Segmentation: Difficult Debts

In the third of our blog series on our segmentation model, Laura Crow, Senior Programme Manager, Propositions, looks at the some of the surprising insights from the relatively wealthiest group across our segments: Difficult Debts.

‘Relatively’, is of course the key word for our starting point: Difficult Debts typically have a household income of £25-50k. The Joseph Rowntree Foundation (JRF) analyses the gap between what people have and what they need for a decent standard of living, and for 2023 they calculate a couple with two children would need to earn £50k to reach this minimum – so as you can see our Difficult Debts segment still represents households struggling to get by.

Despite those in Difficult Debts ranking highest for household earnings in our segments, 37%  reported having no savings at all, this is the third highest across all our segments and represents a 5% rise between March and December 2022.

With the average savings at £346, many in this segment would find it challenging to navigate an unexpected financial expense. These statistics demonstrate the complexity of understanding people’s financial lives; for whilst income maximisation is undoubtedly essential, there are additional factors to consider for improving financial resilience.

Get to know the Difficult Debts segment

• Typically aged between 35 and 44
• 12.5% of the financially vulnerable population
• 81% privately rent or own a mortgage which plays a key part in their vulnerability. Recently, the Office for National Statistics flagged private renters as one of the most challenging groups to be able to build up savings (December 2023)
• Those in this segment typically have the highest average debt levels across the segments at £7,323
• Credit cards are the most utilised form of debt, with 1 in 3 holding credit card balances, followed by arranged overdrafts
• 1 in 3 are missing credit card repayments

Our segments are based around behavioural insights, not just key data points. Our in-person interviews (hall testing) highlighted a heightened concern among participants regarding their expenses exceeding their financial capacity, particularly in relation to heating costs, compared to other segments. This suggests that, due to changes in rent and mortgage rates, this group is relatively new to the stresses of carefully managing their funds. In contrast, other segments have long been acquainted with the sacrifices and adaptations necessary during periods of financial vulnerability.

Diving deeper into their financial needs

Repaying debt at lower costs

We recognise that credit is not always going to be the best solution to addressing the needs of our segments but given the high cost of servicing debt, we see a particular opportunity in providing consolidation loans to this segment. We are in the process of funding lenders to innovate in this area to serve our segments, where there the customer benefits via arbitrage on the rates of many high-cost credit products utilised and simpler repayment to lower anxiety. Moreover, consolidation loans have the potential to remediate cost pressures faster than popularised narratives around mortgage extensions which could cost more over the long term and increase pressure at retirement. We will share learnings as available and encourage any lender to look at its underwriting criteria and use new technology to better assess affordability to reach more customers in this segment.

Personalising recommendations for better outcomes

With 1 in 3 holding credit cards, this segment is reasonably well served by mainstream providers when it comes to access and has a high digital footprint. As such open finance provides that opportunity to better reach out to customers and recommend options which are available to them. Is a consolidation loan right at that time? If so, how can customers be nudged to save the incremental gain from change in payments? Or when is it clear a bigger life event has happened, like losing work from an accident, and more wrap around support is needed? And if weaving this picture together isn’t possible today, what cross industry partnerships are needed to move forward?

Helping customers learn from mistakes

Our interviews and personas also showed a high level of awareness around their own credit score and valued its importance. This is reflected in the segment being the second joint least likely to miss a loan repayment (although the third fastest growing segment for missing payments from its previously low base). As such, other potential areas for consideration include:

• Research and clarity for customers on what really moves the needle in improving credit scores after customers recover from debt issues.
• Rewards for customers who can practically manage down their debt – we have seen providers reduce arranged overdraft limits over fears of indebtedness, but not tied this to finding other benefits to maintain loyalty throughout such a change.
• Better pathway products which help customers re-engage with credit once in a financial position to do so but builds sufficient check-ins and guardrails, so the customer feels empowered yet protected.

What next?

Our segmentation can help financial services providers further understand different groups, identify who they are serving well today and where there is the opportunity to serve different customer groups. This could not only help build the financial resilience of different segments, but also help organisations to diversify their customer base.  

It’s also just a starting point. If you’re an organisation with expertise in this area and are looking to do more to improve propositions for this segment, it would be great to understand more on the gaps and opportunities to serve them.