Dr Dexter Penn explains how cognitive neuroscience and ‘deep tech’ data science can protect vulnerable customers.
Personal financial management is a critical life skill required to maintain independence. Financial capability is an individual’s ability to manage or direct the management of their financial affairs in their ‘own self-interest’ to meet their needs. Layers of accumulated knowledge and personal lived experience are continuously drawn upon to make financial decisions.
Exercising consistent judgement in the face of a variety of factors can make personal finance rather tricky, even for experts. Former Chief Economist of the Bank of England, Andy Haldane was famously quoted in the Financial Times saying that he considered himself to be “moderately financially literate.” This was said to highlight the lack of financial know-how among the general public despite the ever-increasing complexity of financial products and services.
Coronavirus public health restrictions accelerated the transition to digital across most industries. The use of cash in the UK plummeted to just 17% of transactions, bringing many benefits to both businesses and consumers but has been a factor in the 47% increase in fraud and computer misuse. Reuters recently dubbed Britain as the “bank scam capital of the world” as fraudsters took advantage of people relatively new to online banking. UK Finance reported that instances of push payment fraud also increased by a record 71% in the first half of 2021.
The resulting disruption has taken a toll not only on mental and physical health but also on financial health, with the prominence of the term ‘vulnerable person.’ The Financial Conduct Authority (FCA) defines a vulnerable customer as someone who, ‘due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care.’ What many do not appreciate is that anyone can become vulnerable at any time, for a variety of reasons. This presents a particular challenge for banks and building societies in how best to go about protecting customers from financial harms including misselling, fraud and financial exclusion.
The FCA’s Financial Lives Survey found that more than half (53%) of UK adults (27.7 million) display one or more characteristics of financial vulnerability. The pandemic reversed positive trends seen in prior years - finding an additional 3 million UK adults now show characteristics of financial vulnerability.
Financial vulnerability is driven by four key factors: financial resilience, life events, financial capability, as well as physical and mental health. Nearly a third (29%) of vulnerable people have recently experienced a major life event like bereavement, relationship breakdown or new caregiving responsibilities. More than a quarter (27%) of potentially vulnerable UK adults have low financial resilience which means that they are unable to weather increases in their monthly cost of living of £50 to £100. Irrespective of the underlying cause, financial vulnerability can negatively impact the financial decision-making process which then prevents individuals from truly acting in their ‘own self-interest.’ This increases the chances of financial mismanagement leading to an inability to meet essential needs and may also paradoxically increase risk-taking.
Given current high consumer price inflation (CPI 5.5% at the time of writing) and historically high energy prices now exacerbated by geopolitical risks, we expect to see a tidal wave of financial vulnerability. Research by Kalgera, a London based financial technology company focused on protecting vulnerable customers, found that 14% of over 2,000 individuals surveyed confirmed that their household has already had to forgo essentials including heating and electricity to recover from spending over Christmas. To add insult to financial injury, as the number of financially vulnerable people has increased, so too has the number of sophisticated scams. Kalgera’s research found that two in every five (41%) say they have been targeted by a suspected scam since March 2020, which rises to 67% for those who have a carer.
So, why should building societies care? Besides having a moral obligation to protect their members and maintain their trust, recent multi-million pound fines levied by the FCA demonstrate the cost of fines and reimbursements. In the first half of 2021, £753.9 million was lost to fraud, an increase of 30% compared to the first half of 2020, according to UK Finance. Cases of vulnerability and financial fraud have reached such a level that the FCA issued guidance for financial institutions’ fair treatment of vulnerable customers in February 2021.
The guidance has been designed to help financial institutions better understand the needs of vulnerable customers to enable them to make any necessary changes to ensure vulnerable customers are treated fairly. A year on since the vulnerable customer guidelines were finalised, the problem is far from solved or going away anytime soon. As it stands, vulnerable customers are disproportionately affected by fraud and misselling compared to customers who are not vulnerable - and often it only comes to light after they have come to harm.
However, emerging technology has a role in detecting customer vulnerability and proactively protecting your members. Using cognitive neuroscience and ‘deep tech’ data science, their behaviour can be interpreted using existing financial transaction data already generated by members. Examining these data points through a neuropsychological lens provides unique, personalised behavioural insights that help construct a holistic profile of characteristics of vulnerability. This helps member support teams identify vulnerable members and gain efficiency in what is currently an extremely time consuming manual process.
Over time, this can help improve member experience, increasing trust and loyalty. More than half (52%) of those surveyed would be less likely to switch their main current account if they knew their bank or building society was actively protecting vulnerable customers - soaring to 74% for those who have a carer. However, not all organisations have a focused and dedicated team, or an equal level of knowledge and expertise in this relatively new field. Building in-house capabilities and hiring the right talent is a drain on time, resources and finances but there is promise in the increasing emergence of Software as a Service (SaaS) platforms, which can be integrated into existing systems - without compromising on data security and data governance.
A major lesson from the pandemic that must not be forgotten is that cooperation is essential to overcoming challenges. Learnings from the worlds of tech, financial services and healthcare are currently being fused to inform solutions for the greater good.
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The views, opinions and positions expressed within guest blogs are those of the authors and do not necessarily represent those of the BSA.