Cost of Living Crisis - Three Ways that Fintech Can Help

Households throughout the UK are struggling with the cost of living; from soaring food and energy costs to higher interest rates, communities throughout the country are tightening their budgets. Consumers are entering problem debt to make ends meet, spurred on by easy-to-access online lending. But not all is lost - the fintech industry is enabling households to better manage their finances, helping them budget, improving financial literacy and increasing regulation targeting predatory lending practices.

Households are under pressure

Inflation, A key macroeconomic indicator, saw a rapid rise from 1.5% during the pandemic to the current rate of 11.6% (ONS), whilst disproportionately affecting household expenses with a 19.4% increase in the cost of food last year alone. Therefore, households receive fewer goods and services per pound spent and often take on loans to make ends meet. From an all-time low of 0.1% in May 2020, interest rates climbed to 4.5% in May 2023, increasing the cost of servicing debt and mounting pressure on struggling consumers and businesses.

Adding fuel to the fire, real pay decreased by 3% from December 2022 to February 2023 (ONS), causing households to cut back on luxuries and, in many cases, take out loans to bridge the gap between the cost of essentials and household income. This mismatch is concerning; the average UK household income is £32.3k (ONS), whereas the average total expenses are £34.8k(ONS).

Despite this bleak outlook on personal finances, Buy Now Pay Later (BNPL) platforms have continued to expand their market share, enabling consumers to get approval for a high-interest rate online loan in minutes without a complete check of their credit score. It’s becoming clear that increased regulation of the BNPL industry is needed to better protect consumers from predatory lending, introducing a further barrier to individuals entering into problem debt.

The fintech industry has the right tools to help

Apple launched the iPhone in 2007, changing the way consumers interact with companies forever. Noticing an opportunity for a new breed of financial organisations, the CMA focused on increasing competition, leading to online-first banks. Now, consumers interact with feature-rich platforms in the place of visiting brick-and-mortar branches or calling an agent, utilising new banking standards. Therefore, fintechs currently have a perfect opportunity to be disruptive and transform the financial industry for good; if we build with customers at the centre of our solutions, we can create platforms that encourage financial visibility and literacy.

Leveraging open banking 

An innovation enabling today’s cutting-edge fintechs, open banking, was introduced in the UK in 2018 and enables the secure interoperability of financial data. Fintechs have leveraged the new standard to take generational leaps in online banking, lending, payments and many more. When applied to personal finances, open banking gives individuals greater visibility over their finances, viewing each of their financial accounts and debts in one place. The masses of data distributed by open banking also gave rise to “open data”, allowing increased data sharing across industry segments and creating a seamless customer experience. Emma, a UK-based startup, is leveraging open banking and open data to provide individuals enhanced visibility across their bank accounts, budgeting and other finance-related resources.

Rise of super apps

Super apps, pioneered in emerging markets, also have the potential to change the way UK households interact with their finances. Defined as an application that combines many digital services and experiences into one streamlined platform, super apps help customers to manage all aspects of their financial lives in place of interacting with many individual products. WeChat, with over 1 billion users in China alone, compiles food delivery, banking, social media and even traffic violations into one app. Fintechs are applying the same principle to personal finances, including Snoop: a spend management app built in the UK, finding consumers better deals on their bills and identifying high-cost insurance plans to help bridge the household spending gap.

Investing in financial literacy 

A third of adults in the UK are not financially literate, as reported by the OECD, owing to shortfalls during education and complicated product offerings. Fintechs can play a key role in increasing financial literacy, providing traditionally-expensive money advice to all consumers. One shining light in the financial literacy market is Black Bullion, building platforms to provide youth with a complete financial education before they join the workforce. Fintechs are continuing to innovate and partner with traditional institutions, furthering the campaign to build a sustainable relationship between households and their finances.

The cost of living crisis is having a larger than expected impact on individuals in every corner of the country, and fintech is uniquely positioned to help them manage these difficult times and create a healthier relationship with money.