How is the cost of living impacting the behaviours of financial services customers?

Cost of living challenges are having a fundamental impact on many households across the UK. With inflation at 11.1% [1] in October 2022, mortgage interest rates set to increase by an average of 3% [2] and more people turning to other more expensive forms of borrowing (i.e. unsecured lending) [3], people need ever increasing support from their financial service providers. In August 2022, we surveyed over 5,000 banking and insurance customers [4] (including general insurance and life and pensions) to understand what impact the rising cost of living is having on individuals. The insights cover customer expectations of their banking/insurance providers, spending and saving habits, and the products and services customers feel they would benefit from.

The rising cost of living is resulting in even the most financially resilient customers changing their behaviours. This combined with the heightened standards introduced by the Financial Conduct Authority's (FCA's) new Consumer Duty, which requires firms to enable their customers to make better financial decisions and deliver good outcomes, means financial firms must do more than ever to ensure that customers are supported with products and services that help to respond to their evolving needs. Customers with existing vulnerabilities will feel the greatest level of impact, with more customers being pushed into the FCA's "particularly vulnerable" category and firms experiencing an uptick in the number of vulnerable customers they serve [5].

A large cross section of customers are being impacted

Everyone is being impacted to some extent by the current economic pressures. It is clear that whilst the impact is disproportionately greater for some groups such as women, people with disabilities [6] and ethnic minorities [7], the majority of customers are experiencing some impact, irrespective of household income or age. It is imperative that better support is provided across the spectrum. 

With food prices rising at the fastest rate in 45 years [8], and salaries failing to keep up, customers are facing significant impacts to their monthly disposable income, with 64% of banking customers experiencing a difference of £50 or more a month to their disposable income. Given the average weekly food cost for a typical UK household is now around £103 [9], impacts to disposable income of over £50 are significant, especially when we consider that the Trussell Trust food bank network alone distributed 50% more food parcels over the summer of 2022 compared to before the pandemic [10] (2.1 million food parcels in 2021-22 [11]). Over the course of the last six months, 320,000 people have had to turn to the Trussell Trust’s food bank network for the first time – a 40% increase compared to 2021 [12]. 

The increase in cost of living is taking a toll on customers financial and mental health, forcing them to change their spending and saving behaviours

Households are having to closely monitor their outgoings and are adapting their saving and spending habits to try to reduce the impact. 68% of banking customers have changed their spending habits, and 58% have changed their saving habits.

Cost of living challenges are accelerating a decline in the financial health of many, with over half of banking customers feeling worried about how they are going to afford general living costs month to month.

The financial toll is not the only impact we are seeing across the board – the mental health of many is being seriously impacted. 53% of those in households with an annual income below £10,000 agreed that their mental health had been negatively impacted by the rising cost of living challenges, compared to 52% of those with an annual income of £50,000-£70,000. This data shows that everyone irrespective of household income, is being negatively impacted by the cost of living. This greater increase in financial pressure is having a knock-on effect to increased mental health challenges and greater customer vulnerability. 

The impact the cost of living is having on the mental health of customers has repercussions for insurers too. 48% of those insurance customers whose mental health had been negatively impacted by the increase in cost of living also felt that they might need to stop their monthly payments, compared to only 8% of those who’s mental health had not been impacted.

Whilst providers are increasingly putting more measures in place to support customers, they need to do more around identifying vulnerable customers and providing targeted, proactive support.

Customers aren’t able to focus on planning for the future  

Insurance customers have found their premiums are becoming more expensive, and many are increasingly worried about their ability to continue meeting their payments.

The increase in cost of living is forcing customers to shift their focus to making ends meet in the short-term, as opposed to planning for the future. 35% of insurance customers are experiencing a rise in their insurance premiums, and 27% of insurance customers were so worried about meeting their monthly insurance payments that they felt they may have to stop them, with income protection, mobile phone, critical illness and life insurance being the most common products respondents were considering stopping. This presents a longer-term challenge for customers, as a lack of life insurance may reduce their eligibility for a mortgage. Thus, when making these decisions to help in the immediate term, it's imperative customers think about the longer term implications. This number is likely to increase as the challenges deepen across the winter months. Customers will increasingly be forced to decide between what they perceive as ‘nice-to-have’ insurance products, like life insurance, and products that have a legal requirement, like car insurance.

What does this mean for Financial Services firms?

We recognise that firms have developed better processes over the last two years in respect to vulnerable customer identification with more treatment options being available to support customers following the lessons learnt from the COVID-19 pandemic. However, firms still need to further improve their processes, staff training and monitoring in order to be able to pro-actively support vulnerable customers due to the evolving challenges caused by the cost of living, with Consumer Duty raising the expectations of firms in this area. We have outlined below some actions that firms can consider to pro-actively support customers.

Identify customers on the tipping point

Whilst firms should encourage customers to come to them more regularly to seek financial advice, financial providers should look to identify customers who may need more support as well as ensuring that they have the resources and skill set to proactively do this. Utilising customer data and AI (e.g. technology that can help identify customers in distress drawing on their tone of voice, emotion, phrasing and any significant behavioural changes that deviate from the norm) and analysing general changes in behavioural patterns (i.e increase in spending, frequency of being withdrawn, missed payment records etc.) will help firms to recognise those who may be getting into financial difficulty. 

