The way we manage money is in flux ‒ and research highlights four main forces changing money choices. Read more in this excerpt from the Think Forward Initiative 2015 report Economics in 3D.
1. Macro-economy - the fall-out from the financial crisis
After-effects of the global financial crisis that followed the collapse of Lehman Brothers in 2008 had an impact on household finances the world over. Income growth is struggling to get back to pre-crisis rates. Consumer finances also show the effects of the unprecedented policy responses to the crisis.
In the developed world, interest rates have plummeted, in some cases even into negative territory. This has been good news for many borrowers. But it has hurt those relying on interest income, and undermined the solvency of pension funds, threatening the retirement income of ageing populations.
And some borrowers, particularly riskier, less credit-worthy ones, have failed to feel the benefits, as credit availability and credit spreads have failed to return to pre-crisis levels. Seven years on from the onset of the crisis, many households still feel the financial effects.
2. Politics – divergences and disintegration
The financial crisis is also having profound political repercussions. These in turn are affecting consumer finances. The political climate is being clouded by rising inequality of income and wealth.
Policy responses to the crisis are partly behind this trend. Quantitative easing prevented the Great Recession from turning into another Great Depression. But since it largely worked through higher asset prices, it has disproportionately benefited the richer sections of society.
Meanwhile, the crisis and the fiscal austerity that followed have disproportionately hurt the poor, resulting in political pressures to compensate them. However, the scope to do so, for example with higher benefits or minimum wages, has been limited by tough targets on budget deficits.
Indeed, the pressure on public finances leaves question marks over the long term sustainability of public welfare and pension systems. As a result, households are faced with having to take more responsibility for the future burden of pensions and health care.
3. Technology – hyperconnectivity
A third factor that is changing people’s financial decisions is rapid technological change. The ultra-fast global diffusion of smartphones over the past decade is a prime driver of this.
Digital and mobile technology is progressing at an astonishing pace, transforming access to information and, increasingly, analysis. Some struggle with the ubiquity of information and communication, suffering from overload and distraction. For example, Microsoft Research found that once distracted by an email alert, computer users take an average of 22 minutes to return to the same level of focus on the suspended task.
But innovators are addressing these problems with smarter filtering, search and aggregation tools. An emerging trend is the application of advanced analytics on both personal and Big Data. This is increasing the relevance of information and personalising consumers’ on-line experiences, enriching them with peer comparisons. Meanwhile, technological disruption is extending to labour markets, changing the income and employment prospects for a growing range of occupations.
4. Consumer behaviour – more complex, more social
Consumers are faced with more numerous, complex and uncertain decisions. As we have seen, digital technology is both a cause and a (perhaps partial) solution to this, opening access to many more options but also providing ways of dealing with them.
Beyond shopping, consumer lifestyles and working patterns are changing too. Leisure is being transformed by on-demand on-line entertainment and games. Meanwhile, the reluctance of consumers to pay for online content is forcing the media, software and publishing businesses to adopt new business models, such as charging for premium (‘freemium’) services.
Even the burgeoning ‘app economy’ is evolving rapidly. Apps are increasingly meeting consumer needs and demands for decision-making tools and advice. A key aspect of the changes to consumer behaviour is that social influences are having a growing impact on individual decision-making. Technology has been the enabler here, but the technology has also had to respond to how consumers chosen to use it.
Social networking, peer-to-peer sharing, and new marketplaces for all kinds of products and services are having a profound effect on individuals’ decisions.
ING research argues that the rise of the new consumer calls for economists to adopt a new multidisciplinary approach: economics needs to go back to its social roots. A full report, the first in a series of reports for the Think Forward Initiative, can be downloaded here.
This article is related to the ING International Survey: