Evaluation Scotland Wales
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insight

Understanding financial wellbeing through banking data

Evidence type: Insight i

Context

Previous policy research into consumer financial wellbeing has often looked at objective financial outcomes, such as retirement savings, liquidity buffers and timely credit repayment, whereas survey-based consumer finance research has focused on measuring people’s subjective perceptions of their financial situation.

This study integrates the two approaches to understand how subjective financial wellbeing (consumers’ lived experience) fluctuates with the objective state of their finances. As well as overcoming potential biases in self-reports, a key benefit of an approach that uses detailed bank account data is the fine-grained view it allows of fluctuations in people’s finances over time.

The issue of how people respond to volatility of income and expenditure, and how this relates to financial wellbeing is of particular relevance in the light of recent economic disruption due to coronavirus and a shift towards more unstable forms of employment such as self-employment and zero-hours contracts.

The study

The study takes the banking data from a sample of current account holders and combines it with survey data from the same people to create a matched dataset. The sample for the study consists of 2,695 adult current account holders in the UK, who had voluntarily participated in a telephone survey and had also consented to having their survey responses matched to their account data. For each account holder in the sample, the study accesses 11 months of data on item-level account transactions, running account balances, bank charges and remote logins (internet/mobile/phone banking), as well as demographic and account-level data, including whether the account included an arranged overdraft.

The survey uses a set of questions to determine subjective financial wellbeing, which were combined to create a single indicator of wellbeing, which was used as the dependent variable in the analysis for the study.

The study was commissioned by the Financial Conduct Authority, the regulatory body for financial services firms and financial markets in the UK.

Key findings

  • Those with higher subjective financial wellbeing: Those with the highest self-reported wellbeing had higher incomes, higher average account balances and were less likely to use their overdraft facility. More surprisingly, other significant predictors of financial wellbeing were whether someone had a large available overdraft limit and had greater month-to-month variability in both their balance (a negative correlation) and their spending (a positive correlation). This may be because lower subjective wellbeing stems from mismatches in income and expenditure – more volatile expenditure may simply be an indicator of being able to afford more, whereas a volatile balance indicates that incomings and outgoings do not line up, creating stress.
  • Effect of volatility on financial wellbeing: A higher volatility in account balance was negatively related with financial wellbeing. This is consistent with the idea that stability is an important component of financial wellbeing. However the study found no relationship between income volatility and wellbeing, in contrast to a policy and research literature that links income volatility to lower wellbeing.
  • Predicting low financial wellbeing: The authors suggest that the findings can be used to provide insights into which account behaviours could be used to predict people with low financial wellbeing. The strongest overall indicator of low financial wellbeing was the number of days spent overdrawn. Other indicators include account balance volatility, spending volatility and frequency of income receipt.

Points to consider

  • Methodological strengths/weaknesses: The correlation coefficients between account behaviours and financial wellbeing ranged from 0 to 0.26, indicating small-to-medium effect sizes. This suggests that two people with similar account behaviours may have different perceptions of their subjective financial situations, and that different factors not measured in the research may also contribute to these perceptions.
    • The survey only includes data from survey respondents who were participants in a field experiment on overdraft alerts in the months prior to the survey. However the authors tested a control group and were satisfied that the field experiment had no impact on results.
    • The survey data provides only a snapshot in time of subjective wellbeing, which is a dynamic and complex state. This makes it impossible to infer any causation where there are correlations between subjective financial wellbeing and account behaviours. However, the authors state that even with longitudinal data this issue would remain to an extent.
    • Whilst the banking records used have a lot of detailed information, there are still many other details that haven’t been used, such as merchant identifiers, so the picture of behaviour is incomplete.
  • Relevance: The topic of financial wellbeing is always relevant and this study offers a new approach to understanding subjective wellbeing measures
  • Generalisability/ transferability: The survey sampling methodology involved deliberately oversampling individuals with lower account balances, so the participants are likely to have lower liquid wealth, and lower financial wellbeing than the population of account holders. This was appropriate for the research question, but the relationships uncovered may not hold true for people with greater wealth and higher financial wellbeing.
    • The study was conducted in the UK but it is likely that the findings would be similar in other developed countries.
    • Anyone with an interest in financial wellbeing would find this report useful.

Key info

Client group
Year of publication
2020
Country/Countries
United Kingdom
Contact information

Joe Gladstone, University College London, School of Management Jeroen Nieboer, FCA’s Economics and Design Unit Karthik Raghavan, FCA’s Economics Department.

Also Kevin James, kevin.james@fca.org.uk and Karen Croxson karen.croxson@fca.org.uk