Posted in: Wealth Management Administration
First published on Finextra
A study by Barclays on financial wellbeing in the workplace found that almost half of us (46%) worry about money and for one in five it affects our sleep and our performance at work. Clearly our personal wellbeing is closely linked to our financial wellbeing.
As Mr Micawber famously says in Charles Dickens’ David Copperfield, “Annual income twenty pounds, annual expenditure nineteen, nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
The Barclays report argues, as Micawber suggests, it is savings, not income, that determine a person’s financial wellbeing. Not having enough money put aside to pay the bills and also cope with unexpected emergencies can adversely affect our health and happiness.
Yet according to data from TradingEconomics, household saving, defined as the difference between a household’s disposable income and its expenditure, has fallen by between a third to a half in Australia, the US and the UK over the last five years. Recent research by the Money Advice Service found that more than 16 million adults in the UK have less than £100 in savings. A similar study in the US by the Associated Press-NORC Center for Public Affairs Research found that two-thirds of Americans, across all income levels, would have difficulty coming up with the money to cover a $1,000 emergency.
Part of the problem is low interest rates globally. The effect of inflation in this low interest environment means that the value of savings is being eroded, providing little incentive for people to save for the future. At the same time, the opportunity to borrow money cheaply means there is a greater temptation to fund purchases through credit cards and overdrafts or increased mortgage debt.
Another issue is that it has become far easier to spend than to save. For instance ApplePay and contactless credit and debit cards make cashless transactions effortless, while one-click purchases from online retailers such as Amazon can make it easy to forget that we are spending real money.
Encouraging good savings habits against this backdrop is not straightforward, so how can financial services companies support improved financial wellbeing? Financial education is part of the solution, by training individuals in better budgeting and providing practical debt management advice. However, simply giving people more information is unlikely to be the whole answer.
Technology can help, by making the process easy. In the US, the Acorns app aims to help people save without noticing, by rounding-up purchases on a linked credit or debit card to the nearest dollar and automatically investing the difference. Similarly, in the UK, Lloyd’s Bank’s Save the Change rounds-up debit card purchases and puts the difference into a savings account. The idea is that by saving small amounts often, individuals can build a healthy savings pot almost effortlessly.
Behavioural nudges could also be part of the solution by incentivising ‘good’ behaviour with rewards. Pensions are one of the longest-standing examples of a financial behavioural nudge, with governments offering tax-breaks as an incentive for individuals to save for retirement. Superannuation in Australia and auto-enrolment in the UK take the concept one step further, by pushing employees into retirement saving (albeit with an opt-out option in the UK).
In the insurance industry, Pruhealth began incentivising good behaviour with rewards more than ten years ago in the UK, offering customers who took care of their health, for instance non smokers or regular gym attenders, cheaper health insurance premiums and discounts on health-related products. Technology has moved this on with telematics car insurance policies that use GPS to monitor driving style and reward those deemed to be safer drivers with lower premiums.
‘Big data’ is also transforming the sale of insurance products, with technology enabling the analysis of large amounts of historical customer information across industries to more accurately track risk and offer appropriate incentives at the optimum time to reward behavioural change. These analytics can be used to personalise rewards by predicting which incentives will work best for different individuals – be that a free cup of coffee or trip to the cinema or money off gym membership or critical illness cover.
The benefit to the customer is clear – a treat or financial reward for ‘good behaviour’. The benefit to the provider is a strong point of difference to drive initial sales and a loyal customer base who are likely to make fewer claims because of their improved behaviour.
Combining an easy way to save with the incentive of rewards could be the way forward for the savings and investment industry too. In South Africa, savings accounts linked to the chance to win cash prizes have had some success. The idea has transferred to the US with the recent launch of SaveUp, which encourages people to pay down debt and build savings with the lure of lottery style rewards.
To encourage better savings and investment habits, financial services products need to become far more compelling so that they appeal to real people for whom small changes could make a real difference to their long-term financial security. There’s some way to go, but global financial services companies are starting to wake up to the fact that healthy finances have a crucial role in our overall health and happiness.
Like losing weight, or getting fit, small changes in savings and investment habits can make a huge difference over time. We believe this is only the beginning.