By Julia McColl, Chief Product Officer, Chetwood Financial
From the foreboding tone of the UK Chancellor’s recent Autumn Statement to the reality of the recession, there are indicators aplenty that tough times look set to continue for a large proportion of Britons. While measures are being taken in the nation’s fiscal policy to plug the budget deficit, this is unlikely to have a noticeable impact on the cost of living for the foreseeable future.
The factors behind the downward trend of the UK economy are too numerous and complicated to unpack here, but the downturn is clear to see. The rate of inflation remains troublingly high, which the Bank of England has tried repeatedly to stem with record interest rate increases. Prices for food and services are on the up, and energy bills are set to increase by hundreds of pounds for most households.
The discourse around the UK economy has been swirling for months, with economic thought leaders offering their input to the Bank of England on how best to combat inflation and personal finance experts advising consumers on how to limit spending and stretch budgets further. The focus remains on the extremes of the financial spectrum – the central banks in charge of policy, and the consumers who are on the business end of those policies.
What is missing from this discourse is the middle ground; the smaller banks and fintechs that make up a considerable portion of the fiscal landscape and provide financial products and banking services to million. What can these comparatively minor players do to make a difference? Without massive resources or long-standing influence, for the most part, these parties are locked out of the policy debate, but that doesn’t mean they’re unable to have an impact.
The direct access that banks and financial service providers have to their consumers enables them to provide crucial support with financial wellness and planning. However, Chetwood Financial’s own research found that, out of 2,000 UK adults surveyed, almost a third (32%) felt that their bank wasn’t doing enough to support them during the cost-of-living crisis, indicating that many banks aren’t making the most of that access.
Given the hardships that many consumers will face due to the cost-of-living crisis, and the assistance that financial products and services can provide, what can small banks and fintechs do to better support their customers? And what can consumers do to arm themselves against the increasing cost of living?
What a little bank can do
Before the rapid rise of fintechs and neo-banks in the last decade, the only option available to your average British consumer when selecting a financial service was to go to a legacy bank. These were all household names, found on billboards and televisions and up and down the high street, and while competitors would offer slightly different rates and services to one another, their products and services would typically be rigid and inflexible.
While high-profile banks started to digitalise, many of these initiatives have taken years to implement. It wasn’t until the advent of smaller, more agile challenger banks entered the mainstream that the rapid digital transformation we’ve seen in recent years really hit the ground running. These larger banks were stuck in their ways, with extensive legacy architecture that was resistant to change.
When it came to offering customisable banking products that could be tailored to the needs of different segments or even individual customers, neo-banks were able to run rings around their high-street predecessors, in part thanks to their adoption of open banking principles and Banking-as-a-Service (BaaS) provision.
The growth in popularity of neo-banks and fintechs in recent years led to a huge increase in funding and visibility, and while fintech growth has continued in spite of the pandemic and economic slowdown, the boom times may have drawn to a close. The priority of fintechs today shouldn’t be to continue their rapid upward trajectory, but to turn their attention to supporting the customers that made that growth possible.
So, what can these businesses do to support their users? Ultimately, it is the same flexibility and willingness to adapt that made these smaller players popular in the first place that makes them ideally positioned to support underserved consumers. Now is an opportune moment for fintechs to put their offerings to good use.
Small banks and fintechs making a difference
A significant proportion of UK consumers rely on challenger banks and fintechs for their main banking and financial services, which puts these players in an ideal position to support their clientele with novel financial products.
While financial products and services alone can’t prevent daily living costs from going up, having access to practical financial solutions, like suitable lines of credit, can help protect consumers from the impact of unexpected costs. Sudden bills for home emergencies or car repair, for example, can massively disrupt a family’s financial management, and responsible credit usage can be a huge help in improving financial wellbeing.
The conventional market for credit products is full of predatory, ‘payday loan’-style options that disguise heavy payback rates and can take advantage of those who lack financial literacy. What’s more, different consumer segments have unique needs that aren’t met by traditional financial products – this is where fintechs and challenger banks fit in.
Smaller financial service providers, particularly those that are powered by BaaS, can use their position to provide targeted solutions to those underserved segments or even products geared towards specific financial needs, like rental deposits or repair costs.
The additional benefit of these targeted solutions is that it turns consumers away from unsuitable financial services, shielding them from misuse and decreasing the harm that can be incurred as a result of low financial literacy.
Fintech platform as a soapbox
A financial literacy gap lies at the root cause of many fiscal troubles – a problem that’ll be significantly exacerbated by the cost-of-living crisis. The novelty of digital banks and fintechs has made them more popular among younger, more tech-savvy demographics – many of whom will struggle to resonate with the brick-and-mortar banks of the past.
Providing users with the resources for financial education and the tools to enact more effective financial management should be a major priority for challenger banks and fintechs. Warnings and guidance should be issued with credit services, along with support if customers are struggling to meet repayment terms.
Moreover, fintech platforms should offer more interactive and targeted educational resources to increase the financial literacy of their users, using gentle ‘nudges’ and notifications to provide support that really helps. Open banking makes it possible for fintech platforms to instantly access the banking data of users, which can be used to analyse spending patterns and suggest more productive and sustainable habits.
Financial management platforms, when used in tandem with increased financial literacy, will provide a more stable foundation for consumers to ride out the cost-of-living crisis.
The chance for a brighter future
While there is little call for optimism in today’s economic forecast, financial institutions, both big and small, must make supporting consumers a priority. Challenger banks and fintechs have a duty to take what is special about them and use their powers for good.
Resolving the cost-of-living crisis will take time and proper policy management, but ultimately it is the consumers who will suffer the consequences. Let’s do everything we can to support them, make peoples’ lives easier, and make a difference.