Tackling UK household debt: innovation in employee benefits

At the macroeconomic level, central bankers and industry analysts all seem to agree the catastrophic financial meltdown of 2008 is a chapter of the globe’s collective economic history that has been firmly shut. Yet for a vast proportion of consumers and their families, the tremors of that recession are still taking a phenomenal toll – particularly in the UK.

According to the National Debtline, which is a financial advice charity run by the Money Saving Trust, demand for services has reached a 5-year high.

The charity says it’s anticipating 189,000 calls by the end of 2018 – and although there’s been a drop in the number of callers seeking help to repay debts of £25,000 to £50,000, there’s been a huge spike in the number of families on low incomes contacting the charity because they are struggling with smaller debts.

Half of all callers now report being unable to settle debts of £5000 or less. That represents a two-fold increase over the course of the last decade, while the charity also reported ‘stark growth’ in the number of individuals saying they are now unable to afford their council tax bills. In 2008, the issue of council tax arrears only affected 15% of callers – but today, it affects 30% of families contacting the National Debtline.

The average council tax arrears amount to £710. Likewise, there’s been an 11-point surge in the number of callers unable to pay their rent. The average rent debt amounts to £1022.

Unfortunately, paying council tax and affording rent aren’t the only expenses UK families are struggling to meet. An estimated 14% of callers can no longer afford their energy bills, 16% cannot pay their water bills and 14% can’t settle their telecoms debts.

Above all else, it’s worth pointing out the issue of consumer debt in the UK is near-universal. According to the National Debtline, the number of callers aged 18-24 has almost doubled and there’s been a substantial increase in demand for advice from over 50s.

The Office for Budget Responsibility is subsequently projecting the UK’s household debt-to-income ratio to hit a whopping 146% over the next 5 years. The ratio is near identical to 2008 levels.

What’s causing this surge in household debt?

The finger has been pointed at a number of issues, chief among them being the UK Government’s gradual programme to cap the amount of benefits accessible to certain low-income families.

Yet by and large, one of the key barriers cited as preventing individuals from repaying their debts in the UK is a severe lack of financial education.

Almost half of all callers who seek advice from the National Debtline admit to operating on a so-called ‘deficit budget’, which sees families spending more money on their basic needs than they’ve actually got coming into the household.

And despite the complex nature and many contributing factors surrounding household debt, at its core the issue is driven by spending rates and unexpected, one-off expenses families simply haven’t had the capacity or foresight to save for.

Worse yet, according to the Chartered Institute of Personnel and Development, that lack of foresight takes its toll on the health and wellbeing of individuals and their families. Employees cite a lack of financial awareness as a crippling source of stress that often impacts on their work.

At this point, families and stressed employees appear to be running out of options. Wonga’s shutdown doesn’t bode well for the business model of short-term payday loans, while multiple debt advice charities have reported a lack of capacity and resource to cope with a recent influx in demand.

Fortunately, dynamic solutions providers are stepping in to try and offer indebted families and workers a lifeline through innovative new payments platforms – and leading the pack is London-based platform Salary Finance.

Innovation in employee benefits

Founded in 2015 by the former Head of Google UK & Ireland, a former banking consultant and a social impact entrepreneur, Salary Finance is a decidedly unique fintech venture with a moral compass designed to promote fair lending, saving and financial education through forward-thinking partnerships with employers.

Metro Bank, Worldpay, Hays and SAGA have all partnered with Salary Finance to extend a number of financial products to their staff members – including the platform’s pioneering SAVE product, which recently was recently named Benefits Innovation of the Year at the 2018 Workplace Savings and Benefits Awards.

The product seeks to make it simpler for employees to build a savings habit by deducting a fixed amount of income from each individual’s payroll and placing it into a savings account provided by the Yorkshire Building Society.

Those deposits are protected by the FSCS up to £85,000 and are carried out under the shrewd premise that employees have a far better chance of reserving cash to pay for household expenditures and unexpected expenses if that income never touches their current accounts in the first place.

Meanwhile, Salary Finance also offers a dynamic debt repayment solution that enables employees to borrow small amounts of money in order to settle external debts, and then repay those loans directly from their salary prior to receiving their monthly pay. On an average £3100 loan, Salary Finance is able to save employees nearly £600 with rates ranging from 3.9% to 19.9%.

Available loans range from £500 to £25,000, although Salary Finance recommends employers cap the maximum loan size for employees on a case-by-case basis depending on their salary. When in doubt, 20% gross salary is the suggested borrowing limit.

“By helping employees replace existing expensive unsecured debt or providing affordable funds to meet an emergency or enable them to invest in themselves, Salary Finance can make a massive positive and tangible difference to people’s lives,” explains Jason Butler, the platform’s Head of Financial Education.

“Once the loan has been repaid, and the employee doesn’t miss the money being deducted from their wages each month, we can then offer them the option to redirect that money into our SAVE product, so they can build a cash reserve to enable them to cope with any future emergencies. This is part of our ‘From debt to savings’ mantra, and a key part of our social purpose mission.”

That being said, the range of services Salary Finance offers employers and their teams extends far beyond lending capabilities and instant savers. The platform also exists to fill the ever-increasing resource drain for those individuals looking to increase their level of financial awareness and become more financially literate.

“Our core loan and saving products are merely financial tools, but we have this year invested a significant amount of time and money in expanding and improving the financial education and support we provide, in the form of engaging videos, simple guides, useful tools, helpful webinars and personable and inspirational live presentations,” Butler adds.

“What we try to do with our financial education support work is to help employees understand what they can control to improve their financial wellbeing through increasing their income, controlling their spending and lowering the costs of what they do buy.”

Chief among those financial education support tools is Salary Finance’s ‘Smart Spending System’. This tool enables employees to proactively split their spending into “the basics, fun and the future” with respective spending benchmarks of 50%, 30% and 20%.

In turn, users are able to paint a very clear picture of what they’re spending and in what ways they might be susceptible to overreaching their finances on any non-essentials.

Customer surveys indicate employees taking advantage of participating Salary Finance partnerships are reaping substantial benefits. Three out of four users admit the platform’s SAVE solution has pushed them to put aside funds they would not normally have saved, while 62.5% of workers say they’re more likely to stay put with their current employer because of the product range.

That level of satisfaction has helped Salary Finance move overseas with the intention to help families and stretched employees in other markets.

At the end of August, the company announced a $20M Series B investment led by Blenheim Chalcot and Legal & General. That funding will reportedly be used to launch the platform in the US, as well as support continued growth in the UK.

In the wake the platform’s success, there appears to be a genuine gap in the market for socially conscious and undeniably sustainable business models like Salary Finance, which could ultimately start to pick up the slack where embattled charities such as the UK’s National Debtline are struggling to cope with demand for help.

“What we try to do with our financial education support work is to help employees understand what they can control to improve their financial wellbeing through increasing their income, controlling their spending and lowering the costs of what they do buy,” Butler says.

“Salary Finance can’t solve all of the population’s personal financial problems, but we can and do make a real difference, to real people, every day of the week.”