Can banks help customers cope with the rising costs of living?

Con­sumers could be for­giv­en for think­ing that the past two years have been a case of jump­ing out of the fry­ing pan into the fire. After the Covid-19 pan­dem­ic wrought hav­oc on glob­al economies, the recent surge in infla­tion to a 30-year high has trig­gered a cost-of-liv­ing cri­sis in the UK. 

Soar­ing ener­gy costs, ris­ing gro­cery prices and tax hikes mean that liv­ing stan­dards – the amount of dis­pos­able house­hold income – are on course to drop by 2.2% this year, accord­ing to the Office for Bud­get Respon­si­bil­i­ty. It marks the biggest drop in liv­ing stan­dards the UK has seen since records began in the 1950s. 

The find­ings paint a bleak pic­ture for con­sumers, many of whom suf­fered finan­cial hard­ship dur­ing the pan­dem­ic as suc­ces­sive lock­downs led to fur­lough, pay cuts and redun­dan­cies. TSB’s Mon­ey Con­fi­dence Barom­e­ter found that 82% of peo­ple have expe­ri­enced an increase in the day-to-day cost of liv­ing. As a result, almost a quar­ter have been forced to dip into sav­ings, while a fifth have changed their usu­al spend­ing habits and behav­iours. 

The land­scape is equal­ly chal­leng­ing for busi­ness­es. The pan­dem­ic has left many SMEs finan­cial­ly frag­ile, with sig­nif­i­cant­ly more busi­ness­es in debt than before Covid-19. Now, as they bat­tle the lat­est cri­sis, the British Cham­bers of Com­merce said half of busi­ness­es are cut­ting costs, while one in five are scal­ing back invest­ment and, con­cern­ing­ly, 5% are con­sid­er­ing ceas­ing trad­ing. This begs the ques­tion, are high street banks and lenders doing enough to help cus­tomers and busi­ness­es?

Andrew Hag­ger is the founder of con­sumer site Mon­ey­comms. He says: “So far, there hasn’t been addi­tion­al mon­e­tary sup­port from banks and unless there is some pres­sure from the gov­ern­ment to do so, this is unlike­ly to change.

“Slo­gans in bank adver­tis­ing include phras­es such as ‘by your side’ and ‘we’re on your side’ but at the moment these sound hol­low. The banks will tell you they have intro­duced bud­get­ing tools in their apps and help you to track spend­ing but as far as tan­gi­ble ini­tia­tives such as cut­ting the near-40% inter­est rates on agreed over­drafts, not a whim­per so far.”

In ear­ly 2020, the Covid-19 cri­sis prompt­ed an unprece­dent­ed response from UK banks as the pan­dem­ic took hold. Banks were instru­men­tal in imple­ment­ing a raft of gov­ern­ment sup­port pack­ages, includ­ing busi­ness loans, mort­gage pay­ment hol­i­days, inter­est-free over­drafts and repay­ment hol­i­days on cred­it cards and loans. It marked what many called a new era for banks, fol­low­ing the finan­cial cri­sis of 2008. 

But as retail cus­tomers and busi­ness­es face finan­cial hard­ship once again, could it be too much for banks to con­tend with? 

Pradeep Raman, dig­i­tal direc­tor at sav­ings soft­ware provider Fino­va, says: “For the banks we work with, the pan­dem­ic has not had a last­ing impact on their abil­i­ty to lend or offer sup­port. It is a bank’s reg­u­la­to­ry duty to take care of its cus­tomers, so it would not make sense for lenders to take on an atti­tude of max­i­mum recov­ery in our cur­rent envi­ron­ment of finan­cial uncer­tain­ty.” But the Bank of Eng­land has warned that high lev­els of debt among UK busi­ness­es can lead to risks to the finan­cial sys­tem and banks could suf­fer loss­es if busi­ness­es strug­gle to pay back their loans. And in a mes­sage to its busi­ness cus­tomers, Natwest advis­es busi­ness­es to “be pre­pared for every even­tu­al­i­ty and aware of the risks of overex­ten­sion when bor­row­ing in an envi­ron­ment con­ducive to ris­ing rates.”

