Unlocking relief: How payments leaders can combat the UK’s cost of living crisis

by Chris Menon

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What is this article about?

The strategies payments industry leaders can employ to mitigate the impacts of the UK’s cost of living crisis through innovation and financial services.

Why is this important?

It addresses the urgent need for financial solutions that can alleviate the economic pressures faced by millions, offering a pathway to stability and resilience for consumers during challenging times

What’s next?

The industry must innovate and deploy payments solutions that directly address the needs of those hit hardest by the crisis, aiming to enhance financial health and inclusivity.

In the heart of the UK, a silent crisis unfolds as millions face the stark reality of choosing between heating their homes or feeding their families, spotlighted by advocates and researchers who reveal the profound depth of the nation’s cost-of-living crisis.

According to Simon Youel, head of policy and advocacy at Positive Money, an advocacy group, the cost-of-living crisis has been characterised by a surge in fuel poverty and food insecurity across the UK. Many people struggle to afford the basics—such as heating their homes and putting food on the table. For example, the Joseph Rowntree Foundation estimated that 7.3 million households went without essentials in October 2023.

Nor is this an isolated statistic, as Youel points out. “According to the Food Foundation tracker, 15% of UK households – equivalent to approximately 8 million adults and 3 million children – experienced food insecurity in January. National Energy Action warned in February that six million UK households will remain in fuel poverty despite Ofgem’s energy bill drop from April, and 3 million will still be trapped in it by 2030.”

Pranesh Narayan a research fellow from the Institute for Public Policy Research (IPPR) confirms that although inflation has been slowing in recent months from its peak of 11.1% in October 2022, the cost of living is still much higher than it was before the pandemic. For example, although energy prices have come down from their peaks last year they are still well above historic levels.

In addition, “Now the crisis has shifted towards housing costs — the Bank of England has been increasing interest rates to combat inflation, and this has squeezed mortgage holders and renters alike,” he says.

Youel stresses that a host of factors have contributed to this ongoing crisis. “Wage suppression means that, in real terms, many households are far worse off than they were a couple of years ago because their wages have failed to rise in line with inflation.” Indeed, according to figures obtained from the Office for National Statistics (ONS), the average real total weekly pay across Great Britain in January 2024 was less than it had been 17 years earlier in January 2007: £506 versus £512 (after taking into account inflation as measured by the Consumer Prices Index).

Youel also cites a lack of government policy to protect households, such as price controls on essential goods. “The final major factor is this government’s unequal taxation model, which has allowed corporations to profit from higher energy costs and higher interest rates (which have only served to hurt households) whilst allowing fiscal drag to pull swathes of workers into higher tax brackets,” he says.

He points out that the behemoths of the payments industry also benefited from the crisis at the expense of their customers. As proof, he cites the fact that the four big UK banks (HSBC, Barclays, NatWest and Lloyds) made £44.3 billion in profits in 2023. “That’s four times what they made in 2020, all thanks to higher interest rates being paid by borrowers.”

Narayan agrees that corporate profits have exacerbated the cost of living crisis: “Large corporations in the oil and gas industry have profited massively, mainly from speculative trading activities. These profits have largely been distributed to shareholders when they could have been used to keep prices down for consumers or for investment in clean energy. Banks may have been profiting from the crisis as they were quick to increase mortgage rates in response to the Bank of England’s rate hikes, but were slow to increase rates offered to savers.”

Official view

The House of Commons Library recently produced a report titled Rising Cost of Living in the UK, which surprisingly ignores the issue of excess corporate profits, or ‘greedflation’. Instead, it states that price rises are “partly due to strong pay growth, with labour costs making up a large share of costs for many firms, particularly in the services sectors”. It cites an ONS figure stating that annual growth in nominal average earnings, excluding bonuses, was 6.2% from October to December 2023. However, in contrast to the figures cited earlier, these are for a relatively short period and aren’t adjusted for inflation.

Less surprising is its statement that low-income households are more affected by high food and energy prices than higher-income households. Moreover, it does reveal that Citizens Advice reported helping a record 48,533 people with debt advice in January 2024, up from 43,977 in January 2023.

As to the future, it states that: “In November 2023, the Office for Budget Responsibility (OBR) forecasted that real household disposable incomes per head will increase by 0.3% in 2023, fall by 1.5% in 2024, and then increase by an average of 1.5% between 2025 and 2028.”

