Banks and building societies should compete with each other to offer the best set of tools and services to help customers address financial problems that were worsened by the pandemic, a think-tank says today.
The Social Market Foundation said that new “consumer duty” rules being introduced by the Financial Conduct Authority should drive financial services firms to improve the way they offer support to customers facing financial difficulties.
The SMF found that some households and small businesses had exhausted their financial reserves during the lockdown years, adding new urgency to the need to rebuild their financial resilience.
Financial difficulties are adding to the burden on the National Health Service by contributing to mental health problems and placing demands on NHS resources, the SMF said. “Social prescribing” of financial wellbeing tools and services would help relieve some of that burden.
The SMF analysis of financial resilience after the pandemic comes in a briefing paper sponsored by the Current Account Switch Service (CASS). The SMF retains full editorial independence.
The paper, based on evidence from charities, experts and industry insiders, said that banks and building societies are better-placed than any other organisations to know when people are at risk of getting into financial trouble, and to offer tools and services to help.
That means apps and tools giving customers the ability to make spending plans, forecast cash flows, automatic saving functions, and expenses categorisation.
“These tools could be particularly valuable for encouraging financially vulnerable customers to engage with banking services and potentially address their financial challenges,” the SMF said.
Fewer than 2% of people switch current accounts each year. The SMF said low current account switching rates are a “driver of detriment” for personal and business customers in the banking sector. High rates of inertia reduce pressure on banks to improve customer service, offer higher returns on deposits, and offer more attractive overdraft terms.
Instead of offering better support, the banking sector often acts to the detriment of financial resilience, especially among financially vulnerable customers. This includes through high overdraft-related costs, poor quality customer service, and loss of access to banking through branch closures for some customers who do not want to, or cannot, use media based accounts, the SMF said.
A new approach to regulation should spur banks and building societies to do better for vulnerable customers, which might encourage more people to switch current accounts.
The FCA has proposed a Consumer Duty to strengthen the role of banks and building societies in improving financial outcomes for households.
The SMF said banks should use the FCA’s proposed Consumer Duty – with its requirement that firms “enable and support retail customers to pursue their financial objectives” – as a catalyst for to improve the services they offer customers, especially those as risk of financial vulnerability.
Financial institutions also need to continue to do more to empower customers to share their vulnerabilities (e.g. a mental health issues or abuse from a spouse or partner), allowing banks and building societies to provide tailored support.
This includes thinking more about how to assist customers that are not aware of their vulnerabilities – for example someone that is not conscious that they have an issue with compulsive gambling. There is scope for firms to be more proactive, informing individuals about concerning spending patterns.
The SMF also encouraged policymakers to do more to encourage switching, proposing a “prompting” mechanism in current account space. Banks would be required to prompt customers every two years about their current account in order to have customers either re-affirm consent for the continuation of their current arrangements, or to alert the customer to the opportunity to re-evaluate what they have currently and whether there might be gains from switching.
Scott Corfe, SMF Research Director, said:
“Banks and building societies can do more to support vulnerable customers, but they need to think beyond their traditional product offer and create new reasons to switch. For people with limited deposits, the prospect of a higher rate of return on savings from switching bank offers little appeal.
Yet these same customers could benefit from tools that can help them better manage their finances.
Outcomes for financially vulnerable households could be improved, and more customers may consider switching provider, if banks compete more in the financial wellbeing space, rather than on conventional measures such as interest paid on deposits and overdraft rates.”
Jo Ainsley, Senior Service Line Manager, Pay.UK speaking for CASS, said:
“It is very important that we consider the challenges people face when the things that previously may have been taken for granted change. One clear impact of the pandemic is how people stepped closer to financial vulnerability and there may well be more changes for people to think about in the coming year and beyond.
The Current Account Switch Service makes changing a current account simple and easy, once people have considered if a new current account is best for them. The FCA Consumer Duty and the SMF’s assertion that banks and building societies are well placed to offer tools to their customers – and should compete in doing so – is a well-timed argument for greater differentiation across current accounts. We also welcome the idea of a ‘switch trigger every two years’, built in a way so people can see what other accounts are available to them to encourage people to consider switching.”
- The briefing, Banking on change, will be published at 08:30 on Wednesday, 16th February 2022 at smf.co.uk/publications/banking-on-change/
- The briefing is sponsored by Current Account Switch Service (CASS). The SMF retains full editorial independence.
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