Reducing financial risks by looking at financial capabilities as a structural issue

Problems with making financial decisions are often presented as individual issues, but Dr Jeremiah Brown (@JeremiahTBrown) of the Brotherhood of St Laurence argues they are often better understood as instance of structural failure. He illustrates with an example of an aged pensioner trying to change energy providers.

In countries like Australia over the last thirty years, financial services have increased both as a share of the economy and in how complex they are for individuals to navigate. This means that for individuals, decisions are getting harder to make, and coming with increased financial risks. Often these problems are presented as instances of individual behaviour, when they in fact they might better be understood as instances of structural failure within the broader market that individuals are forced to navigate.

Some people are much more exposed to the risks which are now embedded in our system, and often those who are most exposed are the least able to deal with the risks when they materialise. For example, recent work from Marcus Banks and Dina Bowman at the Brotherhood of St Laurence has highlighted the significant difference in the experience and navigation of financial risk for those with very few resources compared to those with more resources.

Against this backdrop of an increasingly complex financial system and growing financial risks being experienced by ordinary Australians, in 2018 the Australian Securities and Investments Commission launched the National Financial Capability Strategy, with a target for all Australians to be in control of their financial lives. The core of the strategy involves developing the financial capabilities of Australians in the areas of: managing money day-to-day; making informed money decisions; and planning for the future.

But it’s important to ask: what kind of structural challenges do people face that limit their ability to be in control of their financial lives?

What are financial capabilities?

Guy Stuart’s definition of financial capability is a helpful one for identifying how financial capabilities link to being in control of your financial life:

Financial capability is the combination of attitude, knowledge, skills, and self-efficacy needed to make and exercise money management decisions that best fit the circumstances of one’s life, within an enabling environment that includes, but is not limited to, access to appropriate financial services.

The concept of financial capabilities extends beyond just the knowledge that people have of financial services and products to include the kinds of behaviours and attitudes which they have around financial services – and their access to them.

In the energy market, the internet is used as the main mechanism for signing up and providing information about different energy policies – and thus the energy system becomes structured around the internet. For this reason, it’s also important to recognise that financial capabilities can be limited by the structure of the systems that people need to navigate. Notably, these structures influence but are not present in the core areas of the National Financial Capability Strategy mentioned above.

Changing your energy provider

For example, Glenda is an elderly pensioner who wants to change her energy provider from the current option which she thinks is quite expensive.

For Glenda, the first step is to identify what the options are. Doing so requires both access to the information, and the skills required to effectively navigate through the different options and make a good choice between them.

As with many other sectors, as the energy market has become more complex, services have developed that help people choose between different providers. Whilst they also provide phone-based services, they are primarily online operators. Their websites assist consumers by giving them access to information at their own pace.

Image source: Unsplash

Image source: Unsplash

Like many other older Australians, Glenda doesn’t use the internet (according to ABS data, only 55% of Australians aged 65 and above use the internet). This means that accessing the relevant information is an issue for Glenda, and because of specific requirements like online billing on many of the cheapest policies available, Glenda doesn’t have access to the same options as does someone online.

For Glenda, a lack of digital literacy (or access to the internet) is a barrier to her being able to exercise her financial capabilities. It’s true that Glenda is not choosing the cheapest option available on the energy market. But it’s because of the way that the internet structures the system that she is unable to do so – she doesn’t have access to all the options which are available.

Financial Control for All?

Choosing between providers for the various services we use, and the goods we purchase, is an important space where we exercise and demonstrate our financial capabilities through choices that match our needs with the appropriate services available to us. But as the example of Glenda shows, there are structural factors that also shape the choices which people can make.

The logic of the market is supposed to be that individuals will choose the option that is most effective for them. However, as Glenda’s experience also shows, there’s a lot more going on than that.

Earlier this week Dr Simone Casey wrote on Power to Persuade about the significance of increasing automation as a driver of growing inequality, because algorithms that target the poor exacerbate already unequal outcomes. In a similar vein, changing structures in our society mean that Australians who are not online will increasingly have restricted options when it comes to the financial choices they are able to make. Consequently, ensuring that all Australians are in control of their financial lives will require increasing support for those who are at risk of being excluded.

Policymakers and organisations working on programs that build the financial skills and knowledge of vulnerable people need to address the accessibility challenges that arise from a lack of digital literacy or access to the internet. Whilst moving programs online can increase the number of people reached, it may also make them harder to access for the people most in need of the program.

Underlying that problem is the more general issue that policies focusing on individual behaviour need to pay more attention to the broader structures that these individuals are navigating. We need to address these structural challenges to help alleviate some of the most significant pressures that people face in controlling their financial lives.