Finn Houli­han is man­ag­ing direc­tor of wealth man­age­ment firm Arlo Group and thinks that banks may be lim­it­ed in the help they can offer. “While banks have offered some lev­el of flex­i­bil­i­ty through hol­i­days on loans and extend­ed mort­gage repay­ments, there is a lim­it to the flex­i­bil­i­ty they have to recu­per­ate the bor­rowed mon­ey to avoid defaults of their own,” he says. For many busi­ness lead­ers, it appears the onus is on them to assess the type and lev­els of debt the busi­ness can sus­tain and make deci­sions accord­ing­ly. 

Experts believe that instead of addi­tion­al mon­e­tary sup­port, banks are like­ly to focus on edu­ca­tion­al sup­port and resources. Since the 2008 finan­cial cri­sis, when trust in the UK bank­ing sys­tem plum­met­ed, banks have worked hard to win over cus­tomers and restore their rep­u­ta­tion and many have intro­duced online mon­ey man­age­ment tools and fea­tures to help increase cus­tomers’ finan­cial under­stand­ing. For Houli­han, finan­cial edu­ca­tion ini­tia­tives will be key in help­ing cus­tomers nav­i­gate this lat­est cri­sis. 

“While banks can only be so flex­i­ble with the relief pro­grammes they cre­ate, there has been a real shift in terms of client ser­vice dur­ing the pan­dem­ic as part of a gov­ern­ment push for edu­ca­tion and open dis­cus­sions with clients. 

“Finan­cial edu­ca­tion, when com­bined with tech­nol­o­gy solu­tions such as open bank­ing, can offer more long-term solu­tions for peo­ple to nav­i­gate their finances. This can help put more infor­ma­tion into the hands of the con­sumer to help them grasp their finan­cial sit­u­a­tion bet­ter,” Houli­han explains. As an exam­ple, TSB said its Spend & Save and Spend & Save Plus cur­rent accounts include fea­tures that are designed to help cus­tomers bet­ter man­age their mon­ey, such as sav­ings pots that allow cus­tomers to eas­i­ly put aside mon­ey and an auto-bal­ancer fea­ture which auto­mat­i­cal­ly trans­fers mon­ey from the sav­ings pot into their cur­rent account should their bal­ance fall below a cer­tain lev­el. 

Raman says banks are proac­tive­ly con­tact­ing cus­tomers to offer advice on their cur­rent expens­es and alert them to poten­tial future dif­fi­cul­ties. Mort­gage lenders, sim­i­lar­ly, are approach­ing home­own­ers near­ing the end of their fixed term mort­gage to advise them of the best prod­ucts avail­able for their cir­cum­stances. 

There is cer­tain­ly greater pres­sure on banks to help cus­tomers who might be strug­gling. The Finan­cial Con­duct Author­i­ty called for stronger pro­tec­tion of “vul­ner­a­ble cus­tomers” after its research revealed near­ly 27.7 mil­lion UK adults dis­play char­ac­ter­is­tics of vul­ner­a­bil­i­ty, includ­ing low finan­cial resilience. 

Anna Rough­ley, head of insight at the Lend­ing Stan­dards Board, says: “How any for­bear­ance pack­ages or sup­port are designed and deliv­ered is a mat­ter for indi­vid­ual banks and lenders. How banks respond will depend on the indi­vid­ual customer’s sit­u­a­tion. This should be done in an empa­thet­ic man­ner, under­stand­ing the stress and anx­i­ety that can accom­pa­ny mon­ey wor­ries.

“Banks and lenders should review how they encour­age con­tact from cus­tomers and ques­tion whether there are ways to improve this that may increase the like­li­hood of proac­tive cus­tomer con­tact.”

But for all the talk of a per­son­al touch and greater finan­cial edu­ca­tion, there is still the con­cern that it will not be enough. Raman says: “While pay­ment hol­i­days haven’t been dis­cussed at length yet, it would be good to see these rein­tro­duced where nec­es­sary to avoid instances of unplanned loan defaults.” Mean­while, Hag­ger warns: “Banks will face high­er lev­els of bad debt and missed loan and mort­gage repay­ments when the cost-of-liv­ing cri­sis real­ly takes hold. The gov­ern­ment has so far giv­en a £150 one-off pay­ment from coun­cil tax and the promise of a £200 loan to pay elec­tric bills come Octo­ber.” But he thinks these mea­sures are pure­ly paper­ing over the cracks and inad­e­quate to help con­sumers cope with surg­ing infla­tion. “I think the gov­ern­ment will be forced to do much more. And per­haps the banks may be roped in to help as part of a range of mea­sures to see the coun­try ride out this storm,” he says.