Cost of living crisis can spur fintech adoption

The cost of living crisis could spur innovation in the fintech sector as consumers look for help managing their finances.

The current economic struggle of people around the world may encourage the adoption of apps, just as the Covid-19 pandemic did, but for different reasons.

When Covid-19 hit the world in 2020, the need for people to avoid contact with others drove the introduction of digital banking. With high streets closed for long periods, the use of financial technology exploded as people of all ages turned to apps to manage their money.

Apps can also help people manage their finances during the current cost of living crisis, with financial management tools, personalized financial products and a range of credit options available.

The combination of older people taking up app-based financial services and younger, digitally savvy people struggling to make ends meet could drive further innovation in the fintech sector.

Recent research from cloud-based card processing platform Marqeta, which looked at how much consumers are struggling due to high inflation and a slowing economy, found that people were looking for more credit options and trying to better manage their finances.

In its survey of over 4,000 people, including 1,000 in the UK, Marqeta found that many consumers were turning to credit to cope with the rising cost of living, with 57% of respondents having used a credit card to make ends meet in the past the year. This number was higher among Gen Z consumers – those born in the late 1990s and labeled digital natives – with 68% of 18-25 year olds using credit cards to get by.

According to the survey, consumers who rely on credit also have service expectations, with 42% seeing refund protection on purchases as a major benefit, 39% liking the fraud protection it offers, and 37% seeing the ability to buy without needing funds immediately as a big advantage.

It found that consumers also want more from their credit card provider to help them budget, with many seeking more personalized offers and non-traditional credit card rewards. These include extra points or cashback for categories where they spend the most money (68%), offers from merchants they have shopped with in the past (43%), lottery rewards (36%), parts of inventory (28%), or cryptocurrency (24% ).

Gen Z consumers were most interested in innovative credit options to help navigate the cost of living crisis, with 63% wanting more insight into their spending to help manage budgets more effectively.

“It is clear that consumers are looking for viable credit options to help them through, but they are becoming more demanding and want flexible credit options and to be able to manage repayments,” said Anna Porra, European strategy director at Marqeta.

“Providers must also offer features that help consumers educate themselves and better budget,” she added. “They’re looking for the smart deals that give them relevant deals and cashback, not just rewards points they’ll never use, which will help ease the pressure. These providers need to understand their customers to do this.”

She said fintechs will quickly adapt to meet customer demands: “Fintech is about innovation, and being successful is about understanding customers and how to better meet their needs.”

Gareth Lodge, an analyst at Celent, said that while more flexible credit would help, there were questions about how responsible lending could be, with some quarters believing it could make matters worse. “A lot of ‘buy now, pay later’ loans don’t show up on credit checks – and I think some people don’t do credit checks either. For a £10 loan it probably makes sense, but where do you draw the line?

He said it was also a more structural issue. “Banks are well funded and need to hold reserves. Many banks are setting funds aside in anticipation of rising loan losses, whether holidays or defaults. But are fintechs as well prepared?”

Lodge predicted that the current crisis would test the mettle of all financial services providers. “I don’t know enough to know if there will be any collapse in the UK market, nor am I anti-credit. But logic suggests that there is an oversupply at the moment, and if economic conditions continue to deteriorate, any business, be it banking or fintech, will face a real test of its lending policies, and it will highlight those who are prepared and those who it isn’t, he said.