High time for banks to rethink how they support customers
Global inflation is much stickier than predicted, with growth expected to bottom out at just 2.8% in 2023.With the war in Ukraine still ongoing, central banks around the world have hiked interest rates to accommodate for the high pressure on energy and food prices. This, combined with the recent banking instability and rising debt levels, has led to inflation increasing by 10% in the UK and 6% in the US – tightening the squeeze on real incomes and lining up consumers to take the brunt of the impact.
Through my previous work as the Chairman of the Big Issue Foundation, and my current role as Chair of the Governing Board Forum at the Global Alliance on Banking on Values (GABV) ‒ a network of over 70 independent banks, using finance to deliver green and inclusive banking to all ‒ I’ve seen first-hand the effects of such events on the most at-risk in our society. And with a global recession still anticipated by almost two-thirds of chief economists, the financial vulnerability net is likely to spread wider than ever before.
Now more than ever, banks need to step up to shield financially vulnerable consumers. Not just because it’s the right thing to do, but because it makes business sense. Loan delinquency, mortgage defaults, a lack of consumer spending confidence – these things aren’t good for anyone.
With the European Banking Authority publishing a new set of indicators to measure consumer protection, and the UK’s Financial Conduct Authority (FCA) set to implement a new Consumer Duty, banks cannot escape the matter. New regulation will force banks to prove they understand their customers and offer them the most suitable products for their situation.
Now is the time for banks to innovate, create relevant products, and provide safe havens for those that need them most. To do that, they need to move faster and harness data – but are they up to the challenge?
Financial inclusivity needs to go beyond lip service
Financial inclusion has been a buzzword for several years, but it’s often meant offering a ‘light’ version of something that already exists. It’s not tailored to the needs of that audience, it’s more of a tick in the box so people can pat their own backs for doing a good thing. True financial inclusivity will require banks to be bolder and make real changes.
Credit scoring systems are a good example. Some countries operate with a negative reporting system, only giving marks to customers who neglect debt instalments. Even in the many countries that provide credit scores, a renter paying thousands every month to a private landlord will have nothing to show for it, while a homeowner’s credit reference is boosted whenever they make an on-time mortgage payment for the same amount When you consider that those who rent are typically in the lower income bracket, this equates to yet another tax on the less fortunate. By having a central rent database, people could be deemed more creditworthy every time they pay their rent just as a homeowner does with their mortgage.
Critically, it would also give banks data on who their renters are, to get a better handle on their affordability and likely interest in other products. While every country has a different credit scoring system, none distinguish between a responsible tenant and someone who spends all their money on nights out. Having this customer insight will make it easier to assess who is at risk of defaulting on loans, as well as who might be eligible for big ticket items like a first-time buyer mortgage.
Proactively identify those who are financially vulnerable
Most financial regulatory bodies advise lenders to help customers who are experiencing financial difficulty. For instance, the UK’s FCA has published guidance for firms to support customers struggling with their mortgage payments, and the Banking Code Compliance Committee in Australia recently advised banks to have financial hardship processes to help consumers facing financial strain. But, wouldn’t it be better for banks to know this before customers become vulnerable?
The reality is, there are countless clues in spending patterns that would help banks get a clearer picture of their customers’ financial health. But to achieve this, firms need a single view of the customer. That means creating a real time ‘event stream’ for every customer, so firms can see exactly where, when, and how they are spending money. Only then will FS firms have the foresight needed to bring in solutions that will benefit themselves and the customer, such as a revolving credit model.
Using this data, firms can also do more to identify when customers are struggling financially in real time. By identifying at-risk customers early on, FS providers can offer much more targeted help and support to those that need it to ensure people don’t fall through the gaps, while also reducing the risk of defaults on loans or credit payments.
Design products with money saving features in mind
Offering advice is one thing, but banks also need to provide practical solutions for people. For example, people who are struggling to pay might benefit from having multiple wallets to help manage different bills. Or, it might be useful to give customers the ability to have a stop on direct debits if they will push the customer into an overdraft. This is something that I looked to address when founding The Change Account – a specialist bank account designed to help the unbanked and under-banked better manage their finances – back in 2015. So, there’s no reason that FS firms can’t do the same today for their customers to help them manage money more effectively.
FS firms can also direct at-risk customers to debt charities, who can offer advice free of charge – helping to resolve the issue before debt becomes unmanageable. For example, charities like StepChange and Debt.org offer serious financial support based on a client’s unique situation, helping them to find manageable ways to manage debt and eventually become debt free in many cases.
A move to financial inclusivity
Personalised and helpful banking features shouldn’t be exclusive to the wealthiest in our society. In fact, they will often benefit those at risk more. As more and more people are feeling the pinch, it’s up to banks and lenders to change their product offerings and provide first class products to everyone.
By harnessing a cloud-based core banking platform, one which enables quick and easy configuration of complex products, this shift doesn’t have to be a costly and labour-intensive process either. Today, there’s no excuse for banks not offering every customer the tools to help them better manage their finances – large or small.
However, to have any hope of helping people to manage their money in tough times, banks need to start the work on their infrastructures now. If not, they risk losing customers to more supportive competitors, taking on more bad debt, or breaching obligations for financial difficulty that could result in fines.
About the author
Steve Round is Co-Founder of SaaScada. He has over 25 years of experience in disruptive financial services working internationally in Russia, South Africa and The Gulf. He is the Chair of the Governing Board Forum of the Global Alliance for Banking on Values (GABV) and is also on the board of Centenary Bank, which is a member of GABV.