By Julia McColl, Chief Product Officer, Chetwood Financial
In a move that has led to interest rates reaching their highest level in 13 years, in late June the Bank of England (BoE) opted to hike interest rates by 25 basis points to counteract soaring inflation – itself, the highest in 40 years. Such inflationary pressures are unforgiving for consumers, with prices skyrocketing in every essential category.
Alone, the UK’s energy price cap increased by 54% in April, with a further increase expected and bills predicted to rise by £800 in October. Elsewhere, petrol and diesel prices are up 32.8% from last year, and food by 8.7%. To make matters more difficult, the BoE says the end is not in sight, with inflation expected to rise to 11% in the Autumn.
Having been plunged from one crisis to another, such bleak news has perhaps lost its sting. But it will certainly find its bite as millions of consumers will be forced to dispense with the indispensables. While paying for everyday essentials may become precarious, the risk of urgent travel, needing new shoes or the washing machine breaking down may all become too great for some consumers.
The vast collection of credit products and services available on the market – from loans, Buy-Now-Pay-Later (BNPL) solutions and credit cards – can certainly provide a useful means of boosting spending power beyond the monthly paycheck when emergencies come calling. Equally, these products can lead to a dangerous spiral if used negligently and without a complete understanding of the conditions, especially in such a challenging economic climate.
Being careful with credit
In particular, it has been well-reported that many consumers are struggling to meet BNPL repayments as the cost-of-living crisis unfurls. As things currently stand, research suggests that a third of BNPL users in the UK cannot handle payments, by their own admission, which is a very worrying prospect indeed. Moreover, BNPL products now appear on individuals’ credit files, as a result, missing repayments may now dampen the ability to secure long-term loans such as mortgages.
Although BNPL has its benefits when used with caution, such benefits are provided in greater abundance with the use of credit cards, which allow consumers to spend anywhere and offer greater control over repayment. In addition, some BNPL users may fail to remember that, despite the millennial branding and frequent omission of the word ‘loan’, such services are essentially credit products with a prerequisite that they are paid back on time. Failure to do so inevitably results in charges which vary depending upon the provider. In the coming weeks and months, caution on the part of the consumer will be needed to avoid users jumping from a national financial crisis into a personal one.
But perhaps the most caution is required on the part of fintech and Financial Services (FS) companies that offer credit products. More than ever, these organisations have a duty to lend responsibly and educate consumers on sensible use and the risks associated with credit products. Moreover, there is an onus on credit providers to be upfront about the strings attached to their repayment schemes. Hidden costs have never been popular, but in today’s economic crisis they could pose a real threat to those relying on the service to get by, who may struggle to meet repayments on time. This crisis demands transparency – repayment terms and affordability criteria must be signposted before the ‘confirm’ button.
Open Banking opens options
Naturally, the likes of Klarna and Clearpay will not be suitable for all. As such, fintech and FS companies must champion products that offer tailored money management solutions, guiding consumers on how to best handle their personal finances and reassess their spending needs.
The key to achieving this lies in the power of Open Banking, Banking-as-a-Service (BaaS) and secure data protection. Already, applications like Plum and Mint are harnessing the power of Open Banking to offer bespoke financial guidance to consumers. The secure collection of financial data allows such platforms to analyse spending patterns and deliver personalised suggestions for better money management. At their most innovative, applications like these can even assess an individual’s monthly direct debits to suggest instances in which they can change providers to boost their savings, identifying prospects for cheaper car insurance, energy providers and more.
Meanwhile, BaaS has had a huge impact on the number of businesses able to bring financial products to market. No longer limited to merely financial institutions, retailers and brands must now be emboldened to launch cutting-edge personalised lending and insurance products that serve their customers throughout times of economic hardship and beyond.
Consider the broken washing machine example. Open banking means that retailers can provide a list of affordable product options while embedding a loan application for the purchase – should the customer require one. All of this is uniquely based on the customer’s personal finances. Excitingly, this could unlock new instalment options for consumers, specifically designed around their budget and outgoings – all without having to step into a bank.
With such novel solutions and payment plans, the risks to financially vulnerable customers of overspending or falling into insurmountable debt are significantly reduced. Moreover, the time spent searching for unsuitable loan options is completely removed.
Improving financial literacy is key
While such innovative financial products offer immediate money-management solutions, a true understanding of the methodology is needed to make longstanding improvements to financial literacy. Providing targeted money-saving suggestions is only the first step, understanding how to initiate them, why they are required, and any conditions are arguably more important.
Already, fintechs are providing cutting-edge solutions that place financial education at the heart of their design. Such applications offer articles, gaming, and quizzes to encourage users to fully grasp the ins and outs of lending options, money management and more.
Particular emphasis should be placed on teaching consumers how adopting a new credit product could impact their monthly budget. The subsequent understanding that follows will allow consumers to make informed decisions and master their money management going forward.
By providing both individual money-saving and management insights alongside wider informational campaigns, fintech and FS companies will not only provide immediate support to those struggling to pay the bills but also set the foundations for a generational leap in financial literacy.
How can we help?
Overall, modern credit products, particularly those enabled by BaaS and embedded finance infrastructure, can make a substantial difference in the battle against the rising cost of living. Although they will not solve the cost-of-living crunch overnight, fintechs will be crucial to bridging the financial literacy gap by turning the task of financial management into a modern and seamless process.
Beyond the current crisis, the creation of next-gen financial products that adapt to the user’s needs as they change will provide consumers with banking services that they can believe in for the long haul, even as inflation becomes less of an issue.