Most of us know it's sensible to have money set aside, whether for a rainy day or for retirement. However, most of us also find it hard to do, condemning us to work longer than we want to, or not having enough to be comfortable later in life. Most of us have that nagging feeling that we should be doing more. Knowing the right things to do for the sake of our long-term financial wellbeing is one thing, doing it is another.
At the same time, we are being asked to take greater responsibility for our own financial health. Governments and employers still have a role to play, but the burden of saving is increasingly falling on individuals. Yet, no matter how many education programmes are put in place, there is clear evidence that people find it difficult to do it themselves. Rather than wanting lots of information and advice on how to save and invest, they want someone to do it for them.
This is where financial technology comes in. Instead of trying to make people more rational, it adapts to human psychology and helps make it easier for them to make good choices about their long-term financial wellbeing. It aims to adjust the environment to ensure better financial behaviour. If you want to stop eating biscuits, don't rely on your willpower, just move them to a difficult-to-reach cupboard. Financial technology works on the same premise.
There are a growing number of consumer apps for managing finances which contain features now being introduced into workplace financial wellbeing. These include rounding up your spend. Rounding up simply rounds up your spend on every day consumer goods to the nearest pound and depositing the difference into your savings account. So if you spent £2.75 on a coffee each day it would be rounded up to £3 and £0.25p goes into your savings. The same principle can be used with savings made through voluntary benefit discount platforms, directing any savings or cash back straight into your workplace savings pot.
Financial technology makes it easy to get started in investment. First, providers have built their technology for an era of mobile phones and digital payments, with easy-to-navigate user interfaces. You can save and invest using the swipe of a finger rather than sending off forms or creating direct debit mandates. Doing it through workplace saving schemes provides reassurance that your future is taken care of simply through a monthly deduction from payroll that you control via an app or through a workplace benefits portal.
It also makes the decision of where to invest easier. People generally keep too much of their long-term wealth in cash (around three-quarters of ISA subscriptions go into cash (1). Part of the problem is knowing where to invest. From the outside, stock markets appear complex, volatile and financial providers tend to favour jargon over clarity. Deciding where to put your money can seem overwhelmingly difficult, so people do nothing at all.
Financial technology can help support decision making and consolidate options available. Investors have clear visibility of the investment options available to them and the tools to compare these quickly and easily to build their own portfolio. Financial technology opens the door to investing opportunities for those less familiar or completely new to investing. Using artificial intelligence and complex algorithms robo-investment platforms can offer ready-made portfolios that are diversified and fully optimised for the individual. The use of data and risk-based modelling tools allow consumers to make informed decisions about investments that align with their personal goals. They can model projected outcomes at a given level of risk, helping investors visualise how building a regular savings habit can help them to achieve their financial goals. With online monitoring tools and automation, investors don't have to actively manage their investments, knowing that it's suited to their goals. Instead, they can receive regular updates on progress, to keep them engaged in the performance of their investments and provide important reassurance over time.
This hands-off approach also prevents wealth-eroding mistakes. For example, in volatile markets, it's tempting to disinvest and move into cash. People usually do this at just the wrong time, missing out on the recovery in markets. The most important ingredients in long-term wealth are saving regularly and staying invested. Financial technology helps this happen. Doing it through the workplace makes this even easier with monthly contributions through pay.
Financial technology helps people feel more in control of their finances and can provide important reassurance about their financial future. At any given time, they can understand how their investments are doing and how close they are to achieving their long-term savings goals. This is vitally important for long-term financial wellbeing.