Shock Absorbers: is there a role for innovation in improving families’ financial resilience?

Financial resilience is often defined as the ability to cope with a financial shock, such as unemployment, or an unexpected cost, such as a car breakdown. It involves access to appropriate and available funds, it is not just a matter of having money available. It also means having access to credit at a reasonable cost; to other appropriate financial products like insurance; the capability and knowledge to navigate the services and products on offer; and the necessary social capital to access support and advice.

As our recent report After Shocks found, the UK performs relatively poorly when it comes to financial resilience. The UK entered the Covid-19 pandemic with high levels of income inequality – with the poorest fifth of households in in the UK, around 20 per cent worse off than their French counterparts. UK households also entered the crisis with low savings levels, and higher levels of borrowing. This, compounded by the biggest economic contraction in over 300 years has put family finances under severe strain.

In response, the Government has set out unprecedented policy, such as the furlough scheme and boost to Universal Credit, which, along with mortgage holidays, have helped insulate most families from the worst effects of the crisis.

However, the problems stemming from poor financial resilience are likely to surface as lockdowns ease and support is withdrawn. Households who entered the crisis in weak financial positions have experienced a further deterioration. Rebuilding and repairing these resources is going to be vital to support their recovery.

Clearly, public policy will need to play a key role in supporting households through the rest of the crisis – not least as the unemployment peak lies ahead of us, not behind.

But, given the UK has an established charitable sector with a proud track record of tackling many of these issues, along with a fast-growing fintech sector, can innovation also play a role in boosting households’ financial resilience? That’s the focus of a new report ‘Shock Absorbers’ which examines the potential of innovation across the UK, France and Germany.

Innovation can help – if support is targeted

Governments and charities have been aware for some time of the problems of financial resilience. The Money and Pensions Service published a UK Strategy for Financial Wellbeing in 2020, which was the latest attempt by government, working with the third sector, to tackle these issues. The growth of fintech and a developing ‘tech for good’ sector presents new opportunities to improve people’s financial health through innovation and technology.

It’s important, however, not to see digital innovation in particular as a panacea. The root causes of financial problems often demand direct policy changes that either increase support or provide more space for households to adjust to new circumstances. For instance, the new ‘breathing space’ scheme announced today is an example of policy innovation that can help those receiving debt advice or treatment with mental health issues more time to deal with problem debts.

But in certain situations, there is significant potential for directed innovation to improve the services available to low-income households. Creating impactful innovation for these groups must mean being aware of their particular needs. They might be less able to access digital tools, through cost or capability. And they may find it hard to plan for the long-term when they face urgent worries about money. Understanding and respecting these challenges and needs is especially important if attempts at innovation are to succeed, and engaging with users and frontline delivery organisations, including charities, is a route to doing that.

The right innovation support depends on the landscape

Innovation can be supported or boosted by programmes that aim to stimulate, fund and connect ideas. These include short-term interventions, such as pitching competitions and hack weekends, as well as longer-term initiatives, such as accelerator programmes, challenge prizes and investment funds.

In Shock Absorbers, we examined the innovation landscape in each country to better understand:

• Demand: the underlying need for financial resilience support, the impact of the Covid-19 crisis, and the existing provision of support from government, charities and the private sector.
• Supply: the availability of talent, finance and sources of ideas for innovation, as well as the connections between sectors and the regulatory environment.
• Emerging activity: innovations and innovation support mechanisms that are already emerging in each country.

The appropriate intervention will be one that connects to the people experiencing the need; makes use of the prevailing resources and conditions; and builds on existing activities and connections to create successful new innovations.

France, Germany and the UK would all benefit from a boost to innovation in financial resilience

In ‘Shock Absorbers’ we identify examples of innovations that boost financial health in all three countries, and set out the potential for greater impact if these initiatives are scaled-up.

• France has emerging examples of innovation, some supported by charities and some by banks. It has all the elements of an innovation ecosystem in this area, but as yet, weak links between charitable, social enterprise and fintech sectors. Further cross-sector collaboration, and stronger connections to impact investors could improve provision further.
• Germany has fewer organisations that recognise financial resilience as a problem. The innovation landscape is less developed, and without a shared view of the nature of financial health problems in the country. Here, the priority should be connecting and convening. Bringing together social and digital innovators, and connecting with the large-scale charity networks might help to increase recognition of problems, and develop ideas that suit the German context.
• The UK has a relatively well-developed innovation landscape, with a variety of start-up support initiatives and partnerships covering challenge prizes, start-up incubators. However, relative to other areas, this is still at a fairly small scale and yet to achieve major impact. Scaling up is the biggest challenge with few large community finance institutions to work with. The priority here is to continue support for start-ups and support for scaling, including via partnerships with financial institutions, charities and employers.

All three countries would benefit from a new injection of impetus and resources to ensure that the relevant aspects of financial innovation are adapted, tested and scaled to better meet the needs of low-income households in the aftermath of the pandemic.

A common theme across all three countries was the need for closer work between the burgeoning fintech sector, and established charities that have the expertise and knowledge about those for who financial security is a huge challenge. Getting the policy framework right is of course vital. But innovation focused on supporting those on low- and insecure- incomes – a group not traditionally well served by finance – could play a key role in boosting financial resilience in our post-pandemic economies.