Payment firms can champion money management to support cost of living crisis

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What is this article about? There are a range of ways the payments sector can support customers during the cost of living crisis that goes beyond the standard payments system.

Why is this important? The cost of living crisis impacts all companies and individuals. The payments sector can offer support during these troubling times.

What’s next? More personalised services are likely to emerge.

As consumer concerns rise about their finances, essential and non-essential spending, and managing their outgoings, the payments industry can create solutions that include clearer communication, personalisation, and transparency, especially around credit terms.

With a focus on tracking spending, banks must invest in technology that enables them to adapt to changing consumer needs. A pioneer is the Starling Bank app, which uses technology and user experiences to help customers better manage their spending. Examples of their money management features include Saving Spaces, Bills Manager and Spending Insights. The bank hopes that these tools help in the cost of living crisis.

Starling Bank also told The Payments Association that measures are in place to ensure customers who are in financial difficulty are identified and able to access the help and support they need. They have a team that is available 24/7 and an informative cost of living hub.

What is the cost of living crisis?

The UK’s cost of living crisis is serious. The Resolution Foundation estimates that soaring energy bills could cut household incomes by 10% and push an extra three million people into poverty. A GMB Union survey found that 41% of respondents have borrowed money over the last six months to cover essentials.

With interest rates at 1.75%, the highest for 13 years, data from the Office of National Statistics show that 88% of adults reported an increase in their cost of living in May 2022. Price increases have outpaced salary rises. This leaves struggling households with ever-increasing challenges to make ends meet.

Citigroup has warned that UK inflation will hit 18.6%, a level not seen in half a century.

Atom Bank, which offers savings and mortgage accounts, is working on providing clear information and signposting within its app to ensure customers can register their financial concerns. On the lending side, Atom has a set of “warning signals” and proactively gets in touch with customers with solutions.

Card-linked instalments are another solution for the payments industry. It enables consumers to spread their purchases, including transparent fees, into monthly repayment amounts. Banks including HSBC and Barclaycard offer this option.

Setting limits for retail finance on basket sizes in online retailing is another measure that can ensure consumers do not enter into unnecessary credit agreements.

Could BNPL become essential?

In May, research by Hargreaves Lansdown found that one in 10 people had recently used buy now, pay later (BNPL) services to cover essentials.

Once popular for fast-fashion purchases, times are changing for operators in this sector of the payments industry.

Only time will tell whether consumers will swap their BNPL payments from luxury item purchases to essential purchases. Most BNPL providers charge no interest and only levy fees for missed payments. However, some – such as Klarna, PayPal, and Zilch – don’t charge any fees even if customers miss or are late making a payment, making them an attractive option during difficult financial times.

BNPL has been hit by a slowdown in consumer spending amid soaring rates of inflation while facing tighter regulation that will come into force in 2023. Swedish payments company Klarna has said that losses more than tripled in the first half of 2022. Banks including NatWest, Virgin Money, HSBC, and Monzo, have all launched BNPL products.

In the short term, affordability checks could help prevent people from amassing debts that they may struggle to pay off.

For the payments industry, emphasis should be placed on teaching consumers how taking out a new credit product will impact their budget so they can make informed decisions. This should be done at the pre-purchase stage so customers can see the exact payment charges and any interest or late payment fees.

Moreover, there is an opportunity for personalisation whereby a potential customer can see any interest they may incur and visuals that highlight typical examples of charges with APRs applied. To date, it has only been car companies that display repayment charges for finance and credit and some traditional clothing catalogues.

It is likely that when the Consumer Duty rules come into place we will start to see clearer marketing materials and forecasts for those making purchases on credit. Although, for many, forced changes might be too late.

The cost of living crisis is unlikely to abate anytime soon. The payments industry can see the current cost of living crisis as an opportunity to offer solutions that help customers through it.

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