Payments Association

Against this backdrop, the Payments Association report, Navigating the rising cost of living, proposes that Fintech innovation generally, and payments innovation in particular, can help hard-pressed consumers.

It identifies three emerging groups of ‘newly underserved’ consumers who are struggling with issues related to the cost of living and in need of financial services to improve their financial resilience and stability in the long term. These are:

  1. The working benefits family: This segment encompasses swathes of individuals newly navigating the complexities of the Universal Credit system amid low-paid employment. The report articulates the need for financial services tailored to bolster these families’ financial resilience and autonomy, emphasising fintech’s potential to bridge gaps in existing support systems.
  2. The embedded underserved: This group’s financial stability is notably precarious, characterised by individuals entrenched in the gig economy or hindered by digital accessibility barriers. The report highlights the necessity for innovative financial solutions that cater to the unpredictability of gig work and address digital exclusion, thereby ensuring equitable access to essential financial services.
  3. The unstable owners: Young, first-time homeowners find themselves at the intersection of homeownership and financial vulnerability, as highlighted in the report. The economic pressures of the cost of living crisis threaten their financial stability, underscoring the urgent need for fintech solutions that offer support and resilience to this demographic.

It argues that the experiences of these underserved groups must be harnessed to drive innovation and ensure that better products and services are developed to match their lives and financial needs. Currently, “Millions of people pay inflated costs for financial services due to a lack of payment services that match their work and life circumstances.”

A standout example of such innovation is SteadyPay, a fintech application designed to enhance the financial well-being of gig economy workers. By utilising data analytics to provide low-cost credit and other financial products, SteadyPay exemplifies how targeted fintech solutions can offer support to those in precarious employment situations. This case study underscores the report’s broader thesis: that fintech innovation when directed by a deep understanding of consumer needs, can significantly alleviate the burdens of the cost of living crisis.

In its detailed exploration of the potential for fintech and payments innovation to address the challenges of the cost of living crisis, the Payments Association’s report underscores the critical need for strategic innovation. By focusing on the development of new products, the adjustment of service offerings, and the enhancement of customer support, the fintech sector is positioned to offer meaningful solutions to those navigating these challenging times. The report, therefore, aligns with the overarching argument that fintech innovation represents a pivotal avenue for promoting financial health, inclusivity, and resilience amid the cost of living crisis.

Fintech innovation

For example, Fintech Hyperjar has developed a spending app that it claims helps its 600,000 customers feel more control over their expenditures. Nicola Longfield, its chief commercial officer, explains: “The app uses digital jam jars to give people a visual, engaging way to separate out their spending by category, goal or time period, taking a forward-looking view rather than realising at the end of the month they’ve over-spent.”

Its adoption was possibly helped by its launch in late 2020, about nine months into the pandemic, as Longfield explains: “So, people were already fast-tracking their online and digital lives, which meant we had a lot of organic growth early on.”

However, the business model is also innovative. “Unlike some pre-pandemic businesses, we weren’t reliant on low-interest rates or on selling debt or credit products to customers…. our business model from the start has allowed us to offer our services without monthly fees, so that was also hugely attractive to people looking for ways to tighten their belts.”

Hyperjar has also emphasised being customer-centric as it has developed, ensuring its customer service team is “the best trained in the business”. She adds: “They’re also important as front-line listeners, so we get weekly reports on what they’re hearing from customer chats and make sure we respond to problems and are aware of suggested improvements.”

Longfield has this advice for those seeking to develop a product or service for those hit by the cost of living crisis: “We’ve always believed that if you give people the right tools, behaviour change will follow. We had over a decade of an easy debt culture, but we wanted to help people do the opposite – to plan and spend well. In early 2020, this felt like zigging while the world zagged, but we soon came to epitomise a new zeitgeist.”

Longfield’s vision is surely one that every Fintech in the payments space would aspire to. “Tech should help us to become the financially competent, in control individuals we want to be, rather than being buffeted by impulses and half instincts about how much money we have and how much we’ll have in the future.”

Nevertheless, Youel provides a note of caution. “Greater innovation in payments has not yet resulted in lower costs for consumers, namely because they are still based on expensive bank payment rails. Regardless, the potential for private sector payments innovation to mitigate the poverty premium is probably limited —there isn’t as much money to be made from providing better services to lower-income customers, particularly when the most vulnerable are also the hardest to reach.”

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