As the cost of living crisis sends numerous households into debt, Paul Stallard from our Centre of Digital Banking and Finance considers how banks, fintechs and other lenders should support borrowers – to avoid the catastrophic outcomes of 30 years ago.
Dark clouds are gathering. Inflation is set to increase even further, rising to around 10%. The Bank of England has increased interest rates – successively from 0.25% to 1%.
On top of an increase in National Insurance, energy prices are soaring. Supply chain disruption and shortages are causing the price of basic living necessities to sky rocket. On average the cost of living increase this year is expected to be as much as £1,200 per household.
Are lenders ready for a credit crisis?
It’s true that UK households have built up their savings to record levels during lockdown. However, the pattern of households accumulating higher savings during the pandemic is highly uneven.
Those who saved most during lockdown are among the highest 40% of earners and the retired, while the poorest 20% suffered a decline in savings. Many home owners – especially those with the additional cost of a growing family – have never experienced such pressure on their finances. As difficult as it will be, many people will cope.
However, most people in the UK will face significant challenges in meeting their repayment obligations in the coming months. This is especially true of those who are maxed-out on their credit cards, unsecured loans, expensive overdrafts, rising mortgage repayments and commitments from ‘buy now, pay later’ (BNPL) schemes.
Very few of us are taught about money management at school. So, for many people, being unable to meet payment obligations is distressing. Financial stress will make some customers physically ill. Others will sink into depression. Debt often creates an acute sense of embarrassment which forces some people to deny or ignore their situation until it is too late.
How lenders communicate with customers
Incumbent banks, challenger banks and even fintechs will have to create strategies and plans to help customers in need of help and guidance.
Lenders cannot help customers if they don’t know their circumstances. So, they must ensure that customers know that – if they run into repayment problems – they should get in touch.
They’ll need to prepare an extensive communications programme giving practical advice to borrowers facing repayment problems. This should go on their website, appear in branches and sent to borrowers through the post as well as email.
It should include special debt management FAQs and details of other organisations who can help with other aspects of financial difficulty
Customers don’t live nine-to-five lives, so lenders should offer round-the-clock help lines or triage services and dedicated ‘chat bots’ on their website.
Try to meet with customers face to face
During the last housing crisis some 30 years ago, borrowers could visit their local bank branch and talk their problems through. That’s not an option for many now.
Helplines might direct borrowers to branches. Banks might also consider renting temporary office accommodation where there’s no branch, so that bank staff can meet with borrowers in person.
However, few branch employees are old enough to remember the last housing crisis 30 years ago. They won’t remember the devastating effect it had on many people, including family break-ups, physical and mental illness. It was not unusual to hear of some who had resorted to taking their own lives.
Staff must learn to develop soft skills, either through formal training or from observing colleagues and assessing which behaviours they might emulate.
Great businesses are created by great people, who attract and keep even better customers. Sometimes those customers need help.
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