Why Fintech has a role to play in the cost of living crisis

Of Julia McCollChief Product Officer, Chetwood Financial

IA move that has led to interest rates reaching their highest level in 13 years, the Bank of England (BoE) chose at the end of June to raise interest rates by 25 basis points to counter rising inflation – in itself the highest in 40 years. Such inflationary pressures are unforgivable for consumers, with prices soaring in all major categories.

The UK energy price alone rose by 54% in April, with a further increase expected and bills forecast to rise by £ 800 in October. Elsewhere, petrol and diesel prices are up 32.8% from last year, and food prices up 8.7%. To make matters more difficult, the BoE says the end is not in sight, with inflation expected to rise to 11% by the autumn.

After being thrown from one crisis to another, such gloomy news may have lost its sting. But it will certainly find its bite as millions of consumers will be forced to give up the indispensable. Although it may be unsafe to pay for daily necessities, the risk of urgent travel, the need for new shoes or the washing machine breaking may be too great for some consumers.

The huge 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 increasing consumption beyond the monthly paycheck when emergencies call. In the same way, these products can lead to a dangerous spiral if used carelessly and without a complete understanding of the conditions, especially in such a challenging economic climate.

Be 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 unfolds. As the situation is now, research suggests that one third of BNPL users in the UK can not handle payments, by their own admission, which is a very worrying prospect. In addition, BNPL products are now displayed on individuals’ credit files, as a result of which non-repayment can now dampen the possibility of securing 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 use anywhere and provide greater control over repayment. In addition, some BNPL users may not remember that, despite the millennium marking and frequent omission of the word “loan”, such services are mainly credit products with the premise that they are repaid on time. Failure to do so inevitably results in costs that vary depending on the supplier. In the coming weeks and months, consumer caution will be needed to prevent users from jumping from a national financial crisis to a personal crisis.

But perhaps the most caution is required from fintech and financial services (FS) companies that offer credit products. More than ever, these organizations have a duty to lend responsibly and inform consumers about the sensible use and risks associated with credit products. In addition, credit providers are required to be upfront about the terms of their repayment plans. Hidden costs have never been popular, but in today’s economic crisis they can pose a real threat to those who depend on the service to make ends meet, who may struggle to pay back on time. This crisis requires transparency – repayment terms and reasonableness criteria must be separated before the ‘confirm’ button.

Open Banking opens options

Of course, such as Klarna and Clearpay will not be suitable for everyone. As such, fintech and FS companies must champion products that offer bespoke money management solutions, guide consumers on how best to manage their personal finances, and reassess consumption needs.

The key to achieving this lies in the power of Open Banking, Banking-as-a-Service (BaaS) and secure data protection. Applications such as Plum and Mint already use the power of Open Banking to offer tailored financial guidance to consumers. The secure collection of financial data allows such platforms to analyze consumption patterns and deliver personalized suggestions for better money management. At its most innovative, applications like these can even consider a person’s monthly direct debits to suggest instances where they can switch providers to increase savings, identify prospects for cheaper car insurance, energy providers and more.

In the meantime, BaaS has had a huge impact on the number of companies that can bring financial products to market. No longer limited to just financial institutions, retailers and brands must now be encouraged to launch groundbreaking personal lending and insurance products that serve their customers through times of financial hardship and beyond.

Think of the example of a broken washing machine. Open banking means that retailers can provide a list of affordable product options while submitting a loan application for the purchase – should the customer need one. All this is uniquely based on the customer’s personal finances. Excitingly, this can unlock new installment options for consumers, specifically designed around their budget and expenses – all without having to go into a bank.

With such new solutions and payment plans, the risk of financially vulnerable customers from overconsumption or insurmountable debt is significantly reduced. In addition, the time spent searching for unsuitable loan options has been completely removed.

Improving financial competence is the key

While such innovative financial products offer immediate money management solutions, a true understanding of the methodology is necessary to make long-term improvements in financial expertise. Providing targeted money-saving suggestions is just the first step, understanding how to get started, why they are required, and any issues are undoubtedly more important.

Fintechs already offers groundbreaking solutions that put financial education at the heart of their design. Such applications offer articles, games and quizzes to encourage users to understand all the ins and outs of lending options, money management and more.

Special emphasis should be placed on teaching consumers how using a new credit product can affect their monthly budget. The subsequent understanding that will follow will allow consumers to make informed decisions and master money management going forward.

By providing both individual money-saving and management insights along with broader information campaigns, fintech and FS companies will not only provide immediate support to those struggling to pay the bills, but also lay the foundation for a generational leap in financial expertise.

How can we help?

Overall, modern credit products, especially those made possible by BaaS and embedded financial infrastructure, can make a significant difference in the fight against rising living costs. Although they will not solve the cost-of-living crisis overnight, fintech will be crucial in bridging the gap with financial expertise by making the task of financial management a modern and seamless process.

Beyond the current crisis, the creation of next-generation financial products that adapt to the user’s needs as they change will provide consumers with banking services that they can believe in for a long time, even if inflation becomes less of a problem.