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April 30, 2019

Shifting battlegrounds for financial wellbeing

Despite 27 years of uninterrupted economic growth, increasing numbers of Australians are experiencing severe financial vulnerability and stress​. We reflect on some emerging trends with the potential to ‘move the dial’ on financial wellbeing.


Ten years ago, Shane* lost both his parents to cancer within a year of each other. Each time he had to take out a loan to pay for the funeral. A decade later, he is still in debt from the funeral costs and dealing with ongoing financial stress.

Three years ago, Geraldine* was living with her husband in a comfortable home and running her own business with a turnover of $2 million. Her marriage broke down and she moved into a rental flat. Then Geraldine’s business hit some troubles, which ultimately led to bankruptcy. Since last year, she has been homeless, staying on friends’ couches or in emergency housing.

I know how to manage my money, but there are more costs than money coming in… It’s taught me not to judge people with money problems. We’re all in this mess for different reasons.

According to research from the Centre for Social Impact, there are nearly two and a half million Australians experiencing significant financial vulnerability or stress – like Shane and Geraldine.[1] That is one in every 10 of us. As such, a third of all households will be experiencing stresses such as how they to pay their rent, meet bills, respond to sudden events such as family illness, or plan for the future.

Someone experiencing financial stress described the day-to-day impact: “I know how to manage my money, but there are more costs than money coming in. Cutting back on leisure cuts me off from my friends, which leads to anxiety and depression…It’s taught me not to judge people with money problems. We’re all in this mess for different reasons.”[2]

Not only is the scale of financial vulnerability a cause for concern, but also the rising trend – Australia has seen an increase of over 30% in a decade in people experiencing financial stress. People can also fall into financial vulnerability very rapidly, precipitated by one or two sudden events. Analysis from Monash University indicates that external factors, such as job loss, health issues or relationship breakdown, have become more common triggers for financial stress over the past 10 to 15 years.[3]

So, what does financial wellbeing look like?

The Centre for Social Impact has crystallised the definition of financial wellbeing into three helpful categories, recognisable to all of us:

  • Meeting expenses and having some money left over
  • Being in control of your finances
  • Feeling financially secure.

… it is dependent on people having economic security, through access to employment and/or adequate income in the first instance.

This is not just a matter of understanding your finances – it is dependent on people having economic security, through access to employment and/or adequate income in the first instance.

The recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Royal Commission) certainly shone a light on this type of vulnerability and the role of predatory industry practices.

A range of organisations across the not-for-profit, government and corporate sectors have been working to support financial wellbeing for many years. The activities include:

  • Services and programs such as the financial counselling work of Financial Counselling Australia and other providers for lower income families, and the Financial Inclusion Action Plan program from Good Shepherd Microfinance to encourage positive corporate approaches (see below)
  • Education and tools, for example, programs delivered by not-for-profits such as First Nations Foundation, Brotherhood of St Laurence and The Smith Family and some of the big four banks to explain budgeting, savings, planning and expense monitoring; or tools such as the Australian Security & Investments Commission (ASIC) MoneySmart budget planner.
  • Research and advocacy, including the work by ASIC, Centre for Social Impact, and several financial sector organisations to build understanding of the issues and behaviour, as well as coalitions advocating on ‘wicked’ issues, such as pay day lending or welfare support.
  • Market interventions with targeted products such as the No Interest Loans Scheme, or NILS, delivered by Good Shepherd Microfinance and NAB, which provides a solution for consumers experiencing financial stress.

This article does not seek to describe all the activity taking place, nor arbitrate about what works best. There is extensive research and discussion on this topic better placed to draw such conclusions. Instead, we share some observations drawn from the experiences and projects that SVA has been part of over the past two years. In some cases, these represent shifting battlegrounds in the struggle towards financial wellbeing.

Building financial literacy and capability isn’t the sole answer

The past decade has seen a proliferation of programs and organisations targeting financial literacy and education. As outlined by the Centre for Social Impact, when a person is equipped with financial literacy (knowledge and skills to make sound financial decisions), they can better make ends meet, keep track of their finances, plan for the future, choose the right financial products and stay informed.[4] The research around financial literacy and education highlights several factors worth discussing.

