After lending her convening power to the UN secretary-general’s financial inclusion efforts, Queen Máxima of the Netherlands is now focusing on ensuring those efforts are actually improving people’s lives.
In her new role as UN special advocate for financial health, the Queen says that although about 80 per cent of the world’s adult population now have access to financial services, compared to less than 50 per cent when she started working on this subject on behalf of the UN 15 years ago, financial inclusion “has not always led to good outcomes”.
“Just to give you some examples, in Kenya, it has actually led to less financial health [and] much more consumer credit, [which means] a lot of families and households end up being overindebted,” she says.
A similar picture is found in more developed economies too. “In my country, the Netherlands, we have 99.7 per cent financial inclusion, but we do have a quarter of the population having problematic levels of debt, and another quarter that is financially vulnerable,” she says. Any small shock would push those people into the spiral of overindebtedness.
The Queen spoke to The Banker during the FT and The Banker’s Global Banking Summit in December. The interview has been edited for brevity and clarity.
Q: Financial innovation can lead to greater financial inclusion but also to greater risks to people’s financial health — are you concerned about the speed at which financial innovation is progressing and how it is being adopted, particularly by younger generations?
A: Yes, I am concerned. Products like “buy now, pay later” mean that the youth are getting overindebted, and sometimes their level of debt is not even being noticed by their own banks.
We were talking to some of the Dutch banks in November, and from all the top 20 forms of payments, very large numbers are being done as “buy now, pay later” by customers that are 25-years-old or younger. And a large number of payments are being made on gambling websites too, which is an increasingly worrying issue. We all need to have a discussion about whether financial innovations are for the good of the customers.
Q: How do you define financial health?
A: Financial health has four aspects. Number one: it is about making ends meet on a monthly, weekly and daily basis, depending on where you are in the world. Number two is about being able to reach long-term goals — for example, being able to afford retirement, buying a house through a mortgage and being able to pay for your children’s university education. Number three is resilience. How can you cope in case of a shock, an illness, damage caused by climate change, financial shocks related to divorce? We need to talk about insurance and emergency savings. And the fourth aspect is a subjective one, but I think a very important one, which is confidence. This is about being able to budget for the long term. When customers are financially unhealthy, they have high levels of stress and mental health issues, and productivity gains are lost. This matters to companies too, not just banks.
We’ve had an amazing programme with PayPal. Dan Schulman, the CEO, did a survey of all his employees, and realised that 65 per cent of the workforce were experiencing financial stress. He did a lot of things to improve that, and this led to increasing productivity and loyalty.
Q: What needs to be considered in these programmes?
A: Budgeting was a very important component. Budget education is very important. Financial education is important but it’s not enough. We have to teach our children at school how to budget, what an interest rate is and what a compound interest rate is.
It’s not only about informing your customers when they’re making certain decisions, but also when you’re selling a product, you need to ensure that the default offer is the right one for your customer.
We were talking with the Central Bank of Brazil, for example, and they were having huge problems with credit card debt. One of the big issues was that the statements were very complicated, so they worked on simplifying them. One of the other issues was that the first available option was to pay only 10 per cent of what customers owed. So most of them ended up paying that small percentage when the bill was due, becoming overindebted and paying a lot of money in interest rates.
The bank managed to turn that around, requesting in the first instance that credit card debt be repaid in full, while allowing providers to continue to offer smaller repayments in case of need. The results were extraordinary. The design of financial products has to consider customers’ needs and their worries.
Q: Is financial health something that needs to be discussed with banks, or are regulators better placed to address it?
A: I would not like to have any “greenwashing” in financial health programmes, this should not be an ESG issue [the term grouping environmental, social and governance factors that has attracted criticism for becoming an empty label for sustainability investment and activities].
This should actually make business sense. At the end of the day, if your client wins, you also win — you’re going to end up being able to cross-sell much better products and much more long term.
The Office of the Comptroller of the Currency in the US has encouraged banks to turn overdrafts into other types of products, like small loans — and that has led to a lot of innovation. This is the type of innovation we need to work on together.
Banks may lose revenues from not receiving overdraft fees but, in the long term, they actually improve their clients’ position. They reduce clients’ credit risk.
I guess it’s going to be a trade off between short- and long-term revenues. And that’s, I think, the discussion we have to have now — what is the role of the regulator?
Regulators, together with the financial industry, must have a dialogue as to how they can each help to ensure customers have sustainable debt levels and better financial futures. It’s better for the banks, and it’s better for the whole economy.
Q: Why do you feel financial health is something that a UN-linked initiative should promote?
A: I don’t want to generalise, and there’s a lot of banks that have been working with me that really consider the financial health of their clients first and foremost. But, as they rightly seek to make money for shareholders and comply with regulation, we sometimes forget that all these financial innovations are just a means to an end. We cannot lose the central piece, and that is the betterment of a customer’s life. That’s what we need to focus on and I think it was a good decision for the UN secretary general to start looking at this issue.
Q: Are you concerned about payments happening outside of traditional channels, for example through cryptocurrencies?
A: We’ve been seeing a lot of influencers giving financial advice, we see it in the Netherlands, but also in other countries — a lot of youth using crypto and losing money. This is something that also needs to be discussed with the regulators.
Should we have these influences certified?
As a bank, you see what is going on with a customer, when they’re not making ends meet. You see when they’re not saving, if they don’t have, say, £1000 in their bank account to deal with an emergency, like a car breakdown, and therefore can’t go to work. This is the type of data we should be monitoring.
And when we look at the youth, and they are spending in digital assets, maybe we send them a message of alert, something like “80 per cent of your peers have lost money in [crypto]; maybe I can offer you this other investment instead”.
I think banks can come up with new innovations to help customers make better choices.
Q: Will financial health be top of mind for banks and regulators, or simply a feelgood initiative?
A: I hope it will be top of mind, because we’ve seen that in many countries, including the UK, a quarter of the population is financially unhealthy. In the Netherlands, for example, we have the societal costs of bad financial health, of having high levels of debt, being nearly three times the value of those levels of debt. So if we would say let’s just forgive all that debt, it would actually make sense. I’m not saying that we should do that, but we have to think of the impact of overindebtedness and financial health in another way.
I was speaking to the CEO of a European bank and he said that his data teams can see when a couple gets divorced six months in advance, because their credit ratings go down, they have more trouble paying bills. Instead of looking at it from a risk perspective, how can we help this couple going through this painful process in a way that they can rebudget much more quickly, so they avoid unnecessary problems. And it’s not just the financial system that needs to work in isolation, other organisations can also support those customers to weather the storm.
We have to have informed discussions about this, between regulators, the financial industry and society at large — how do we look into it in a holistic manner?
