Why Data Is Key To Financial Health Success
Open Banking, the UK’s implementation of the EU’s PSD2 legislation, has catalysed two parallel revolutions in finance. The first is in digital consumer products, the second is in data analysis.
The outcomes of the first are increasingly well-known. Consumer budgeting apps such as Plum, Cleo, Emma and Yolt have established market share and gained momentum during lockdown.
The outcomes of the second are still to be written but are likely to be more significant over time.
Thanks to Open Banking, transactional data (suitably anonymised) has moved beyond the walled-gardens of banks into the hands of new groups and is affording new levels of analysis.
Employers in particular are at the forefront of this.
By partnering with fintech providers of financial health technologies and offering them to their staff, employers have access to data that gives them actionable insights into the financial health of their workforce for the first time.
The challenge of data
All tech companies are also data companies. Digital interactions create data and tech companies must answer the question of what, if anything, they can and should do with it.
Social media companies have famously come unstuck on this issue.
Technical innovation often brings new ethical challenges. And the challenge of Open Banking is what level of analysis is acceptable, even beneficial, and what is not.
Search queries and ‘likes’ are personal and private, but transactional history is far more so.
Central to this discussion is the principle of ‘anonymisation.’
It goes without saying that an individual’s transactional history should never be shared in an identifiable context. This runs counter to fundamental principles of data privacy and to the ethical charters most responsible fintechs sign up to when they start out.
But what about anonymised data, analysed at scale and presented in aggregate across an entire workforce? Would employers benefit from understanding the true financial health of their staff? And what actions could they take if so?
The issue of ‘vulnerability’ is central to this debate.
An extension of the Peter Parker Principle – “With great data comes great responsibility” – fintechs and their clients must address the question of how to respond when new technology helps to identify the financially vulnerable with greater clarity than ever before.
In July of 2019, the FCA published their initial guidance for firms on the fair treatment of vulnerable customers.
In the report, the regulator encourages fintechs to embed processes that identify the vulnerable and to use ‘data analytics and machine learning’ as aids to achieving this.
Measuring Financial Health
The Open Banking organisation’s recent webinar on ‘Open Banking and Consumer Vulnerability’ brought together a number of experts working at the leading edge of financial health analysis and was both rewarding and insightful as a result.
The contribution of Joe Gladstone (a professor at UCL and an author of the FCA’s recent paper on ‘Understanding consumer wellbeing through bank data’) was particularly noteworthy for fintechs working in financial health.
Gladstone’s research established tangible connections between specific datapoints, accessible via Open Banking data, and financial health.
His paper concluded,
“WhateverFinancial wellbeing is correlated with a number of objective metrics that we can straightforwardly derive from bank account records, such as income, available liquidity and overdraft usage. People with higher incomes, more liquidity and fewer days in overdraft report higher financial wellbeing.” it is, the way you tell your story online can make all the difference.”
These correlations represent metrics that employers could monitor.
Negative correlations, or signals of financial vulnerability, include:
Days in overdraft per month
Volatility of Account Balance
Variable income receipt
Positive correlations, or signals of robust financial health, include:
Volatility in Spending
Arranged overdraft limit
Consistent income receipt
Average account balance
Monthly income
Days in overdraft, it seems, is the most reliable indicator of financial vulnerability and a clear opportunity for fintechs and employers to identify those for whom special attention may be required.
Of course, data is only useful to the degree that it allows us to take action. Ideally, action that prevents harm or improves outcomes for individuals.
What actions could and should employers take?
They might invest more time advising employees how they could cut costs by switching utility providers or of the importance of paying into a pension.
Or they could introduce new services that improve an individual’s sense of wellbeing.
The importance of ‘Cash on Hand’
An earlier study, to which the ever-present Gladstone also contributed, was titled ‘The importance of “Cash on Hand” to life satisfaction’.
This paper concluded that,
“Having readily accessible sources of cash is of unique importance to life satisfaction, above and beyond raw earnings, investments, or indebtedness. To improve the well-being of citizens, policymakers should focus not just on boosting incomes but also on increasing people’s immediate access to money.”
This affirms the importance of establishing a ‘Savings Buffer’ – another benefit that can be conferred by employers, this time as a ‘salary-linked’ service deducted monthly from salary.
It also strengthens the case for ‘Early Wage Access’ (sometimes known as ‘On-Demand Pay’) which give employees real-time access to earned wages ahead of payday.
If access to money improves one’s sense of financial wellbeing, so does closing the gap between income and spending. As Gladstone et al. also observed,
“people with mismatched income and spending patterns have relatively lower financial wellbeing for the same level of expenditure volatility.”
The importance of qualitative data
Vulnerability, like wellbeing, is a subjective experience; measured in qualitative ways such as state of mind, loss of sleep, anxiety and (for employers) absenteeism and low productivity.
Gladstone’s research matched surveys with financial data and found a surprisingly low co-relation between those who appeared objectively vulnerable and who self-reported as being so.
The variance, it seems, is more psychological than transactional.
Open Banking data reveals indicators of an individual’s financial health but objective metrics are not enough on their own. It’s vital to incorporate self-assessment into the analysis via surveys in-product or conducted externally.
In 2018, PayPal surveyed a large sample of its hourly and entry-level employees to assess their financial security. The results indicated that almost two-thirds of employees were periodically running out of money between paydays.
In response, PayPal instituted a number of changes to reduce health care costs, grant stock awards and provide access to personal financial education.
Predicting Financial Health
With enough historical data, we can predict almost anything with a high degree of accuracy. The past really does equal the future.
Level Financial Technology’s Chief Behavioural Officer, Dr Jim Coke, recently explored whether financial service providers should forecast your ‘Future Balance’ as well as your past and present history.
On the basis that we make decisions now based on predictions about the weather, he reflected on the decisions we might make now if we knew what our balance would be next month, next quarter or even next year.
Data makes it possible, even likely, that financial forecasts will become a standard feature of fintech products in the near future.
In Summary
The problems of measuring returns has historically constrained greater investment in employee financial health.
Financial health providers can now offer data platforms to employers which aggregate anonymised insights into the financial health of their employees.
This data can be fed into BI systems revealing the true impact of financial health on absenteeism, retention and productivity for the first time.
This could enable more efficient feedback loops between workforce financial health and company outcomes which, in turn, is the most efficient way to scale financial support for staff.
