The Value of Financial Literacy

As the average Customer Acquisition Cost (CAC) for fintech companies soars to an estimated $1450, companies are seeking innovative ways in which to increase customer retention, particularly through products that combine immediate utility with long-term financial security. As embedding products and services into other platforms becomes the norm - the UK embedded finance industry is projected to grow by 27.6% YoY to reach $7.76 billion in 2024 and £18.2 billion by 2029 - it follows that an embedded solution might well be the answer to fintechs' retention woes.

Research commissioned by banking app GoHenry reveals the profound economic impact of financial literacy: prioritising financial education across the UK could generate an additional £6.98 billion in economic value annually. At an individual level, financial literacy can boost early-career earnings by up to 28%. 

The business case for embedded financial products is well-established. From embedded insurance to embedded payments, these offerings deliver clear, measurable returns through new revenue streams and enhanced customer value propositions. Yet the value of embedding financial education—while less immediately tangible—may be equally transformative.

For businesses, embedding financial education creates long-term customer value through improved financial decision-making, increased product understanding, and stronger brand trust—benefits that, while harder to quantify than embedded insurance premiums for instance, can significantly impact customer lifetime value and loyalty.

One particularly promising area of embedded finance is income protection insurance. As economic uncertainties persist, embedding income protection products at relevant customer touch points—such as during loan applications —can significantly enhance customers' financial resilience. When combined with financial education about emergency planning and risk management, embedded income protection creates a powerful safety net that helps customers maintain financial stability during unexpected life events.

The Benefits of Embedding Financial Education for Businesses:

1. Enhanced Cross-Selling Opportunities: According to the Money and Pensions Service, financially astute customers are more likely to be able to use a wider range of financial products. This is particularly evident in the uptake of protection products—when customers understand concepts like risk management and emergency planning through financial education, they're more likely to appreciate and purchase embedded income protection products, creating a virtuous cycle of financial resilience and product adoption.

2. Fewer Defaults and Payment Delays: Research indicates a strong connection between lack of financial knowledge and increased instances of loan defaults and late payments. A 2022 study by the National Bureau of Economic Research (NBER) revealed that people scoring lower on financial literacy assessments have a much higher likelihood of defaulting loans and credit cards. This not only impacts businesses bottom lines through reduced income but also drives up expenses related to recovering debts and setting aside funds for potential losses.

3. Increased Operational Efficiency: Financial illiteracy among customers increases operational expenses for banks due to heightened service demands and account management errors. However, when customers understand and utilise income protection products, financial institutions see a marked decrease in loan defaults and payment disruptions during customer hardship periods. This creates operational efficiencies through reduced need for collections activities and hardship program administration. Moreover, it poses fewer systemic risks to financial institutions, as evidenced by the 2008 crisis where borrowers' limited understanding of mortgage terms contributed to market instability.

4. Increased Customer Value: Customers with limited financial acumen frequently exhibit counterproductive financial practices, such as insufficient utilisation of savings vehicles and excessive account overdrafts, potentially reducing their long-term value to financial institutions. Research from the Global Financial Literacy Excellence Center (GFLEC) suggests that financially adept consumers tend to engage with a broader spectrum of banking services, consequently bolstering institutional profitability through more diverse income sources. Furthermore, customers with embedded income protection coverage demonstrate higher engagement with wealth-building products and services, as the security provided by income protection allows them to confidently pursue longer-term financial goals.

5. Increased Customer Trust and Loyalty: By providing valuable financial education, businesses can position themselves as trusted advisors rather than just service providers. This fosters deeper customer relationships and increases brand loyalty. A study by Edelman found that 81% of consumers say they need to be able to trust a brand to buy from them. By demonstrating a commitment to customers' financial well-being, companies can significantly boost trust levels.

6. Competitive Differentiation: In a saturated market, offering financial education can be a key differentiator. It adds value beyond the core product or service, making a company's offering more attractive to potential customers. This unique selling proposition can be particularly effective in industries where products are often perceived as commodities.

The Future of Embedded Financial Education and Protection

The convergence of financial education, embedded finance, and protection products represents a significant opportunity for financial institutions to create lasting customer value while building more resilient businesses. 

As the embedded finance market continues its explosive growth, companies which successfully combine educational initiatives with practical financial safeguards like income protection will be best positioned to capture and retain customers. The data clearly shows that this approach not only benefits customers through improved financial outcomes and increased resilience but also delivers tangible business benefits through reduced defaults, increased product adoption, and enhanced customer loyalty. 

In an increasingly competitive financial services landscape, this holistic approach to customer financial wellness may well be the key differentiator that determines which businesses thrive in the years ahead. Financial institutions that recognise and act on this opportunity now will be well-positioned to build stronger, more sustainable customer relationships while contributing to greater financial resilience across society as a whole.

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