The success of the education relies on it being offered at a ‘teachable moment’…

The effectiveness of financial education interventions is highly nuanced. The evidence surrounding financial literacy programs shows that the cohort, subject matter and timing has a significant impact on how effective it is. Education has been found to be less effective for low income groups, as is the subject of handling debt. And the success of the education relies on it being offered at a ‘teachable moment’ – the point in time when the person is making a decision or can see its immediate relevance.[5]

Financial capability is only one of four pillars that build a person’s financial resilience.[6] Given the level of focus on financial education to date, the battlegrounds for coming years may need to prioritise the other three pillars:

  • An individual’s economic capacity – integrally linked to their level of income
  • Access to the right financial products and services – bank account, credit and insurance
  • Social capital – such as support in times of crisis.

Without doubt, these can be more challenging areas to influence – and in some instances, market intervention or disruption is the only way to make an adequate impact.

Corporate Australia has a key role to play

Several of SVA’s projects have focused on the linkages between corporate Australia and financial vulnerability or exclusion. This work has illuminated the scale of what is possible for customers, staff and the broader community when a corporate directs its efforts to supporting financial wellbeing.

The Financial Inclusion Action Plan (FIAP) program is run by Good Shephard Microfinance. Similar to a Reconciliation Action Plan (RAP), a FIAP is a set of agreed, practical actions that an organisation undertakes to improve financial inclusion and resilience in Australia.[7]

FIAP has shown us that any organisation, no matter how big or small, can promote financial inclusion, resilience and wellbeing within its own sphere of influence.

SVA developed estimates of financial value delivered by FIAPs in areas such as customer and staff hardship and financial capability.Reviewing FIAPs across 15 corporates in the financial services and utilities sectors, SVA estimated that if completed, these actions would deliver social value equivalent to over $500 million (80% of which would be derived from actions focused on client hardship and financial capability). Dr Vinita Godhino, General Manager at Good Shephard Microfinance emphasises “FIAP has shown us that any organisation, no matter how big or small, can promote financial inclusion, resilience and wellbeing within its own sphere of influence”.

An emerging opportunity for corporate Australia to make a real difference is by prioritising customers in their business models and culture. This was certainly a key message in the Royal Commission report published in February. Some positive steps have already been made.

ASIC’s new product intervention powers… will hopefully provide the necessary incentive for these sorts of cultural shifts in the financial services sector…

For example, several financial services organisations have overhauled new insurance products to eliminate features that disadvantage customers, such as stepped premiums and contributions exceeding payouts. The next step will be to make sure that all customers have access to these new, more fair products.

When SVA worked directly with one large financial services organisation last year, we noted that the greatest area of potential impact for its disadvantaged and vulnerable customers would be to proactively contact and shift the large numbers of customers on legacy products to newer products that offer a much better deal.

ASIC’s new product intervention powers came fresh off the legislative press from Parliament earlier this month.[8] It will hopefully provide the necessary incentive for these sorts of cultural shifts in the financial services sector, but also more broadly across corporate Australia.

Broad coalitions may be needed to disrupt system-wide problems

In markets with a history of bad outcomes for consumers, disruptive solutions may provide the key. An independent third party, such as SVA, can help to facilitate the many parties required to come together to solve a systemic issue.

In response to predatory debt consolidators and payday lenders, a coalition of organisations set a vision for a not-for-profit, customer-focused body that would help vulnerable consumers to bring their debts together into a manageable way.

Way Forward is unique. It is a genuine collaborative effort between the banking industry and the community sector – none of us could have done this by ourselves.

In December 2018, that organisation (Way Forward) was launched. Within its first six months, Way Forward has begun to help people living with financial hardship return to financial stability, avoiding the extortionate interest rates and other damaging behaviour of high street debt consolidators and lenders. Fiona Guthrie, CEO of Financial Counselling Australia, one of the collaborating organisations, explains that “Way Forward is unique. It is a genuine collaborative effort between the banking industry and the community sector – none of us could have done this by ourselves.”

Way Forward

Way Forward is a social enterprise that assists people living with financial hardship to return to financial stability. Some of the key parties in the coalition include ANZ, CBA, NAB, Westpac, the Australian Banking Association and Financial Counselling Australia (FCA).
SVA produced the business plan and feasibility study to underpin this not-for-profit model – helping to secure $4m in initial funding for the enterprise. Way Forward commenced its pilot in December 2018.

