Financial Wellbeing – can we spot the signs of money worries?

(FCA Insight)

 

What does it mean to be ‘financially well’? Is it having a large bank balance and not getting into debt? Or is it not about how much money you have but rather how comfortable you feel? The answer is not straightforward and, to a large extent, will depend on who you ask. But research in this field has huge potential and poses new challenges for firms and regulators.

A feeling of financial wellbeing – feeling comfortable or free from worry – is obviously a subjective feeling. But how well does it map onto objective facts about people’s financial circumstances and behaviour? Is it as simple as having more money that will bring a feeling of financial wellbeing? Or are there other factors at work and other signs that might indicate a distressed consumer?

We wanted to know whether people’s everyday financial behaviour (payments, transfers in and out of their account, mobile banking logins, credit use, and so forth) could help us predict how financially well they feel.

Our research, carried out jointly with academic expert Joe Gladstone, involved asking 2,695 current account holders about how much ‘money management stress’ they said they were feeling in everyday life. This was then compared to their current account records over an 11 month period – with their consent and with data anonymised, naturally.

Signs of stress

The study examined what behaviours correlated with feelings of ‘money management stress’. Some behaviours were essentially neutral. So, for example we found little or no correlation between people’s age or gender and their reported levels of financial stress. Interestingly, income volatility also showed little correlation with financial stress. Irregular earnings do not necessarily match higher stress.

However, a number of behaviours or circumstances showed strong correlations. Some of these were as expected: people with higher incomes or higher bank balances, for example, reported fewer feeling of money management stress, while on the other hand, there was a strong correlation between the amount of time spent overdrawn and feelings of stress.

There were also some less-expected correlations. There was, for example a modest correlation between how frequently people logged on to a mobile banking app and higher levels of financial stress. And while income volatility showed little correlations with stress, account balance volatility showed a quite strong correlation. One possible explanation for this is that wellbeing is affected by mismatches in the timing of income and expenditure. Or maybe simply looking at income fluctuations in account data does not do justice to the full complexity of people’s financial situations?

Either way, this is an area where innovative research with banking data could make a tangible difference, arguably now more than ever with the Covid pandemic’s effect on people’s incomes.

Those interested in the state of research into this field can delve into the links above and of course into our own research paper, which provides more details of our findings.

But underlying this work are some key questions about people’s subjective feelings of financial wellbeing. Crucially, what are the potential uses for this kind of research both for regulators and financial firms?

Feelings and facts – when objective and self-reported wellbeing don’t align

We believe there is a lot to be learned from situations where objective and self-reported financial wellbeing don’t align. Objective measures of financial wellbeing, such as savings and debt balances, are easy to obtain and compare but they are not comprehensive and may not provide a full picture.

A good analogy is measuring prosperity by GDP per capita, which most people agree paints a very incomplete picture of human progress. The Office for National Statistics  acknowledged this a few years ago when they began tracking the UK’s national wellbeing.

In the realm of personal and household finances, mismatches between how people feel and what we can objectively see about their finances may be crucial. If people are objectively well off, but do not feel that way, then something is amiss.

So we might look at the people who feel more stress than their objective financial situation warrants. Are they in a vulnerable state? Could they be more susceptible to scams and predatory products? Is there anything that firms could do to reassure these people and make them feel more financially secure?

Our research also indicated a correlation (albeit very modest) between online banking activity and subjective feelings of wellbeing. People who log into their mobile banking app regularly report lower financial wellbeing, which may well be linked to the experience of stress. These questions are potentially linked to the relationship between financial wellbeing and mental health, which is increasingly being picked up by industry and policymakers.

And what about people that feel financially well off, even though objectively their finances are not looking good? This could be a coping mechanism, or perhaps a sign of complacency or disengagement. These behaviours could be indicative of broader issues in some parts of the population, such as young people using high-cost short-term credit or putting off saving for their retirement by not engaging with pension products. Put crudely, people with little or no provision for retirement may not be stressed about this fact, but that might simply be because they are not thinking about it.

If people’s disengagement with their finances spans across different product areas, then perhaps engaging them in one area could be a ‘jump-off point’ for greater engagement in other areas.

Greater financial wellbeing through data and technology

Whilst our exploratory analysis sheds some light on the origins of subjective financial wellbeing, we can explain only a small part of the differences between people, and our study does not track differences in wellbeing over time.

Before moving on to questions about offering assistance and designing appropriate communications, there is a need for work with more detailed data. Data science approaches could be used (as the FCA has done previously) to better predict the likelihood of different consumer outcomes, accessing the ever-increasing range of consumer data collected on a daily basis. With greater data sharing through Open Banking and Open Finance, the number and range of parties being able to conduct such research should also increase.

But for data and technology to truly drive greater wellbeing, there are at least a couple of tricky questions that deserve more attention. The first question is around the right blend of subjective/self-reported and objective data. This is because designing new tools and approaches with a focus only on objective data may be quite limiting. The growth of digital channels allows financial institutions to capture subjective measures more regularly and more systematically, which may offer new opportunities. Capturing subjective metrics may be combined with a conscious opt-in to the use of financial wellbeing tools, which are increasingly being rolled out through digital channels.

Another important issue is the ethical use of data for monitoring subjective financial wellbeing. Although recent research suggests that consumers are largely supportive of banks doing such monitoring, this support may depend on what actions the bank takes based on the data. Banks may have to demonstrate that subjective wellbeing metrics are not used to take advantage of consumers, but rather to help protect and support consumers.

To return to the example of online banking logins, if high rates of logins are a meaningful indicator of possible financial stress, then such data has the potential to be used for both good and ill.  This particular correlation in our research is not conclusive, but we believe it illustrates the principle and the potential that data analytics have for monitoring financial wellbeing.

Looking ahead with this in mind, there may be a case for making such wellbeing monitoring explicit and allowing consumers a choice to opt out. There may even be a case for pre-emptive opt-outs for certain consumer groups.

Such questions are obviously closely aligned with wider societal debates on the ethical use of AI.

Studying subjective measures of financial wellbeing is a developing activity, but one that has huge potential. But whatever innovative solutions emerge from such work, ensuring they are welfare-enhancing is a crucial challenge.

 

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