The Many Faces of Financial Vulnerability: How Can Data Insights Improve Customer Outcomes?

TransUnion data and studies point to consumer vulnerability being a key challenge for a wide variety of UK businesses. As our Managing Consumer Vulnerability webinar outlines, vulnerability is an umbrella term that can include financial vulnerability, fraud and health issues. Emerging and established data solutions and insights clearly have a role to play in helping businesses better understand consumer vulnerability and proactively spot warning signs earlier. And complementing customer management initiatives, the right data stack can support strategies that are both invested in customer care and yield improvements across KPIs.

This article details key observations made by TransUnion’s research and consultancy, and data science teams, highlighting current trends around the number of potentially vulnerable UK consumers, the characteristics they share, and how businesses can improve their customer vulnerability strategies in 2023. 

One of the UK’s most pressing economic challenges stemming from the cost of living crisis is the growing concern around consumer vulnerability. The socioeconomic turbulence of the 2020s created unpredictable consumer behaviours and a spike in digital crime. This made vulnerability a complex and wide-ranging concept organisations are increasingly grappling with.

Adding urgency to the debate was the publication of the Credit Information Market Study Interim Report and Discussion Paper (Nov 2022) — covering non-financial vulnerability and the need to ensure good customer outcomes — and skyrocketing fraud rates which observers now consider a national security threat.

Consumer vulnerability should be a priority for senior leaders across financial services, insurance, gaming, e-commerce and government. It requires organisations to invest in data solutions and data science talent, adhere to evolving compliance requirements, be committed to customer care and have a strategic mindset. 

“In a consumer-facing world, failing to address consumer vulnerability exposes a vulnerability within an organisation. This could lead to the degradation of an organisation’s performance in areas such as customer satisfaction and trust, portfolio health, brand reputation and compliance efforts,” explains Gareth Howell, head of data science at TransUnion.

“Strategies that leverage consumer data points and insights to truly understand consumer circumstances, and act in responsible, caring and proactive ways, can have a positive impact across KPIs. As well, humanising the brand in a customer’s mind through better experiences. There’s naturally a fear 1:1 interactions will incur extra costs, but data-driven solutions underpinned by software can actually create efficiencies through automation and streamlined processes whilst at the same time helping customers reach positive outcomes.”

Vulnerability is an umbrella term that escapes simple definition. The Financial Conduct Authority (FCA), in their guide to the fair treatment of vulnerable customers, states: A vulnerable customer is someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care. 

A traditional view is the financially vulnerable demographic consists of those on low incomes, lacking a savings buffer, self-employed, working within the gig economy or economically inactive. However, economic events since 2020 have caused other UK consumers to fall into this demographic. For instance, high-income consumers who may have severe mortgage debt, and potentially face increasing costs brought about by rising interest rates and responses by the mortgage market, or individuals subject to an income shock. Income shocks are typically associated with job loss, illness or large-scale socioeconomic events out of one’s control. A shared characteristic of those at their financial limit is that their expenditures outstrip their incomes. For those customers who are financially squeezed, it’s imperative they, and lenders, get their calculations and budgets right in the face of the rising cost of living. 

However, there are also non-financial vulnerabilities that are equally as important. As the author Ian McEwan wrote in his novel Atonement, “A person is, among all else, a material thing, easily torn and not easily mended.”

Non-financial vulnerabilities include life events like bereavement, retirement, divorce and health issues, and a lack of education and literacy, lack of confidence with financial matters or digital skills. All can impact a consumer’s well-being and their ability to make suitable and affordable financial decisions.

Additionally, financial vulnerability includes those who are susceptible to fraudulent activity; fraud and scams often intensify problems for those who can least afford it. In times of economic upheaval, historical data analysis points to increases in first-party fraud (e.g., no-intent to pay, inflating insurance policies or acting as money mules) or victims of third-party fraud who also fall into the financially vulnerable consumer segment. 

Consumer vulnerability is clearly multifaceted, nuanced and inextricably connected to the cost of living crisis facing the United Kingdom. As such, all customers should be viewed as being at risk of becoming vulnerable as a consequence of recent economic events.

In the UK, TransUnion’s understanding of financial vulnerability is built on strong foundations. We introduced the concept of affordability to the market, and consolidated this innovation by launching connected data solutions and product enhancements. During the pandemic, economic shocks emphasised the need for deeper customer insights into creditworthiness and potential vulnerability. Both established and relatively new data insight solutions and software were suddenly invaluable. Trended credit data and Open Banking, fraud and identity, and increased focus on consumers’ financial literacy came to the fore to help organisations create first-class customer experiences and management.

At the end of 2022, TransUnion’s Beyond the Headlines webinar series explored the issue of consumer vulnerability. Senior leaders from across our business presented new data models and insights into the size of the UK population classed as financially vulnerable and explained what consumer vulnerability covers. They also explained how cutting-edge data attributes and modelling can help organisations better understand consumer situations, and execute superior, customer-first programmes that enable optimal business performance.

TransUnion modelling indicates 12M UK consumers are spending more than their monthly incomes on non-discretionary costs, such as accommodation, food and energy. As well, 1.6M consumers could soon move from having positive disposable incomes to exhausting all of their spend on essentials by the end of the month. This suggests lenders could start to see an increase in delinquencies and early-stage arrears as household budgets become increasingly stretched. Identifying triggers and developing appropriate customer management programmes is in the best interest of the customer and the business to prevent harm.

Three key considerations for businesses wanting to strengthen their customer vulnerability strategies are: 

1. The financial regulator, the FCA, intensified the onus businesses need to take in preventing harm to customers by proactively identifying potentially vulnerable consumers, putting the right processes in place, and aiming for higher standards of customer service. To meet regulatory requirements, organisations need to reflect on their customer plans, by asking:
   • How frequently can data be sourced to identify potential vulnerability?
   • How can experiences tailored to individuals be scaled, and when is it timely to deploy them?
   • What strategic goals, such as trust, loyalty or brand reputation, can the strategy help with? 
     
     
2. Adoption of new data sources and models offers access to richer, more actionable insights and trends. The volatility created by financial turbulence means behaviour can change quickly and many consumers are potentially financially vulnerable.
   
   For example, delinquency rates may be at record lows, but this doesn’t truly reflect the levels of vulnerability our data shows exist within the UK market. Working with the understanding not all vulnerabilities are the same, research using existing portfolio data has allowed TransUnion to categorise 12 groups of indicators that can be used to help organisations better understand vulnerability from originations to customer management. 
   
   
3. Fraud risk is baked into financial vulnerability. Fraud accounts for 40% of all crime against individuals across the UK. We’ve seen the publication of the first National Fraud Initiative in over a decade, and there’s a clear motivation across the digital economy to better detect and prevent fraud. Three key areas to focus on are:
   • Authorised payment fraud and the mental health impact this fraud typology can have on victims.
   • Scams, mules and account takeovers are increasingly evident. We’re seeing them being countered by marketing campaigns and the introduction of controls like confirmation of payee, but there’s still a long way to go.
   • Dormant accounts, and for those businesses wanting to grow, increased ability to spot no intent to pay characteristics. In response to both areas, TransUnion has begun portfolio analyses for clients looking for fraud signals within existing dormant accounts, and launched new models to help businesses.