Why we're all financially vulnerable (and how tech can help us)

Imagine you or your partner fell seriously ill, or one of you lost your job. Would you still be financially secure? It’s a scary thought, but shines a light on how vulnerable so many people are to a financial shock. Things can change on a knife edge, and anyone can become financially vulnerable at any given time. 

Financial vulnerability has become a pervasive and underestimated problem. It extends beyond marginalized groups to impact a broader swath of society due to income inequality, mounting consumer debt, and unexpected financial shocks.   

The UK’s financial regulator, the FCA, maps out four drivers of vulnerability: health; life events such as job loss or bereavement; resilience to withstand financial or emotional shocks; and capability, such as numeracy or literacy.  

It is very common to identify with one of these - in 2022, the FCA found that this was the case for just over half (52%) of UK adults. That was an increase from 46% in 2020 and represents around 25 million UK adults.  

But those adults who don’t currently consider themselves financially vulnerable aren’t immune. People move in and out of financial vulnerability as their circumstances change: anyone can become vulnerable.   

Unbanked and digitally excluded   

While anyone can slip into financial vulnerability, it is particularly closely linked to the problem of financial exclusion. 

The ultimate example of this is not having a bank account, the most unassuming but most essential financial service. The FCA estimates that some 1.1 million adults in the UK are unbanked. That is approximately the population of Birmingham, the UK’s second largest city.   

Part of the problem is poor financial literacy in the UK. In May 2022, an FCA study showed that around a quarter of UK adults had low confidence in their ability to manage their money and about a third had poor or low levels of numeracy. Adults with poor financial numeracy were three times as likely to be unbanked.  

Financial exclusion also overlaps with digital exclusion, and it is important to recognise the harmful impact that any digital divide may have on people’s financial lives.   

Digitally excluded adults are defined as those who never or very rarely use the internet, or those who use the internet occasionally (less than once a week), but rate their ability to use it as poor or bad. In 2022, 7% of adults (3.9m) were digitally excluded.  

Lenders’ responsibility to support consumers  

So, given financial vulnerability is so widespread, and can affect such a broad range of people, what is being done to help?  

The FCA understandably puts the onus on lenders, and this was re-enforced in its Consumer Duty requirements, which came into force in July.  

There are clear benefits for lenders if they provide proactive support and appropriate forbearance. Firms can help customers through difficult times and build brand loyalty.  

For example, by arranging new payment plans to enable consumers to pay a reduced amount for a longer period; by treating customers fairly and appropriately when they make contact; and perhaps referring them to not-for-profit debt advisers.  

The role of technology  

It's clear that lender communications and customer support services should use technology better. According to the FCA's Financial Lives Survey, 32% of adults with one or more characteristics of vulnerability reported that provider communications did not help at all, and 19% stated that customer support services did not help at all.   

Yet, the financial services sector would not have grown to its current size without embracing technology, and there are many exciting ways which technology can help tackle financial vulnerability and exclusion. 

This includes AI, conversational user interface and chatbots. These could have a significant impact for vulnerable customers who don't feel comfortable talking to a human about their problems, and would rather talk to a chatbot. Although it is also crucial to recognise when the customer does not want to interact with a chatbot. Serious investment is needed by fintechs to make this work.  

Another example is analysing big data with AI, which can enable consumers to have a borrowing experience that truly understands and addresses their unique needs. By leveraging a deeper understanding of vulnerabilities, lenders can design inclusive financial products, and provide compassionate and comprehensive support to vulnerable customers, thereby strengthening customer relationships and increasing brand loyalty.  

But there are risks. Data privacy concerns, high implementation costs, and a reliance on accurate data are particularly prevalent. We also need to be mindful of any signs of discrimination or exclusion.   

Then there is open banking. For consumers who are happy to share their data, the reward is a secure way to help them understand their day-to-day finances, find cost-effective lending, and help tackle debt. For those with a thin credit file, open banking may also create opportunities to access funds that they were previously excluded from. 

Fintech's can help drive tech solutions to vulnerability  

At the forefront of these technological advancements sit fintechs like Lenvi. These firms should help make financial interactions easier for people to understand, so they can make the right decisions, ensuring it's fairer for everyone. Also, given that financial inclusion and financial literacy go hand in hand, fintechs need to work hard to use technology to employ as many data sources as possible for people with thin credit files to be able to access finance.   

But it is crucial to recognise that technology alone is not the answer; indeed technology used inappropriately can increase financial exclusion. We know that customers are seeking closer relationships and the human touch. Striking the right balance between these two elements will be key to success.   

This article was first published in The European Financial Review