The role of digital investing in the cost-of-living crisis

The role of digital investing in the cost-of-living crisis

As the cost-of-living crisis takes hold of the world, there are bound to be a number of challenges the financial market will need to brace for. One of the ways firms are looking to prepare for the challenge is through technology. 

Research from Lloyds Bank found that 75% of UK financial institutions believe the cost of operations will rise over the next year due to the cost-of-living crisis. To combat this rising cost, 71% of respondents are investing into core technology. This is a much more popular route to survival compared to other options, with 46% looking to absorb costs and 38% set to increase prices.

The UK public are also seeking options to improve their prosperity during this period. A report from Investing Reviews found that in September, searches for ‘how to invest’ surged by 186% in the union. Similarly, the searches for ‘investing for beginners’ also exploded by 522%.

As the pressures on finances intensifies, more people will be looking at ways to make their money do more. Naturally, people turn towards their bank when worried about money, but what can they offer? Investing has been reserved for people with an influx of capital, but simplified, digital investing offers a way to ensure some stability.

Kidbrooke founder and CEO Fredrik Davéus said, “An ongoing cost-of-living crisis on the individual level I think is hard to mitigate there and then using investing. Investing is all about putting away money at good times for when you need them in the future. So, in this regard I think everything that makes reasonable investing available to more people at a lower cost is a good thing.”

Digital investing services provide people with quick access to investments with the option to invest as much as they can. Interest rates on savings accounts in the UK are currently below inflation, meaning money sitting in a savings account is essentially losing people money. While the need for a safety net is critical, keeping all of one’s savings sitting in one of these accounts is not helpful. Instead, investing can make that money do more.

When asked if people should invest during this crisis, Davéus said, “If you can afford it, I think you should always amortise on your mortgage and/or invest in risky assets. If for some reason the economy starts to shrink over very long periods of time (and hence investing would not be worthwhile) then we will have completely different sets of problems and challenges to face and very little will resemble our current way of life unfortunately. So YES!”

One of the biggest impacts the cost-of-living crisis is having on young adults is holding them back. A report compiled by Starling Bank found that 76% of young adults are putting their life events on hold during the cost-of-living crisis. Its survey also found that people under 35 are twice as likely to be anxious about budgets or rely on credit during this period, compared to those over the age of 55. Many are holding off from major purchases, home renovations, holidays or buying a house.

There is a lot of fear in the market. Not only will people be checking their balances and savings, but many will be looking at the market dip and thinking if time is to take money out. During this time, clear communications between a firm and their customers will be integral to relieving stress.

Davéus said, “A lot of human biases are at play when the value of our investments decreases. So, it is important that institutions communicate that (at least historically correct/beneficial) it is usually best if you for liquidity reasons need your money right now to sit tight and let the crisis play out. Timing markets are notoriously difficult and not something most investors should try to do (I mean the debate is still out on if any investor should try it).”

Firms have already spent the past two years improving their communication channels. The Covid-19 pandemic forced many to reassess how they are engaging with customers, and many are becoming more adaptive. As the market hits another uncertain period, firms should continue to explore ways to improve how they speak to customers. In fact, Davéus warned that firms should not see this as a time to relax customer facing capabilities. This will only cause even greater problems when the tides turn.

“Part of a good customer relationship I think is adding value continuously and not only at the point of sale,” Davéus added. “A crisis is a period in time where many customers actually need guidance and advice since in good or very good times simply leveraging to the max and buying any risk asset will provide great but potentially temporary outcomes. Hence, having tools that can provide financial guidance and advice at scale on an ongoing basis becomes key.”

One of the ways firms have sought to help customers is through financial education initiatives, but Davéus believes they are not enough and do not work for all types of customers. The biggest problem with them is that they are often boring, leading to many people just giving up.

He concluded, “What works, and we see this in data from our customers, is providing valuable (ie realistic) and simple to understand (this combo is of course challenging and hard to get right) and interactive (crucial!) tools that can provide a baseline of quantitative decision-support for distribution via self-service or advisor-led channels. These tools will then be used by customers to self-educate when they need to. This works!- So, go ahead and build out your decision-making capabilities and get those in front of your customers asap.”

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