The Consumer Duty also encourages firms to identify customers that need extra support using digital channels e.g. analysing cursor movements or keystrokes. In light of this, firms need to ensure that their monitoring arrangements are robust and sufficiently equipped to provide a view on whether fair outcomes are being delivered and that current processes and controls are able to cater for the ever changing and challenging economic environment that customers are navigating.

Ultimately, firms are likely to struggle to fully understand the complexities and precise circumstances an individual customer is experiencing at any one time. More firms could benefit further from working with charities and third parties, to better understand some of the broader trends and behavioural cues of vulnerable customers. This will help to not only signpost more customers for additional, specialised support, but also to draw on their expertise to better train and equip staff to identify vulnerabilities. Additionally, charity partnerships can help firms to think through the design of their products and services and analyse how inclusive they are to meet a range of different customer needs and characteristics.

Encourage customer contact

The best way for firms to support their customers is to be able to help them navigate through better financial decision making, before financial difficulties occur. Ask yourselves – how easy is it for a vulnerable customer to contact and interact with the firm? Consider call waiting times, the number of hand-offs required between departments/teams, the availability and avenues for customers to contact the firm. Financial Service providers need to offer a range of channels for each customer journey. For example, on the phone, digital, in person, as customers prefer to interact with their bank in different ways. Additionally, shrinking branch networks may have a significant impact on the access for certain customer demographics.  Do customers only feel empowered to contact the firm if there is a problem or is further work required to drive awareness around how a firm can help customers with financial decision making? With some firms instigating ‘support hubs’ for customers, they should be monitoring their effectiveness – how are they being utilised? What learning are they obtaining from them and how are they using those learnings?

One size does not fit all

Providers must consider making products and services more flexible and tailoring them to changing customer needs. Consumer Duty requires firms to consider their customers journeys and identify barriers or friction which may result in poor outcomes and identifying when customers may need more support. For example, if a customer has missed a credit card payment – how are firms engaging with them to assess their personal circumstances and ensure that appropriate options are discussed and agreed, in doing this they should consider whether the repayment plan meets the needs of the individual customer. Firms should reflect on what factors trigger further customer review, and where appropriate, update their processes to ensure they are capturing a range of cues to warrant deeper analysis.

Firms should look at ways they can better equip their customer support teams to look at varied and flexible personalised solutions that suit the needs of the individual customer. For example, if a customer enquires into upping the excess on their insurance product to ensure they have cheaper monthly premiums, a customer advisor could discuss their options in a simple jargon-free way to better inform them of the suitability of the product and the implications of increasing their excess. Firms acting in these small ways can help support customers and build greater customer loyalty and trust in financial service providers.

Handling of a potential increase in customer complaints

Rising financial and emotional pressures may also mean customers start to expect more from their product or service. Naturally, if expectations are not met, firms may start to see more customer complaints. They will need to ensure that their employees are dealing with these complaints in a supportive way, being mindful of the mental health implications the cost of living challenges are bringing, and have sufficient resources, capacity and skills across all business channels to be able to identify, manage and respond to rising volumes of customer complaints. Whilst a robust approach to root cause analysis will help firms to learn lessons from the originations of these complaints, in line with the new Consumer Duty, firms will be required to identify emerging and systemic issues and proactively manage and mitigate these.

Together we can create a better financial future

Our survey showed that 73% of banking customers felt that their bank had made no difference to their life during the cost of living challenges, and 66% of insurance customers said the same about their insurer, so firms have a real opportunity to better position themselves as a reliable and trustworthy point of contact for personalised and effective support. When providers are successful in engaging customers, they can have a real impact; another piece of Deloitte research showed that 72% of women, and 63% of men do not contact their bank for advice, but that out of those that did contact their bank/building society for advice or support, 87% described their interaction as helpful [13]. 

We can help you respond to the challenges presented by cost of living and the opportunity presented by Consumer Duty to support vulnerable customers. This includes a range of support from supporting you to develop revised vulnerable customer strategies, to helping you develop revised processes, products and services. Please contact Zeinab Chaudhary or Alastair McGeorge if you have any questions.

[1] Inflation increases to 11.1% in October: ONS | Mortgage Strategy

[2] What are interest rates? | Bank of England

[3] Britons turn to credit cards and loans to cover basics as cost of living crisis bites | UK cost of living crisis | The Guardian

[4] We surveyed 2502 banking customers and 2568 insurance customers. The majority of the survey data is quantitative in nature derived from closed questions with a few free text boxes mainly to address answers outside a series of closed options.

[5] FCA’s Finalised Guidance for firms on the Fair Treatment of Vulnerable customers (FG21/1) | FCA

[6] Why disabled people are at the centre of the cost-of-living crisis | SCOPE

[7] Ethnic minority workers more likely to be affected by cost of living crisis | The Guardian 

[8] Milk and cheese drive food price inflation to 45-year high | BBC

[9] Average UK Household Cost of Food | NimbleFins

[10] Forty percent of people claiming Universal Credit skipping meals to survive, new research from the Trussell Trust reveals | The Trussell Trust

[11] The Trussell Trust End of Year Stats | The Trussell Trust

[12] Almost 1.3 million emergency parcels provided in last 6 months | The Trussell Trust

[13] Women less likely to contact their bank as cost of living bites | Deloitte UK