‘Times are expected to get worse before they can get better’. The Resolution Foundation’s warning may not fill consumers with confidence. But it does provide clear insight into the financial resilience and health in the UK. This is particularly true when it comes to the UK’s growing reliance on credit.
While the cost-of-living crisis has piled additional pressure on households, this isn’t a wholly new phenomenon. Since the oil crisis in the late 70s, GDP growth has outpaced consumer income – leading to stagnation in household finances. The 2008 financial crisis shook consumer finances too, though it did lead to a much-needed overhaul of some of the practices that led to the crisis in the first place.
However, this was merely the first step to tackle the ingrained issues within the financial system. As of March 2023, almost a quarter of adults are borrowing more money than they were compared to a year ago.
With borrowing on the rise, lenders need to be more accurate with lending decisions otherwise we may see an increase in cases of irresponsible lending, often impacting the most vulnerable within society.
15 million UK consumers currently under-served
These customers often fall into the ‘near prime’ category, meaning they find it hard to access regular forms of credit due to possessing low or thin credit scores and are thus unable to get a fair borrowing fee. There is a whole section of society currently under-served by today’s financial system – estimates suggest up to 15 million people in the UK alone struggle to access affordable credit.
An untouched issue across finance is why consumers are not offered help until their financial situation has worsened. This is a counterintuitive approach, and as a society, we should be questioning why this is the case. By placing the focus of regulation on good consumer outcomes, the incoming Consumer Duty is a step in the right direction. However, it is unlikely to bring the required change by itself.
If we’re going to democratise borrowing, then transformation of the financial system is vital. Those needing to access credit need to be more effectively supported, with products designed for their financial situation and access to preventative measures to ensure things do not have to get worse before they can get better.
Lessons from US healthcare
This approach is one we can see mirrored in the healthcare system. I believe one of the major factors behind why finance has failed to improve consumer finances is because there has been a lack of accountability to do so. The finance system is currently in a similar position to healthcare in the US a decade ago – care was expensive, difficult to attain, and had poor quality control.
But where healthcare turned the corner was in creating the model of Value-Based Care (VBC) – where providers are paid based on patient health outcomes i.e., only when the patient’s health improves. Clearly, this resulted in a shift in focus to prioritise the patient’s wellbeing and try to intercept any potential issues before they manifest into longer-term problems.
In finance, a similar approach that incentivises products that prioritise the financial health of the consumer could unlock huge value for consumers. Put simply, if lender profits relied upon whether customers saw an improvement in their financial situation, then we’d likely see investment in financial health monitoring solutions that predict and prevent ill financial health, and in the longer-term reduce arrears. Ultimately, increasing lender accountability would lead to improvements in consumer financial wealth.
Open banking: boosting transformation of financial services
Pave launched to support the much-needed transformation across financial services, by improving consumer financial health and education. One of the next critical steps to support this transformation is to expand the range of datasets and insights available to lenders through Open Banking and other analytics services, such as Fuse by Pave.
This provides lenders with richer data-driven insights about a prospective borrower’s financial health, improving lender decision making, reducing defaults and boosting profitability, all whilst enhancing borrower protections and support. These improved tech solutions are vital to provide insight into borrowers but, just as importantly, monitor outcomes ensuring that lenders, and the financial system more generally, becomes more focused on delivering value to consumers.
A focus on prevention rather than cure has worked in healthcare, there’s no reason why it shouldn’t improve consumer outcomes in finance too.
Sho Sugihara is CEO and co-founder, Pave