines or decreased interest rates. This often leads to bad outcomes where people either don’t know what they need to do to achieve their goals or their credit line is raised more quickly and to a higher amount than they are comfortable managing. Instead, Arro’s learning program allows customers to determine their own pathway to a higher credit line and lower interest rate through their own actions such as taking financial education activities, making payments, or setting a budget. This both provides a strong incentive to engage with important literacy topics and allows customers to take charge of increasing their credit line and decreasing their interest rate.
Like most types of education, financial education requires both an effective teacher and an engaged learner. Most credit card companies only provide lip service to financial education while they happily collect interest charges and late fees from their customers, while credit card consumers often don’t have a strong incentive to learn until they are already encountering challenges. Arro believes that financial education can be a partnership between companies and customers that can help people raise their credit scores, pay down debt, and achieve their financial goals. By combining effective content with the right incentives and giving people a chance, financial education can make a meaningful difference.