Financial vulnerability and stress leading into 2021

  • By Anna Shaw

Given the growing consequences of the global pandemic, financial institutions will need to support customers to help manage financial stress and hardship in the new year. 

RFi Group estimates that over 11 million Australians will have their income negatively impacted due to the COVID-19 pandemic, and over 1 million Australians expect that it will take more than two years for their personal financial situation to return to pre-pandemic levels, if at all.

Consumer sentiment has fluctuated throughout 2020 with the Westpac Melbourne consumer sentiment index showing the single largest monthly decline in the 47 years of the survey during the month of April – this was lower than consumer sentiment seen during the GFC. In December, consumer sentiment peaked and is now substantially higher than the April results, reaching the highest level since October 2010. 

When investigating customer sentiment across product segments, RFi group data saw a peak in mortgage stress in March 2020, with nearly 1 in 4 (24 per cent) mortgage customers indicating an expectation of struggling with repayments in the next 12 months. This has fallen in recent months, with less than 1 in 5 (15 per cent) borrowers now indicating an expectation of mortgage stress, returning to the levels of 12 months ago. 

In the personal loans space, RFi Group saw similar results, with a rise in repayment stress in March 2020 and recovery during September 2020, where less than 1 in 5 (14 per cent) personal loan holders indicated an expectation of struggling to meet loan repayments. 

However, there may be flow on consequences experienced by Australians over the next 12 months, even after the immediate impact of the pandemic. 

RFi Group data shows that personal loan holders who saw their income decline due to the pandemic are the most likely to indicate having made a late repayment on their loan, and to expect to struggle to meet their repayments. 

 “…just under 2 in 5 (38 per cent) home loan customers indicating that their lender has and will support them if they are to experience financial hardship.” 

Mortgage holders who saw their income decline are most likely to expect to struggle to meet repayments, and borrowers who are self employed are the most likely to indicate that they have requested a loan repayment holiday on their current home loan.  

Recent research commissioned by the Customer Owned Banking Association into financial vulnerability and stress highlighted some important statistics that will be important for banks and lenders to consider in the new year. 

Over a quarter of Australians experience vulnerability, according to the research, with vulnerability risk factors including mental illness, health issues, trauma and difficulty in understanding financial information. 

The COBA research highlighted that ‘soft skills’ may be the path towards more effective support and the data showed that customers rated their bank higher on customer services components such as being friendly, approachable and respectful compared to ‘soft skills’ such as showing compassion, sensitivity and compassion. 

One recommendation made by COBA was for financial institutions to focus on relationship driven interactions with customers, with particular emphasis on empathy and compassion.

RFi Group data highlights a similar sentiment, with just under 2 in 5 (38 per cent) home loan customers indicating that their lender has and will support them if they are to experience financial hardship. 

Customers that agree with this statement are more likely to indicate that they trust their provider, be satisfied with their lender and be less likely to switch, so there is clear value in financial institutions considering this when seeking to improve customer loyalty and support.  

… “younger Australians are less likely to indicate they feel in control, particularly those aged under 35 years.” 

The COBA report also recommended that financial services providers combat financial stress through making customer interactions and the provision of information as simple as possible, particularly given that fact that when people are experiencing financial stress and vulnerability it can make decision making increasingly difficult. 

When customers are stressed and make decisions, it can lead to what COBA refers to as a ‘vicious cycle’, where customers are more likely to make poor decisions that can be a detriment to their financial situation, in turn increasing stress and contributing to this complex cycle. 

RFi Group data shows that 1 in 2 (54 per cent) Australians feel in control of managing their money and finances, however, younger Australians are less likely to indicate they feel in control, particularly those aged under 35 years.

The COBA research highlighted that customers currently experiencing vulnerability are more likely to indicate high levels of concern about their financial situation in the future. 

They are also more likely to indicate stress, and to not agree that it is easy to find the information they need about financial matters. 

Vulnerable customers are also less likely to agree that they feel informed about the financial options available to them and are less likely to feel able to ask questions that could help them financially. 

Key reasons customers did not contact their banking institution when they needed support was a perception that the bank would be unable to help, being unsure who to contact or an expectation that they would be contacted proactively. 

When customers are asked how they could be better supported during the pandemic, a key finding from RFi Group data was that customers highly value proactive communication when it comes to highlighting support measures that are available, checking in with customers and communicating in transparent and clear ways so that customers know what options they have. 

Ensuring that customers are able to get in contact with their banks and lenders is also seen to be valued, particularly if the customers has requested a callback or has struggled to make contact. 

The first recommendation of the COBA report was that every organisation should have an approach to deal with customer vulnerability, and this is especially true of financial services institutions. 

As financial stress and vulnerability are likely to continue into the new year, proactive communication and easily accessible support measures will be highly valuable to customers and should be considered by financial institutions. 

Anna Shaw is the client insights manager at RFi Group