Navigating the pressures on household budgets - Stuart Chalmers

With inflation soaring, energy price rises and interest rates increasing to their highest levels for 30 years, our financial services sector has a critical role to play in helping customers navigate the pressures on household budgets.

The challenge is all the greater because of a rapidly changing fiscal environment, but current circumstances offer a path for banks and financial institutions to embed their credentials for empathy and prudence over cold financial decisions.

Just four months ago, data gathered on household finances by UK Finance in collaboration with Accenture revealed that while many were anticipating an intensifying squeeze on disposable income there was also an element of defiance of cost-of-living pressures with evidence of growth in the travel and hospitality sectors. Spending was stable and house-buying had returned to pre-pandemic levels. But the prospect of still tougher times ahead was evident in an accompanying sharp fall in consumer confidence.

In particular, households’ confidence in the economy plunged to a reading of -56, the lowest score since 1996. This is below dips seen at the start of the pandemic and, before this, the beginning of the global financial crisis. Households’ confidence in their own position also dropped away sharply and is now well below the readings seen throughout the worst of the pandemic.

A sense of foreboding was deepened by the findings on the “wiggle room” for the average mortgaged household – the disposable income left over after paying the mortgage and basic outgoings. If the 1.3 million existing borrowers coming to the end of their fixed rates this year were to refinance, they’d have only a quarter of their net income left over.

And while it is possible that in the early part of the year, households’ spending decisions may have had an element of “make hay whilst the sun shines”, further cost-of-living pressures will now significantly constrain their ongoing ability to pay back loans and manage debts.

Analysing the data alongside the immediate experience of our clients, we could foresee people making potentially significant financial decisions due to fear of rising interest rates. In the near to medium term, banks and insurance companies must now prepare for customers taking the penalty of early redemption on mortgages to fix a new rate, stopping premiums for life or redundancy insurance to save a few pounds each month, running into housing debt or raising questions about their pensions as the stock market swings.

In the immediate term, for some customers, the ability to spend on discretionary, and potentially on essential items, is now coming under increasing pressure. In the Q2 data, we saw evidence of increased borrowing, particularly via personal loans, with overdraft levels rising to £5.5bn but savings remaining static.

Looking longer term, there is the likelihood of knock-on impacts, including aspiring first-time buyers being less able to save for deposits, and reduced ability to make pension contributions.

Quite rightly, lenders are watching for emerging signs of financial distress among customers. While not necessarily able to offer advice on regulated products, the need to be vigilant to customer circumstances has grown in significance. It is judicious for banks, insurers and pension funds to step up their support and help keep people secure in their finances.

Helping to improve financial literacy, especially of younger consumers, can be a crucial way of doing this, while it’s important to give customers the right combination of digital tools and human-centric services. Offering clearer information and making digital transactions and financial management tools even more transparent and intuitive are further ways in which lenders can help their customers.

Interestingly, what was also highlighted by the UK Finance data was an increase in the use of physical cash over electronic payments – a trend that suggests people are going back to more traditional forms of money management and budgeting.

The aggregate data from the UK Finance report suggests that by the middle of this year, household finances were still in good shape, which is reassuring. But even then, they were beginning to feel the strain. Now we’re in October, and as economic pressures mount on everyone, pushing some to struggle to pay unsecured debts and mortgages, the financial services sector must continue to respond with empathy. Using customer insights and data analytics, it can anticipate customer needs and take proactive action to help customers make informed financial decisions and navigate the challenges that lie ahead.

Stuart Chalmers, Head of Financial Services Scotland, Accenture