In order to innovate finance, we must understand people

10 May 2016

We know the figures: 3.6% of the UK population, or nearly 2 million adults, remain unbanked today; around four in ten adults are not in control of their finances and 8.8 million individuals are overindebted. But these numbers merely show there is a problem. We can only begin to solve these problems effectively when we listen and reflect on the ‘lived experience’ of financial exclusion.

The first thing to understand is that successful financial management is not one-size-fits-all. We each have our different methods which may appear curious to others. Take money management and budgeting; despite fanfare around new and innovative ways of making payments, from phones to watches and even jewellery, there are 1.6m people for whom cash is their only payment method by choice.

For those on low incomes who use cash, having a physical coin or note in hand can make them feel more comfortable. Additionally, coins and notes are a fool-proof  way of keeping tabs on how much money is left. And accuracy and control matter most when every penny counts.

Even with consumer credit, there is real value in being able to borrow small amounts of money quickly – which is perfectly normal behaviour when managing fluctuating expenditure against a limited income. The challenge is not necessarily discouraging people from doing so, but finding inexpensive ways to allow small sum borrowing without the creditor-debtor relationship becoming predatory.

Being able to save is another challenge for low income households. StepChange has recently estimated that £1,000 in savings is needed to ensure people don’t fall into a trap of using high cost credit and getting themselves into problem debt. The Help to Save initiative announced in the April Budget, where the government matches up to £50 of savings every month, is also built on the premise that savings behaviour among low income households is currently too low.

However much more research is needed to find out what motivates and enables low income people to save at all. Previous research finds that many incentives attached to savings products and initiatives don’t help those people who feel, by virtue of their low income and large outgoings, that saving money just isn’t for them because they can’t find any spare money to save.

One key to unlocking savings is how we think about money; for some, savings are  thought of as a regular act of self-sacrifice: taking money out of one spending pot and putting it in another non-spending pot for the future. But this assumes that there is excess money today which isn’t needed for essentials.  The way we often talk about good savings behaviour isn’t reflective of some low income household’s relationship with money, which experiences often unpredictable peaks and troughs.

When we at Toynbee Hall evaluated our Community Money Mentors programme last year, we found that what really worked was empowering people dealing with small sums of money to change the way they felt about both their essential spending and putting money aside. Without the aid of products and incentives, we found the key trigger comes from challenging assumptions that savings are impossible by identifying where in a typical week’s spending savings can be found.

In short, we first show people how to spend less today without feeling deprived, and then make it very clear that any change in savings behaviour is good and people should not feel dissuaded from putting away money – even if it’s only a little bit.

We feel the solution is twofold: a) finding ways to restore confidence in people with low incomes for whom the feeling that financial service providers are working against them is prevalent, and b) clearly acknowledge the hidden rationality of non-traditional financial behaviours, particularly those of some low income consumers.

For too long financial services and products have been designed, not around the particular needs of consumers, but upon a series of assumptions of which financial behaviours are correct. This needs to be challenged. The work that we at Toynbee Hall are doing, through our mentoring programme and, importantly, with our new MAP Tool, explores non-traditional financial behaviours without judgement, and recognises that in achieving financial inclusion these behaviours need to be engaged with by the entire financial services sector.

This post was originally posted on the Guardian Public Leaders Network on April 21, 2016.