Why banks should avoid personal finance tools that ‘shame’ customers

Deepening customer relationships has become not only a central focus for 2024 but a significant priority to remain relevant and competitive amid a constantly evolving financial services landscape.

Customer loyalty is a coveted asset and consumers have more banking options today than ever before.

So, how do consumers choose who to bank with? And how do banks cut through the noise to gain their attention?

Here’s a hint: it’s not digital banking. At least not singularly.

Yes, more than 90% of consumers view digital banking as an important factor in their decision, but this is table stakes. The key is differentiating the experience based on what consumers need and want, which is financial guidance. This is also where missteps might be made.

PFMs are popular… and are killing the customer experience

Nearly every report shows that consumers are still anxious about the overall economy. In fact, a December report reveals that a whopping 71% of Americans believe inflation will continue to increase in the next few months.

Consequently, personal finances and health remain the #1 concern among individuals. Banks and fintechs know this, which has led to a sharp increase in Personal Financial Management (PFM) tools and budgeting apps on the market.

However, these tools offer little actionable guidance. Even worse, they may negatively impact the customer experience through financial “shaming.” This happens when updates are sent to the user on what they should have done versus championing and encouraging healthy behaviors. This could also answer why many of these tools have demonstrated little ROI for financial institutions. They’re simply not meeting consumers’ needs.

The problem is that most banks don’t even realize that these tools shame customers. One way to think about it is to compare personal finance apps to a typical fitness app. To motivate users, a fitness app wouldn’t push notifications summarizing how many cheeseburgers they ate, right? Instead, it sends encouraging updates on how many steps they need to take to meet their weekly or monthly goal. This approach is rooted in psychology and has proven to keep users engaged.

This begs another question – why do banks keep sending summaries of poor financial behavior, like how much money a customer spent that should have gone to their savings or retirement accounts? This “you should have done that instead” message can easily be perceived as financial shaming.

TikTok ‘FinFluencers’ are beating out bank PFMs

As PFMs prove to stifle the customer experience, consumers are increasingly turning to alternative sources for guidance, including TikTok and other social media avenues. This is especially the case for younger individuals. According to a survey by WallStreetZen, nearly half of Gen Z relies on TikTok, and another 27% rely on YouTube, for financial advice.

Specifically, they’re looking for guidance on savings and budgeting. According to a 2023 study, more than half of Gen Z (52%) also indicated they are very worried about not having enough money — the highest increase among their critical concerns since 2021.

Not surprisingly, many of these self-proclaimed “FinFluencers” are likely giving unsound advice, or at least advice mismatched to the viewer’s needs.

At the same time, banks may be missing out on opportunities to engage with customers and provide guidance encouraging healthy habits.

Personalized financial guidance eliminates financial ‘shaming’

To counter misguidance from popular social media sites while also avoiding indirect shaming, banks must consider a new approach – Personalized Financial Guidance (PFG).

Rather than shaming users, PFG functions like a financial coach in your back pocket, motivating users to make healthy financial decisions without intimidation. Instead of advising on what customers should do by presenting a summary of past activity, banks can encourage healthy habits by showing customers appropriate next steps. In other words, forget about the past, because you can’t change it, and instead focus on the future, which you have control over.

Additionally, reports argue that most consumers are “financially illiterate.” Even financial guru Suze Orman said she believes it’s as high as 95% of Americans. And yes, perhaps there is a limited understanding of things like Roth IRAs versus 401(k)s, but consumers are well aware they should be saving more and making better financial decisions; they don’t need you to tell them that.

By leveraging gamification, banks can reward users for positive behavior or when goals are met. For example, rather than intimidating users by reporting how much money they spent on Starbucks last month, banks can encourage them to improve their financial wellness by suggesting actions like saving for retirement, and then celebrating with them when they do so.

This is also based on psychology. When users are rewarded by earning points or seeing improvements, this triggers a rush of serotonin and dopamine, which creates a feeling of happiness and well-being. In turn, users come back to experience that feeling again.

Developers of gaming apps know this and rely on this approach to get users hooked. Apps like Duo Lingo and Elevate are examples of promoting education through gamification. Banks might use a similar approach to help educate their customers; not facilitating an unhealthy habit like doom scrolling.

With personalization and a genuine interest in helping customers make better financial choices – without shaming them for past mistakes – banks can increase engagement and deepen long-term relationships. Not only does this help banks acquire and retain customers, but it’s also beneficial for the customer. And after all, that is the central mission of banks.

Parker Graham is founder and CEO of Finotta.