This weekend I was listening to Money Box on BBC Radio 4 and a segment about the so-called “Challenger banks” (small, recently-formed, retail banks competing with larger banks) caught my eye… well, it caught my ear. This wasn’t just because I bank with Monzo and love it, but because it highlighted the amazing potential for people to use digital tools, such as banking apps, to take back control (probably not the best choice of words this week) of their finances. I have to admit, I initially started my account with them because they don’t charge you for spending from your card overseas or mark up the exchange rate, but I found they have a lot more to offer.
Monzo (other challenger banks are available!) boasts that half of their customers are under 30 and a further quarter is under 40. So, I am proudly of the 25% of over-40s who are giddy about the potential that smartphone-only banks, that give you real-time visibility and control of your cash, offers us all. I think it would be really useful if more demographics explored the empowering possibilities of digital banking. Especially that which challenges the status quo.
The way we are paying for things is transforming, and the biggest change is that we aren’t using change (or cash)! We’re tapping with our card or our phone. However, not using cash to pay for things can cause some people to develop negative behaviours with their money. Let me explain; You’re on a night out, you’ve taken some cash out to pay for drinks. When you run out of money you know it’s either time to go home or tackle the dreaded internal dilemma of “should I go to the cashpoint and get more cash out? How will I feel about this decision in the morning?” However, the number of establishments which actually take cash is dwindling. If you spend the night paying for things contactlessly (I’ve just made up a word) – not even entering your pin – it sometimes doesn’t even feel like you’re really spending money, does it? We all know what the result of that can be, spending a lot more than you should have done or wanted to.
The beauty of being able to see your finances in real time, and getting instant notifications when you’re spending money, is that it makes spending your money feel like you’re spending your money again! This allows people to tackle any negative behaviours they have developed around managing their money better in the age of contactless. Hopefully, it can stop the thinking that just because you cannot see physical currency leaving your pocket and going into the till, that it doesn’t mean it isn’t costing you.
One of the converts to the church of digital banking told Radio 4 “It has improved my relationship with money exponentially.” Being able to have realtime access and analysis allows him to budget based on how much money he actually has now, not on how much money he thinks he has. This has given him a sense that he now feels in full control of his money, and this is important. For too many people, especially people on low incomes, it is easy to feel like your finances are spiralling out of control and this can lead to getting loans to pay for everyday essentials and, ultimately, getting stuck in a debt trap. Payday loan users are typically on low incomes or unemployed and looking for work and 3 out of 4 payday loan customers take out more than one loan a year. Wouldn’t being able to grab their finances by the scruff of the neck through banking methods like this help them massively?
Another interesting aspect of these challenger banks is the ease of savings, another person on the show, who is a customer of Starling spoke of a scheme these banks do called “rounds ups”. Basically, every transaction he makes gets rounded up to the nearest £1 and the difference goes into a savings account, making it easier for people to build savings. You buy a £1.40 sandwich? 60p goes into savings. You spend 25p on a Fredo (although it should be 10p), 75p goes into savings! Recent data shows that 14 million working-age adults in the UK are not saving at all and the majority do not have a rainy day or savings pensions pot. The mean amount a UK household is putting just 1.7% of their income aside for savings. Encouraging people to save will help them save for their retirement, a rainy day or a special purchase.
Another bonus of some of the new kids on the banking block is the flexibility and immediateness of applying. There aren’t lengthy credit checks and there isn’t the need to go into a branch and have a meeting. Whilst there will always be a desire for people to have a personal relationship with their bank in person, it is becoming harder-and-harder to do so. Nearly two-thirds of the country’s banks and building society branches have closed over the past 30 years.
Another opportunity they offer to help you manage is your finances, is that you don’t need to have empty jam jars full of cash dotted around the house, assigned to different expenses – these apps allow you to digitally separate your money into “pots” only to be spent on certain things, to help you budget better. This has struck me as particularly useful for people who have accidentally found themselves in rent arrears following the roll-out of Universal Credit, being able to just keep some ringfenced to pay vital bills.
It’s clear that people who struggle to keep control of their finances are the ones who can benefit the most from these developments in banking, however, these are often the very same people who have low digital and financial capabilities. Non-internet users are more likely to be in the social classes DE, older and/or have left education earlier. There are 17 million people in the UK with low financial capability and 1.4 million people with both low financial and digital capabilities.
So how do we get the people who will benefit most from these innovations over the hurdles that are stopping them? To answer this I was looking at a project we were doing at Good Things Foundation, in partnership with the Money Advice Service, where we built up a financial capability course, giving structure and support for people to make their first online transaction. Whilst it’s not strictly the same as getting into online banking, it could be seen as the first step on this path and the fears around online banking and online transactions are very similar; people don’t know what they’re doing, people fear they’re going to get ripped off and people just don’t feel confident enough to get into it.
We found from the project that, if you help someone to make an online transaction, they are more likely to make a transaction again independently. We did a Randomised Control Trial where we gave people 8 weeks of financial capability classes through our Online Centres and found that the group who had been assisted with an online transaction saw their financial capability improve by 18-38% compared to just 12-22% of people who didn’t and they were 6.5 times more likely to make an online transaction again in the future. Perhaps then a logical hypothesis is that through supporting people to use smartphone-only banks, that they are more likely to embrace these opportunities for improved financial health.
Being able to make transactions online saves money and, as a result, stabilises peoples’ finances. Whereas, the inability being able to save money online exacerbates “the poverty premium”. Shopping online for bank accounts can’t just save you money, it can sometimes makes you money. However, people remain frightened, and understandably so, The ratio of media coverage of negative aspects of online transactions compared to the positive aspects must be about 1000:1! That is why it is good to support people in their first forays into online banking, answering their fears, giving them safety tips, and showing them that online banking isn’t a dark dystopia where they are helpless to fraudsters, but an opportunity for them take the reins of their finances.
We also found through our project with the Money Advice Service that our Online Centres are particularly useful places to as they do not abandon clients when it is no longer financially viable to continue supporting their learning, giving them open-ended support as, even the most computer literate amongst us, always find a question they don’t know the answer to.
I, and many others, are living proof that these banks aren’t just for twenty-somethings to easily ping over £25 to their mate for a concert ticket. They offer great potential for improving people’s financial health, whether it’s by making it easier to budget or curbing carefree consumption. However, for society to reap the full benefits that these innovations offer, we need to make sure that people who need better financial control can build up the digital skills to be able to access these opportunities.