Other areas that have historically been challenging for government and regulators to influence are the funerals and funerals financial product markets. There were days of testimony at the Royal Commission exposing myriad concerns about the selling of funeral insurance. Less publicised is the significant debt many families are left with after purchasing funerals – funerals can cost anywhere between $7,000 to $15,000. Despite such significant cost, many families still feel this doesn’t provide a meaningful and culturally appropriate farewell.

SVA is progressing an innovative disruption of these two markets on behalf of a broad group of concerned organisations. Replicating a successful not-for-profit funeral model from Illawarra region (NSW), the initiative will drive down the cost of funerals and allow families to focus on the elements that mean most to them. It will also bring an unconventional savings product to the market which will provide an attractive alternative to funeral insurance and encourage people to prepare financially for a funeral.

The combined approach will lead to fewer families being left in financial hardship as they grieve for a loved one.

The combined approach will lead to fewer families being left in financial hardship as they grieve for a loved one. This work with Tender Funerals is expected to launch by the end of 2019 (and will be covered in a future SVA Quarterly article).

These two examples involve unlikely allies working together. Significant, multi-year, ‘no-strings’ funding was provided by financial services organisations, many of them household names. Valuable pro-bono contributions have been made by legal and professional services organisations. A broad array of consumer and community organisations have walked alongside throughout, and a strong voice from government and regulators has also contributed. These have been truly cross-sector, bipartisan coalitions, with SVA playing a central convening role.

Conclusion

There are innumerable complex systems at play that lead to two and half million Australians experiencing significant financial stress and vulnerability. The answers are never going to be simple.

We are heartened, however, to see a range of emerging approaches, some of which have been catalysed by the Royal Commission. Financial literacy and capability activity is being framed more often alongside the broader need for economic security, as well as better financial products and services. There also seems greater appetite for truly radical disruptions, when markets or circumstances are consistently delivering bad outcomes for consumers. SVA welcomes this shift in the battleground for financial wellbeing.


For more information, contact Louise Campbell on lcampbell@socialventures.com.au


Notes

* Real names have been changed

[1] Muir, K., Hamilton, M., Noone, J.H., Marjolin, A, Salignac, F., & Saunders, P. (2017). Exploring Financial Wellbeing in the Australian Context. Centre for Social Impact & Social Policy Research Centre, UNSW.

[2] Bourova, Evgenia and Ramsay, Ian and Ali, Paul, The Experience of Financial Hardship in Australia: Causes, Impacts and Coping Strategies (May 28, 2018). Journal of Consumer Policy, 2018; U of Melbourne Legal Studies Research Paper No. 805..

[3] The stressed finance landscape data analysis (2015), commissioned by Consumer Action Law Centre, Good Shepherd Microfinance, and Financial Rights Legal Centre. Research conducted by Centre for Commercial Law and Regulatory Studies at Monash University and Digital Finance Analytics..

[4] ASIC National Financial Literacy Strategy 2014-17

[5] ASIC (2011) Financial literacy and behavioural change; ASIC (2014) Financial Literacy Strategy 2014-2017; Kaiser & Menkhoff (2017) Does financial education impact financial literacy and financial behaviour, and if so, when; Miller, M., Reichelstein, J., Salas, C., and Zia, B. (2015). Can you help someone become financially capable? A meta-analysis of the literature. World Bank Research Observer, 30(2): 220–246; Fernandes, Lynch & Netemeyer (2014) Financial Literacy, Financial Education and Downstream Financial Behaviours, Forthcoming in Management Science.

[6] Centre for Social Impact (2015) Financial Resilience in Australia; ASIC (2014) National Financial Literacy Strategy 2014-17..

[7] In 2014, Australia led the G20 to commit to country Financial Inclusion Action Plans. Good Shepherd Microfinance was commissioned by the Australian government in 2015 to design and implement a Financial Inclusion Action Plan (FIAP) program. Since inception in 2016, 30 organisations have committed to their own FIAPs, totalling 580 .

[8] The Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2019 was passed by Parliament on 3 April 2019. Financial product providers will have to ensure that the design of the products is consistent with the objectives, financial situation and needs of customers. The obligations will be phased in over two years. The legislation also grants ASIC the power to step in to protect customers from inappropriate products if there is a risk of significant detriment.

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