April 5, 2002
American Banker
By Ben Jackson

With consumer bankruptcy filings at an all-time high, financial literacy education has emerged in recent months as a top priority for bankers, lawmakers, regulators, and consumer groups.

Money management programs are popping up all over the country -- in schools and churches, on public television, and as part of job training programs. In Chicago, for example, a local community group and the Federal Deposit Insurance Corp. are both sponsoring financial education classes for adults, while the Federal Reserve Bank there is putting the finishing touches on plans for a financial literacy week to be held later this month.

In Cleveland, the Consumer Federation of America is partnering with local banks on a Cleveland Saves initiative to help consumers become better savers. The program has been so successful that the group recently rolled out a similar one in Kansas City, Mo. Other such programs, under the "America Saves" banner, are in the planning stage for other cities, including Charlotte, N.C., Indianapolis, Seattle, Philadelphia, and Phoenix.

And at the federal level, a provision in an education bill President Bush signed in January directs public funds to states that commit to improving students' financial literacy.

Bankers and consumer advocates say increases in consumer debt, a record-low savings rate, the explosion of financial services such as payday lending, and the option of online shopping have made financial education more important than ever.

David Fynn, a senior vice president at National City Corp. in Cleveland, compared the financial literacy effort to other public awareness campaigns. "Through education, appropriate product offerings, and other assistance, the objective is to change the national psyche related to savings -- abysmal at almost every income level -- in the same way as we have addressed 'No Smoking' campaigns and awareness of child safety."

The Administrative Office of the U.S. Courts reported in February that bankruptcies reached a record high last year. Consumer filings increased 19.2% last year, to 1.45 million, and since 1990 total bankruptcy filings, including those by businesses, have increased 90.6%.

Additionally, FDIC figures show that credit card chargeoffs in the fourth quarter of last year increased 25.8% from a year earlier, to $3.5 billion.

Maintaining that bad spending habits are acquired early in life, Americans for Consumer Education and Competition lobbied to get federal funding for financial education included in the No Child Left Behind Act. The law allocates more than $3 billion over the next six years for local education programs, including financial literacy.

"The economy is changing," said Mike Canning, the president of the Washington advocacy group. "The great availability of financial products and the ease with which young people can purchase things now make it necessary that they begin at an early age to learn how to manage money properly."

Two states, Wisconsin and Delaware, last year established task forces to study the idea of adding money management classes to high school curricula.

With credit defaults on the rise, Visa U.S.A. is at the forefront of the consumer education effort. It has declared April "Financial Literacy for Youth Month," and on Thursday it released a survey that says 92% of parents believe that practical money skills should be taught in schools.

But children are not the only ones who need to be taught how to budget and balance checkbooks. To help educate adults, the FDIC created Money Smart, a 10-module program designed to teach everything from how to open a bank account to credit management and borrowing for a home.

The nationwide program was preceded by local curricula like the one created by Financial Links for Low-Income People, a Chicago coalition of banks, community groups, and government agencies whose goal is to teach financial literacy classes and help people open bank accounts.

Michael A. Frias, a community affairs officer for the FDIC in Chicago, said the Chicago Fed's upcoming financial literacy week will bring together banks, government agencies, and various community groups and will help educate banks about financial literacy issues that are not addressed in their classes.

For example, banks need to know that they can open accounts for immigrants and foreign nationals by accepting individual taxpayer identification numbers issued by the Internal Revenue Service or matricula consular cards issued by the Mexican government as identification, he said.

"It does no good for people to complete these programs if they can't go into a bank afterwards and open an account," said Mr. Frias. He said the FDIC will launch a Spanish version of its Money Smart program in Chicago on June 19.

Of course, banks are crucial to any financial literacy program's success.

"For financial education efforts to be effective in bringing low-income people into the financial mainstream, banks must offer opportunities for graduates to put what they have learned into practice," said Dory Rand, a coordinator of the FLLIP coalition.

"To me, financial literacy is really a lynchpin issue," said Reid J. Smeda, a vice president and director of compliance and community affairs for Fifth Third in Chicago. "While making loans, our approach is to make sure every component of the financial relationship is reviewed and in place, and that often requires financial education."

Fifth Third is using the program to satisfy its Community Reinvestment Act requirements, but such efforts do not always lead to increased business, he said.

"If you approach it just from the perspective of CRA, you may get the loan, but not necessarily the deposit relationship, and both are necessary to the bank's, the community's, and the customer's needs," Mr. Smeda said.

The America Saves program, which began in Cleveland in March 2001 and has since enrolled 1,300 consumers in savings plans, is also trying to go beyond classroom training. Participants include motivational speakers (brought in to encourage people to save), coaches (to help develop savings plans), and banks (which set up accounts for people in the program).

National City is one of the banking companies offering no-fee savings accounts to America Saves participants. Mr. Fynn said that by helping develop savings habits, the $118.4 billion-asset company stands to gain more deposits.

"Remember that in times gone by savings were always our lowest cost of funding for lending," he said.

Dino DeConcini, the Consumer Federation of America's director of financial education, said partner banks do not have to create new account products for consumers -- they can simply broaden the reach of existing low-cost products aimed at young people or seniors.

America Saves has received funding from Bank of America Corp., which also gave a grant to the National Council on Economic Education to create personal finance education lessons for grades K-12. The banking company says it has given $4 million to the two programs because it views financial literacy as the key to future success.

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