Individuals and families on lower incomes often find themselves subject to a poverty premium, paying more for a range of essential goods and services such as heating, loans and insurance than those who are more financially secure. The premium manifests itself in different ways, including compounding factors such as financial and digital exclusion and geography.
To support Fair By Design’s mission of eradicating the poverty premium in the UK, we launched the Fair By Design Roadshow, convening regional decision-makers from the private and public sectors who are collaborating to reduce unfair living costs for low-income households using the latest social innovations. These include housing associations, credit unions, large employers and local authorities capable of adopting tech solutions that are reshaping essential services (energy, finance, insurance, food waste, digital inclusion, and employment).
Discussions from the expert panellists at our inaugural April Roadshow in Oldham, Greater Manchester underscored key considerations of adopting digital solutions for financial wellness.
The first thing people tend to think about financial wellness is access to credit: a relatively longstanding and effective category of digital solutions. Indeed, Payday lenders are known to have some of the smoothest customer journeys and fastest turnarounds for short term lending. They are also some of the worst triggers for debt spirals, compounded by the opaqueness of late repayment fees and extortionate APRs, which can sometimes make the interest cost higher than the principal itself.
This is where it is important to note that digital solutions do not drive financial wellness, rather, combining them to existing ethical financial infrastructures can scale effectiveness.
Recently, the FCA called for the expansion of Credit Unions (CU) as a viable alternative to the Payday loan market. They are structured as not for profit cooperatives and currently, there are 400 CUs operating in the UK controlled by c.2m members. Yet, one of the biggest issues for CUs and other community banking institutions is the overhead cost of maintaining physical branches, impacting other essential budget lines such as marketing, hiring, and loan monitoring. A limited marketing budget and fragmented digital presence contribute to CUs and other community banking institutions being an under-used solution, despite their growing footprint and lending books.
To this end, FinTech Incuto is a welcome integration-based platform for CUs, enabling their customers to not only apply for loans online in a faster and more efficient way, but to gain financial freedom and access to services with the same level of interaction and engagement that they would receive from a high-street bank. Incuto also allows CUs to use more payment solutions, more cost-effectively. Vulnerability is still a key component for many low-income customers and the cost efficiencies achieved through a platform like Incuto allows CUs to maintain a tailored level of service for those needing more support.
Lending isn’t the only source of financial wellness. The ability to manage a restricted budget resilient to financial shocks is paramount. Particularly in light of the establishment of the new universal credit system, household budgets are being further tightened. 85% of the UK is paid monthly, with the highest financial stress experienced towards the end of the month when most people are taking payday loans. If one had access to their earnings, this could be prevented. Income streaming platform, Wagestream, found that most of their withdrawals are taken out c.8–10 days before the end of the month. By allowing salaried workers to access their accrued earning, Wagestream provides a financial cushion they can rely on that stops them having to go into overdraft or credit card debt. Wagestream highlights the benefit for employers to offer digital tools for financial wellness, as well as encouraging consumers to consider a wider range of financial wellness tools on the market. Wagestream observes that 40% of its users are no longer taking out a payday loan thanks to the app.
Tools like Incuto and Wagestream, as well as many of the recent budgeting apps or even utility switching services such as Youtility, rely on contextual and personalised data provided by Open Banking to help customers:
As a consumer, the trust and mindset change required by Open Banking will hopefully rapidly evolve to understanding the opportunities it can bring for improved access to appropriate financial tools. FinTech companies are increasingly looking at ways to leverage technology to create and increase social impact.
When rolling out and scaling access to these tools to low-income and vulnerable households, trust and transparency remain key. The FinTech market must demonstrate that it can be trusted in an era where abuse of data usage is a growing issue. Lastly, consumers are likely to be better off by adopting these new digital tools, but requiring behaviour change from the user isn’t always the best approach. Hence, the onus of behaviour change and adoption rests on the technology and partner infrastructure.
When choosing to work with a FinTech offering some of these tools, the test is to see whether the team is committed to transparency, data accountability and ultimately, whether they are able to evidence a degree of purpose. This may be articulated through the founding team, more formally through defining their social objectives, or even taking on impact investment such as the Fair By Design Fund, indicating impact due diligence.
Originally published here.
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