As inflation brings down consumer financial confidence, banks are key in boosting it back up

The key stat: Sixty-eight percent of US adults said they felt financially confident in Q4 2022, down from 79% in Q4 2021.

The finding comes from the Bank of Montreal’s (BMO’s) Real Financial Progress Index, which surveyed 3,402 US adults between October 24 and November 28, 2022 on how they feel about their personal finances.

Why so down? Eighty-three percent of those surveyed said that their financial situation is increasing their anxiety.

• Financial factors behind that anxiety include the fear of an unexpected expense (85%) or a family-related expense (69%), housing costs (68%), and credit card debt (54%).
• Additionally, 67% of respondents said they are struggling to pay medical bills, with that percentage rising to 74% for respondents between the ages of 25 and 34.
• 63% of those polled between the ages of 55 and 65 said they’re anxious about keeping up with their bill payments, up 16% from Q3 2022.

Making adjustments: The study revealed that inflation is the main driver behind the decrease in confidence. Forty-four percent of respondents said that inflation is causing them to change their financial behaviors.

• 60% of surveyed consumers said they are deferring the purchase of a home or a car this year.
• The number of consumers saving for retirement dropped from 62% in Q3 to 58% in Q4, and those saving for vacation dropped from 48% to 43% in the same period.
• Consumers’ top goals for 2023 include paying down debt (45%, up from 39% in Q3), reducing spending (31%), and creating a budget (19%).

What does this mean for banks? During the pandemic, consumers were able to build a savings nest egg thanks to government assistance and a shutdown that decreased spending and increased interest in investing. But rising inflation and interest rates, widespread layoffs, and geopolitical and economic uncertainty have drastically changed consumers’ situations.

Here are some things banks can do to ensure their customers feel supported and help boost their financial confidence.

• Humanize the banking experience: Consumers are already stressed out by their finances, and complex financial situations can cause consumers to lose confidence in their ability to keep their heads above water. Creating a more relationship-based experience, especially when consumers are seeking in-person guidance, can help consumers feel less alone in their struggles and help them feel like their financial institution is on their side.
• Offer free budgeting tools: Consumers have made it clear that they expect their bank to help them during times of economic uncertainty. One clear way to do this is by offering free, easy-to-use, and conceptually simple financial planning tools. Banks that can do this with an acute level of personalization will set up their customers for success and build trust in the process.
• Prioritize financial literacy: Personal financial management tools are useless if consumers don’t have the financial aptitude to use them. Banks should ensure their tools explain the saving and budgeting processes, and they should prioritize financial literacy during in-person interactions to build consumer financial confidence.
• Share the wealth: Recently, UK bank execs came under fire for offering low rates on consumer savings accounts while enjoying higher profits due to increased interest rates. Banks should make sure they pass along some of the benefits to their consumers to build strong, sticky relationships that will thrive in all economic conditions.

This article originally appeared in Insider Intelligence’s Banking Innovation Briefing—a daily recap of top stories reshaping the banking industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.

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