What banks can do to support consumers and small businesses through the cost-of-living crisis

Introduction

?As part of our series of ongoing cost-of-living events this year, the EY Financial Wellness team hosted an industry breakfast with a number of financial institutions in January 2023. We discussed the challenges Retail and SME banking customers are facing and how we might solve them. In May 2023, we co-hosted a cost-of-living hackathon with Innovate Finance which, again, included a number of financial institutions, Fintech companies and charities. We were focused on easing the very real challenges that banking customers face. Six months on from our first event, as interest rates keep climbing and consumers and businesses continue to face the biggest squeeze on their finances for a generation, we have been reflecting on some of the key takeaways and where banks should be focusing.

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Key takeaways

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1.????For consumers and businesses, the worst is likely still to come

?While inflation is expected to have peaked, households are facing historic falls in Real Household Disposable Income (a measure of living standards). This is the biggest drop since Office for Budget Responsibility (OBR) records began in 1956. After a 3.1% fall in 2022, the OBR forecasted a further 3.2% fall in 2023, with disposable income per person expected to be below pre-pandemic levels until 2028.

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To fund the increased cost of living, it appears many consumers are using credit or borrowing to fund increased costs. Others are using savings to support daily expenses, potentially up to 44% according to respondents of the Resolution Foundation Hoping and Coping report in March 2023. Whilst Banks might not have yet seen substantial increases in defaults, the same Resolution Foundation survey shows that the % of customers missing priority payments is slowly increasing. This reduced financial resilience - where consumers are using savings or debt to cover costs - is 'kicking the can down the road' and likely to emerge as latent issues with lasting effects.

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The challenging macro-economic environment can also be seen in registered company insolvencies in England and Wales. According to official government statistics for June 2023, insolvencies are 27% higher than in the same month last year, with company liquidations 77% higher. Approximately 60% of jobs in the UK private sector are tied to the success of small businesses according to business population estimates from the government.

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2.????New demographics (the ‘squeezed middle’) are being impacted, and Banks need to re-evaluate to ensure they can meet the needs of these customers

Whilst low-income households who spend the highest proportion on energy and food are particularly affected, middle-income earners are also feeling the squeeze, especially homeowners with a mortgage. As reported by the ONS, the monthly cost of a new mortgage rose by 61% during 2022 for the average semi-detached house in the UK (based on the average mortgage rate offered by lenders in Dec 2022 at a 75% LTV).

With 1.7 million fixed rate deals expected to expire over the next 12 months and with the Bank of England base rate continuing to rise (5%, June 2023), financial resilience is likely to be tested for a segment of customer that might not have been as challenged historically. The Government and many lenders are committed to ongoing support of their residential mortgage customers and in June 2023, signed up for additional measures under a Government led Mortgage Charter. These include the commitment to provide options for customers to switch to interest-only payments for 6 months or extend their term without affordability checks, which have been reflected in immediate changes to the FCA’s MCOB rules. Lenders are considering how to implement these new requirements swiftly and whether this can be done through digital self-serve journeys to support customers to access these options, ensuring the impact of these is clear to customers. In addition, customers will not be forced to leave their homes without their consent, in less than a year from their first missed payment, unless in exceptional circumstances. However, firms should be mindful they don’t provide over forbearance and consider the likelihood of a customer’s financial position improving in 12 months. There is a risk of property values dropping further, so waiting more than 12 months to take action may not be the best outcome for the customer.

Small business owners are hit with a double burden, rising costs impacting both their personal and business finances. Those that took out a bounce back Loan and have now exhausted all available Pay As You Grow (PAYG) options will be feeling the stretch even further. Businesses that are particularly reliant on energy are likely to be some of the most impacted, as well as sectors, such as retail that will be heavily impacted by the reduction in consumer spending. The ‘cost of doing business’ in the UK has been negatively affecting SMEs in recent years. Rising costs of labour and materials have made it increasingly difficult for companies to maintain profitability and businesses have made concerted efforts to reduce the costs they pass on to customers. In today’s economy, it is increasingly important to be a great employer and despite the media’s perception of businesses profiting from the cost-of-living crisis, this is rarely true; businesses need to continue to seek opportunities for growth in the UK’s challenging fiscal environment.

