Understanding financial health

This year our Fellowship programme, which supports financial innovators with a social mission, is focused on financial health – but what does that mean? Our Innovation Programme Manager, Marloes Nicholls, explains…

Despite being rated a top global economy and world-leading centre for finance, economic and financial life for many people in the UK is challenging and sometimes precarious.

Last month the Institute for Fiscal Studies reported that in 2021 average household incomes will be nearly 20% below what we could have expected before the financial crisis of 2007/08. Increasing casualisation of work has led to nearly one million people taking on zero-hour contracts, and there are rising levels of under-employment. At the same time, changes to the welfare system have left some of the most vulnerable people in our society worse off.

The impact of these factors can be seen in the state of our finances. While household savings are at their lowest on record, consumer credit is peaking. The Centre for Responsible Credit estimates that over 1.5 million households are in “extreme problem debt” – paying out more than 40% of their income on consumer credit repayments. The repercussions are serious for our physical and mental health, relationships and even our ability to fulfil basic needs, such as food and heating.

An organisation that knows all too well about the challenges of living with financial difficulty is Toynbee Hall – a community organisation based in East London pioneering ways to reduce poverty and disadvantage. They have over a hundred years of experience and expertise working with communities to understand the root causes of financial ill-health (check out their Financial Health Exchange for the latest research).

To help us understand the drivers of financial ill-health and the opportunities for innovation, last month we brought together over 30 experts from community organisations, policy-making, fintech and beyond for a ‘Financial Health Hack’.

Our starting point was Toynbee Hall’s framework for financial health, which takes a systemic and holistic approach to the forces that can influence a person’s overall financial situation. These factors can be grouped into four areas:

  • Demand – this includes characteristics that will affect demand for products and services, such as attitudes, motivations, skills and abilities
  • Supply – this includes the policies, institutions and incentives that affect whether and how people can access products and services, and online security
  • Complex needs – this includes individual characteristics and states that are usually beyond a person’s control and sometimes unanticipated, such as mental health conditions, bereavement and unemployment
  • The wider environment – this includes factors that set the wider context of financial health e.g. the cost of living, labour market trends and the welfare system, house prices, and social norms.

Each of these factors and the overall picture they make up is dynamic, meaning that the state of a person’s financial health can change over time. So, while the level of wealth and opportunity a person is born into is a key determinant of financial health, anyone’s life circumstances can change, leaving them at risk of financial ill-health. When that will happen is often hard to anticipate and control and the impact it has depends on many factors, including a person’s social support networks and the financial ‘safety nets’ they have or can access.

Financial products and services can’t offer a panacea to multi-faceted, complex life problems, of course, but they can play a key role in helping to solve or compounding the problem.

Financial health is related to but distinct from similar concepts, such as financial capability, financial inclusion and financial resilience.

Financial health puts people first and asks: how can financial services be designed to work with a person’s life circumstances, wants and needs, rather than trying to fit the person into the existing financial system?

Technology and innovation bring exciting new opportunities for finance to give people the support, control and power to manage their finances. Guided by the interests, expertise and lived experience of Toynbee Hall’s community, the Financial Health Fellowship will support the best new approaches to supporting financial health. The search is now on for the ideas and people who have the potential to transform the financial system to everyone in society – watch this space to find out more!

You can download a summary of the Financial Health Hack findings here.