Financial vulnerability and the cost-of-living crisis

Anupama Mundollikkalam, research manager at Pay.UK, outlines some of the findings from its recent research into financial vulnerability, which highlighted the challenges some customers face in paying monthly direct debits, despite being linked to cheaper deals.  

Britain is facing its worst cost-of-living crisis in decades. Last week, Ofgem announced that the price cap on default tariffs will rise by 80% to £3,549 in October, fueled by supply disruption caused by Russia’s invasion of Ukraine, and analysts have suggested it could pass £4,200 in January.

Spiralling energy bills are heaping further pressure on already-stretched households. And, as research published by Pay.UK shows, coping with bills can be even more of a struggle for individuals classed as financially vulnerable. This group are less likely to be paid monthly, unlikely to have seen salary increases to match rising bills and are therefore more likely to find it harder to meet fixed direct debit payments for their energy costs.

Pay.UK provides the UK’s critical financial infrastructure that enables individuals and organisations to transfer money to others whenever they need to, quickly, safely and cheaply. We believe it’s important to understand the challenges that people in the UK are facing. That’s why our report, “All Aboard”, explores the phenomenon of financial vulnerability through focus groups, interviews, consumer research, payments diaries and roundtable discussions.

We’ve examined four important topics within the current consumer payments landscape: authorised push payment fraud; bill payments; buy-now-pay-later products; and cryptocurrencies. We’ve found that vulnerable people are more likely to suffer negative effects in a whole host of areas, from being targeted by fraudsters to taking on debts they cannot afford through buy-now-pay-later services. And we consider how the payments system can be improved to better protect and empower financially vulnerable people.

These issues are becoming more pressing. The FCA’s last Financial Lives survey (September 2020) found that 27.7 million UK adults – 53% of the adult population – had at least one characteristic of financial vulnerability. This was borne out by Pay.UK fieldwork conducted in December 2021 which put the total at 54%. But we estimate that the sharp increase in cost-of-living pressures during the first half of 2022 will have increased this proportion, and it could go higher still if, as the Bank of England predicts, the country enters a protracted recession this autumn.

Direct debits can prove a challenge for some people

When it comes to bills, our research shows that only 55% of financially vulnerable people in December 2021 were paid monthly, compared to 62% of the population as a whole, leaving them more likely to struggle with direct debit payments. For many, direct debit is the right payment choice, but with more people than ever are working zero-hours contracts, doing gig-economy work or “hustling” on the side, it is reducing the proportion of households who receive a fixed monthly income and are able to plan their finances with certainty.

Many people in our focus groups and interviews spoke of the stress of gathering money to pay for an upcoming direct debit, with one woman telling us how she and her neighbours rely on each other. “One of my friends down the road will be like, ‘Oh I’ve got £20 cashback (in cash), I’ve got a direct debit going out tomorrow, can you transfer me over and I will drop £20 off?’” she said. Our fieldwork showed, too, that 53% of financially vulnerable people had borrowed money to pay a direct debit and nearly one in 10 said they had to borrow money several times a month.

One option for financially vulnerable people struggling with the stress of fixed direct debits is to pay by other methods like cards. But this has a vicious circle effect because it leads people to miss out on the better deals associated with direct debit and means they end up paying more for their bills overall – the so-called “poverty premium”. What other solutions are there on offer to help?

Request to Pay offers the flexibility of timing that people really need.

One payments solution which could benefit financially vulnerable people in the future is Request to Pay (RtP), a tool which has been designed to give people more choice in how and when they pay. RtP is a messaging service through which the payee receives a payment request from the biller and, subject to the biller’s approval, can then choose whether to pay fully, pay partially, ask for more time or decline the payment request.

Our research found that RtP is already recognised as a valuable tool for people with financial vulnerabilities and those managing low or irregular incomes. Of the people we spoke to, 39% said it would be useful to have flexibility to choose payment dates within a set window, rising to 44% for financially vulnerable people. The option to ask for a payment extension beyond a set window was also most popular among people in the vulnerable category, as was the ability to communicate directly with the biller.

Request to Pay does not solve the problem of working with a tight budget. But it does offer a more flexible, ‘self-service’ option to manage monthly bills without the stress of looming fixed direct debit deadlines. As the cost-of-living crisis deepens, it is vitally important to promote the alternatives open to consumers and households, especially those feeling the pressure from rising bills.