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3.????As the first real test of Consumer Duty, there is an even greater emphasis on banks to do everything possible to proactively support their customers

The cost-of-living crisis is likely to be the first real test of the FCA’s Consumer Duty. Firms should proactively look to:

a.????Focus on customer need: Customer needs are rapidly evolving, and this is only accelerated by the cost-of-living crisis. Firms should reflect on business strategies, product and service offerings accordingly, and think creatively about flexing their existing approaches to support specific customer segments and provide sustainable solutions. For example, some "good" small businesses may need additional funding to thrive in a downturn and this may sit outside the existing bank appetite. More customer centric propositions, delivered in real-time, using rich, data driven insights, underpinned by sophisticated technology and architecture is required. By absorbing transactional data from within the bank, or third parties through open banking, banks can better understand customer needs and identify how to support with contextual and tailored insights.

b.????Upskill and Empower the front-line: Ensure staff (especially those in direct contact with customers) understand what is expected by the Duty and have the right skills and tools to identify and respond to the needs of vulnerable customers. This includes empowering front-line colleagues to more easily identify and support impacted customers with improved policies, processes and technologies. With the right technological backbone, the right approach to data, and a continual focus on identifying and serving customer needs with real-time solutions, banks will be able to both adapt to future shocks and provide the more personalised services which are the basis of lasting relationships.

c.????Consider channel strategy: Review journeys for customers in financial difficulty and reflect on whether customers can engage through their channel of choice. While digital continues to advance in origination journeys, financial support journeys are still playing catchup across many firms and only a limited number of firms have begun to implement self-service digital tools that enable customers to proactively understand the options available. Omni-channel approaches should also be considered to improve customer engagement and reduce operational burden e.g. allowing customers to complete an online I&E, with options to leverage data from internal or external sources, in advance of a discussion with an agent.

d.????Strike the right tone: Review customer communications to understand if they are achieving the right outcome. Focussing on the tone of communications could enable banks to become the first port of call for customers in financial difficulty, which often isn’t the case today. By having an effective data-led pre-arrears strategy, firms can proactively identify those customers that need support earlier and implement an outreach approach that encourages discussions with the lender earlier in the journey.

e.????Measure the right things: Ensure adequate MI is in place to monitor whether customers’ needs are met and communications effectively enable customer decision-making.

4.????A new, personalised approach is needed to respond to these challenges

To help face into these challenges, we believe Banks need to be developing solutions that help support customers in financial difficulty in its broadest sense, and not just those that fall into collections through missed payments. This includes offering a wider range of potential solutions both to customers proactively seeking support as well as proactively engaging those where data may show early indicators of financial distress or low financial resilience.

Offering personalised support to clearly defined customer segments, as early as possible, in their financial difficulty journey results in better outcomes for customers and a cost to serve opportunity for Banks. Advancements in technologies such as event-driven microservices allows an enriched real-time view of customer circumstances and affordability, which empowers the bank to respond in the right way, at the right time, on the right channel, everytime.

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Who we are

EY’s work on Financial Wellbeing is driven by a team of consultants who bring deep insight and experience in Transformation, Risk, CX/UX, Technology (legacy modernisation, digitalisation, re-platforming etc,.) and Data (management, contextual, AI/ML etc,.). We work with our clients to help them deliver a holistic approach to Financial Wellbeing for all of their customers across the banking lifecycle – and particularly in the moments that matter most.

We can help you transform the way your organisation supports customers across the full end-to-end journey, from implementing effective early identification methods, to developing self-serve journeys that enable customers to access suitable forbearance options through to delivering event-driven microservice solutions that empower personalisation and an improved customer experience.

If you are interested in finding out more about EY can help, please feel free to connect with me to discuss any of the topics discussed in this article.

Thanks to? John Saxton , Heather Alleyne , Christopher Woolard CBE , @Nicole Smith, Alison Hay , Rob R. for their contributions to this article.

The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organisation or its member firms.

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