The UK is a nation in debt
Horror stories about payday lenders and tv programmes about high court enforcement litter the national media. Indeed, financial vulnerability is prevalent throughout British society, and it is easy to stumble across examples of ‘bad debt’ that is poorly managed and improperly distributed. What is less clear, however, is how this financial vulnerability can be tackled. In this article, we explore contemporary financial vulnerability and its implications on lenders and billers.
Have you ever been woken up at 3am in the morning by the thought of how the next bill is going to be paid? Do you know the anxiety and stress that accompanies the knowledge that your next pay check will not cover all of your outstanding bills? Or have you ever been driven to consider that the only way out of paying off a loan is to take out another one at a much worse rate?
These are some of the worries that haunt thousands of people across the UK and have led debt and lending to be in such a dire state. For them, financial vulnerability is a unforgettable and omnipresent problem that rules every part of their daily lives. It consumes them both mentally and physically. However, it is unfair to dispel financial vulnerability as something that only happens to other people. These ghosts can and should spook all of us. As a society, we have never more needed to tackle financial vulnerability head on and banish it from our lives.
How can we define vulnerability?
There’s no one form of financial vulnerability. Everyone has the potential to be financially vulnerable at some point in their lives. Definitions of financial vulnerability have been broad, categorising it as the ability of individuals to recover from sudden financial shocks. Indeed, the FCA defines a vulnerable person as someone “who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care.” However, broad definitions such as this prove no use to lenders or customers in understanding individual circumstances. By defining vulnerability as a category, the tendency is to group other individuals with the same characteristics as equally vulnerable and apply the same approach to all. This is a fundamentally flawed perception.
Instead, it is important to consider vulnerability as a fluid circumstance rather than a category; it is diverse and ever-changing, rather than a static label. Lenders can no longer rely on providing products for a typical customer and financial services themselves need to able to adapt to changing individual needs and responsibilities.
Lenders should seek to identify individual circumstances that can lead to vulnerability, and determine how to address them, rather than painting individuals with the same brush. With debt so prevalent throughout society, to tackle financial vulnerability we must do so through a more individualistic, conversational approach. As such, the challenge in tackling and defining vulnerability is the diversity itself.
How has the pandemic affected financial vulnerability?
Another ghoul that has haunted society over the last 18 months is the financial impact of the COVID-19 pandemic. This had undoubtedly made everybody more susceptible to financial vulnerability. For example:
According to a Lowell study the average financial vulnerability index, comprising various parameters such as the use of credit and the lack of emergency savings, rose from below 40 in 2019 to a current 46.3 in 2021.
Of particular note in the above study is the steady and continuous increase in average credit use among consumers during the pandemic. People from all walks society have experienced job losses and drops in financial income that have resulted in a significant strain on personal finance.
The increase in the use of financial products and credit can certainly account for the near daily debt coverage in the media, but what it does not help to explain is how these vulnerable circumstances are to be dealt with as restrictions ease and industries recover. With effective social distancing and a near-completed vaccine rollout proving to be the antidote required to get the economy moving again, the financial circumstances of individuals are changing. It is lenders themselves that need to keep up with this fluidity.
Traditional online application forms lack the nuance and adaptability needed to determine the circumstances of individual customers.
The way forward
A new approach towards identifying and tackling financial vulnerability is needed. Lenders need to capture the individual circumstances of their customers to better help them access financial products and to avoid unintentionally placing themselves in a perilous situation. Thus, an intelligent and dynamic conversation between customers and lenders needs to be established.
Here, skilful and tailored questioning is key. It’s necessary to understand the impact that socio-economic situations have on individuals and how these influence their ability to manage their finance. Only then can a personalised determination of individuals’ vulnerable circumstances be made.
Solutions to embrace audience diversity are coming onstream
To facilitate this new conversational approach with individual customers, a new onboarding process is needed. Traditional online application forms lack the nuance and adaptability needed to determine the circumstances of individual customers. Moreover, they fail to provide adequate information for both the credit provider and the applicant.
The solution to this is to develop a new conversational approach that is adaptable to different circumstances and needs. While this may be seen traditionally as a laborious and expensive process, this is no longer the case.
Dynamic digital conversations can be orchestrated by digital application software that is not only cost-effective but also helps to reduce the regulatory risk that has led to the debt horror stories. Indeed, it is only through this personalised and intelligent approach that financial vulnerability can be better understood and the UK can be lifted from the haunting horror of bad debt.
